Issue 15 - December 2003

At odds with your partner about retirement planning?
Think creatively to break the gridlock
By Christopher R. Jarvis, MBA and David B. Mandell, JD, MBA

When an older doctor takes on a younger partner, things can go well — until the time comes to decide on retirement planning. Then the partners can become gridlocked.

Typically, younger member(s) of the group are very motivated to reduce their income taxes while the older doctors are often uninterested, either because they are already so close to retirement that don’t need extra retirement planning or they are simply set in their ways and don’t want to change anything.

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 healthcare — and these new times demand more creative planning.

The gridlock, however, can be broken — with some creative planning. Here are two methods to consider:

Use Non-qualified plans

Consider using non-qualified retirement plans, in addition to your typical qualified pension or profit-sharing plan. Although tax and ERISA-qualified retirement plans require the participation of virtually all employees, non-qualified deferred compensation plans (NQPs) can be offered to select employees.

This means that only certain physicians need to participate — even if it means only one or two out of a large group. Younger physicians could participate in such a plan and let the older uninterested doctors opt out.

When compared to qualified plans, NQPs are typically much easier and less expensive to implement. Even if a few physicians decide to implement a NQP for their practice, they could personally cover all plan expenses themselves — so their partners truly have no out-of-pocket costs.

Still, NQPs do not win automatic approval. 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 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 the attorney and/or accountant to implement, if you push hard enough.

Change the 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, one legal entity exists — usually a corporation, LLC or a 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 does not adopt a planning strategy, no individual doctor has any flexibility to adopt one on their own.

If this is 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 insurers pay the group and the group, in turn, pays the physicians’ PCs.

Physicians who want to implement advanced strategies can do so through their individual PCs, but others who do not want to engage in this type of planning are not penalized.

While this may seem simple, it is not. 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.

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

Bring in an expert

Whatever direction you go, get expert help. Experts can assist in breaking the gridlock and then design plans to help you go forward.

Christopher R. Jarvis, MBA and David B. Mandell, JD, MBA are the authors of The Doctor’s Wealth Protection Guide and co-founders of Jarvis & Mandell, LLC (www.jarvisandmandell.com). You can reach them at 888-317-9895.