Financial and Legal Issues That Can Blindside Physicians

We are taking a break this week from our ongoing series on start-up issues facing doctors buying or opening a new practice. The legal and financial details affecting doctors we have covered here together for more than a year are introductory in nature and meant to spur you to more detailed and personalized examination with the help of experts. 

Fortunately, there are some bright line rules we can share on specific issues; below are just two of the issues that have taken physician practice owners by surprise over the last 12 months.

Defined Benefit Plans are Not Protected if Your Practice Fails or Closes

A reality we have increasingly had to help even successful and well-established physicians address is the specter of insolvency. In some cases the financial issues have been the long-term result of compensation changes. In others, financial issues have been the result of changing demographics, the economy, huge malpractice awards, and even the doctor’s personal finances.

In these cases, if your plan is already fully funded, you are likely OK and there are standard rescue and distribution strategies that your advisors can implement to keep you solvent and complaint.

If the plan is under-funded, meaning that the business closed before the plan was funded with assets adequate to meet the actuarially determined distribution, things are much more uncertain.

The Pension Benefit Guaranty Corporation (PBGC), a federal agency, will assume management of the plan in such cases and make the legally required minimum annual distributions, (currently capped at about $57,000 a year for a 65-year-old), regardless of what your actual goal or contribution was.

At this point, 16 percent of plan beneficiaries are receiving decreased distributions because of such caps and circumstances and we expect that percentage to increase. I’m not trying to discourage use of such plans: For the high-earning physicians for whom they fit they offer a tremendous opportunity to put away large amounts of tax-deferred income, but we want every decision you make to be informed and based on a risk-benefit analysis. As always, they key is to act preventatively and explore conversion and termination options with your advisors if you have any warning or idea that your practice may close; don’t wait until the 11th hour when you may be forced into a distressed termination.

Vacant Real Estate is Often Not Covered by Your Insurance Policy

The idea here is very simple: Vacant buildings are a higher actuarial risk for your insurance company and if a property is vacant for some extended period of time you have a contractual duty to inform your carrier so they can charge you more premiums. The insurance company considers this a “material” change to the use and status of the property. If your property is vacant more than 60 consecutive days the fire, vandalism, and even general liability coverage you have may be decreased or even terminated. Some specific examples I’ve seen clients have to come out of pocket for:

1. Accidents and injuries incurred on the property (think kids on skateboards at vacant office with great stairs to jump off or worse, skating the empty pool at your vacant rental home);
2. Catastrophic loss from flood on the second story of building due to a pipe freeze and sprinkler failure (even seen what happens to wood laminate flooring when it gets wet?);
3. Vandalism and theft including broken glass, graffiti, and the stripping of copper, pipe, wire, and even light and bathroom fixtures by scavengers ($150,000 in damage out of pocket);
4. Claims reduced by a large percentage (if you’re lucky);
5. Polices cancelled completely due to non-conforming vacancy, in some cases as little as 31 percent. This means a commercial property with three renters could be going “bare” if just one renter leaves.

In one case a doctor remodeling an apartment unit had a catastrophic loss when the workmen started a fire that affected all units and took out the roof. The insurance company denied all coverage due to the length of vacancy and she was faced with both rebuilding the building out of pocket and the loss of her rental income while the bad-faith lawsuit went on for more than a year.

The answer is fortunately simple: Inform your carrier while your coverage in still in place and pay for the standard required “gap coverage” or get the required additional insurance rider you need.

Find out more about Ike Devji, JD, and our other Practice Notes bloggers.