Your Money: Office Politics, Inertia Cost You Money

Over the past few years, we have written many articles on potential strategies that a doctor can use to reduce income taxes, increase benefits, or build retirement savings. In that time, we have also consulted with hundreds of medical groups on how to implement such strategies for their practices.

Unfortunately, these consultations too often turn out to be less than fruitful because of office politics.

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.

Take income tax planning, for example. While the younger members of a group are typically very motivated to reduce their income taxes, the older doctors are uninterested. Either they are so close to retirement that they don’t need extra retirement planning or they are 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 physicians, the long-term costs of such gridlock are significant - as they 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. Nonetheless, each year we meet with hundreds of motivated doctors who cannot 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.

Use nonqualified plans

You should consider using nonqualified retirement plans in addition to your typical qualified pension or profit-sharing plan. That is because, while tax and ERISA-qualified plans require the participation of virtually all employees, nonqualified deferred compensation plans (NQPs) can be offered to select employees. In this context, this means that only certain physicians need participate - even if it’s only one or two out of a large group. So 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. So even if relatively few physicians decide to implement an NQP for themselves, they could personally cover all plan expenses on their own. Their partners truly have no out-of-pocket costs. One would think that this fact alone would eliminate any gridlock.

Still, NQPs are sometimes met with resistance. Because they are 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 doctors who choose not to participate are neither helped nor hurt financially by the plan. Nevertheless, these adjustments should be easy for your attorney and/or accountant to implement - that is, if they are 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 small- to mid-sized medical group should not be insurmountable.

In the end, then, NQP adoption typically succeeds or fails depending upon the effort put forth by motivated physicians. When hundreds of thousands, if not millions, of retirement dollars are at stake, this extra effort will be handsomely rewarded.

Change your 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.

A typical medical group structure consists of a single legal entity - typically a corporation, LLC, or professional association (PA). Physicians are either owners of the entity (informally referring to themselves as “partners”) or nonowner employees. In all such cases, individual physicians have no ability to separate themselves from the central legal entity. If the central entity does not adopt a planning strategy, no individual doctor has any flexibility to adopt one on her own.

If this is the case in your practice, consider a structure in which each physician has his own professional corporation (PC), with the PCs tied together by a larger central entity. This central entity would be neither owned by nor employ the physicians, but instead would do business with the physicians’ PCs. This way, the central entity - the group - would get paid through insurers and other payers, and the group, in turn, would pay 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.

Setting up a structure like this can be tricky. Experienced corporate counsel is required to navigate issues such as state rules on the ownership of medical practices, ERISA and other federal rules on affiliated services, Medicare billing rules, and others.

Nevertheless, if such planning effort results in the ability of physicians to put away $10,000 to $50,000 more for retirement each year, it is obviously well worth the effort.

Bring in an expert

In our practices, we speak to more than 1,000 physicians each year, many of whom experience this planning gridlock. Most 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 advisers or consultants who convince the group to implement creative planning. Such experts often have the credibility and expertise to convince your partners to “see the light” in a way that fellow physicians cannot. You should strongly consider bringing in an expert to speak to your group in order to get productive discussions started.

David B. Mandell, JD, MBA, is an attorney, lecturer, and author of “Wealth Protection, MD.” He is also a cofounder of The Wealth Protection Alliance (WPA), a nationwide network of independent financial advisory firms whose goal is to help clients build and preserve their wealth. Jordon R. Katz, CLU, is president of JR Katz, and provides sophisticated business planning to physicians around the country. Mandell and Katz can be reached at 800 554 7233, or via editor@physicianspractice.com.

This article originally appeared in the June 2006 issue of Physicians Practice.