Avoiding Financial Gridlock in Group Practice

A s you may be painfully aware, financial decisions in your group practice may be hurting you, and you may feel powerless to do anything about it. This situation is more common than you may know, and it can take a huge financial toll over the lifetime of your career savings and planning if you don’t overcome roadblocks early. Over the past few years, we’ve written many articles on potential strategies that doctors can use to reduce income taxes, increase benefits or build retirement savings. We’ve also consulted with hundreds of medical groups on how to implement such strategies for their practices. Unfortunately, too often these suggestions go by the wayside because of office politics. The Generation Gap Typically, while the younger members of the group are very motivated to reduce their income taxes, the older doctors are often uninterested. Either they are already so close to retirement that don’t need extra retirement planning or they’re simply set in their ways and don’t want to change anything — the old “if it ain’t broke, don’t fix it” mindset. The result: planning gridlock. Unfortunately, for the younger dermatologists, the long-term costs of such gridlock are significant because they’re the ones who will have to work more years to reach the same retirement goals as their older partners. Gone are the “golden days” of medicine, and these new times demand more creative planning. Even with all this said, nonetheless, each year we meet with hundreds of motivated doctors who can’t implement the planning we recommend because the “powers that be” in their group won’t allow it. We decided to write this article to suggest some alternatives to this dilemma. If you see yourself in this situation, the following solutions may help you. Use Non-Qualified Plans You should also consider using non-qualified retirement plans, in addition to your typical qualified pension or profit-sharing plan. Although tax and ERISA-qualified plans require the participation of virtually all employees, non-qualified deferred compensation plans (NQPs) can be offered to select employees. In this context, this means that only certain physicians need participate — even if it means only one or two out of a large group. Applying this to the common scenario described above, the younger physicians could participate in such a plan and let the older uninterested doctors opt out. Furthermore, when compared with qualified plans, NQPs are typically much easier and less expensive to implement. In this way, even if a few physicians decide to implement a NQP for their practice, they could personally cover all plan expenses themselves — so that their partners truly have no out-of-pocket costs. One would think that this fact alone would eliminate any gridlock. Still, NQPs don’t win automatic approval. Because they’re at least partially deductible to the practice, they must usually be formally adopted by the corporation or limited liability company (LLC). This requires the proper legal paperwork. Further, compensation accounting may need to be adjusted to make sure that each doctor not participating is in the same position he or she was in before the plan was in place. Nevertheless, these adjustments are easy for an attorney and/or accountant to implement . . . if they’re pushed hard enough by you, the client. After all, if Fortune 500 companies can adopt such plans for their executives, the corporate inertia from a relatively tiny medical group shouldn’t prove insurmountable. In the end, then, NQP adoption typically succeeds or fails depending upon the effort of the motivated physicians. When hundreds of thousands, if not millions, of retirement dollars are at stake, this extra effort will be handsomely rewarded. Employ a More Flexible Corporate Structure Despite the availability of NQPs, we still see medical groups stuck in planning gridlock. Another way to solve this problem is to alter the practice’s legal structure so that it allows individual physicians their own planning flexibility. In the typical medical group structure, there’s one legal entity — whether it be a corporation, LLC, or professional association (PA). Physicians are either owners of the entity (informally referring to themselves as “partners”) or non-owner employees. In all such cases, the physicians have no ability to separate themselves from the central legal entity. If the central entity doesn’t adopt a planning strategy, no individual doctor has any flexibility to adopt it on his or her own. If this the case in your practice, you might consider a superior structure when the central entity is not owned by, nor employs, the doctors directly, but rather through their own professional corporations (PCs) or PAs. In this way, the group is paid by the insurers and the group, in turn, pays the physicians’ PCs through 1099 independent contractor income. Tax-wise, there is no downside to the central entity or to the doctors who are not motivated to engage in any additional planning. However, for the physicians who want to implement advanced strategies, they may do so through their individual PCs. Their strategies will be implemented at the PC level, leaving the central entity unchanged. While this again may seem simple, it isn’t. Experienced corporate counsel is required to navigate issues such as the state rules on the ownership of medical practices, the ERISA and other rules on affiliated services, and Medicare billing rules, among others. But, if such a planning effort results in the ability of physicians to put away $10,000 to $50,000 more for retirement each year, it’s obviously well worth the effort. Bring in an Expert In our practices, we speak to more than a thousand physicians each year, many of whom experience this planning gridlock. Most, in fact, find no solution to this dilemma. The only ones who are able to navigate past the gridlock have help, typically in the form of outside advisors or consultants who convince the group to implement creative planning. These experts in the field of tax, benefits planning or corporate law have the credibility and expertise to convince your partners to "see the light" in a way that fellow physicians cannot. No matter whom you select to advocate on your behalf, strongly consider bringing in an expert to speak to your group in order to get productive discussions started. If you are personally grappling with financial gridlock in a group practice or would like to explore advanced planning options, be advised that your partners may be an important hurdle to overcome. Hopefully, some of the suggestions we’ve outlined will help overcome any roadblocks you may encounter.