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2010 Tax Planning for Docs: What’s Certain and What is Not

Physicians News — Thu, 16 Dec 2010 14:31:10 +0000

By Joseph P. Nicola, Jr., CPA, JD, CVA

Taxation affects many people. Recently, the subject has become the focus of much political attention, most notably involving the Bush tax cuts. The debate directly affects many physicians, whose income levels are the primary target of the possible staggering tax increases when the Bush cuts sunset on December 31, 2010. Most significant among those are the return of 39.6 percent tax rates on earnings and dividends, and 20 percent tax rates on long-term capital gains. Neither the Obama Administration nor Congress has been clear on the extent to which the Bush cuts will be retained. As such, year-end tax planning requires an extraordinary effort to engage in transactions that optimize one’s tax posture under either scenario. Fortunately, Congress provided some relief by way of legislation this year to enhance that process. In September, for example, Congress enacted the Small Business Jobs Act of 2010, and many of its provisions favorably affect physicians. For equipment purchases in 2010 and 2011, the Section 179 expense election increased from 0,000 to 0,000. Equally important, Congress also temporarily expanded these rules to include certain leasehold improvements (up to 0,000), and extended 50% bonus depreciation to 2010, permitting large depreciation expense in the year of the equipment purchase. The effect is to significantly reduce taxes. In addition to these provisions, Congress changed the computation of self-employment income as it pertains to health insurance costs. For the taxable year beginning in 2010, the self-employment health insurance deduction for individuals is deductible in determining net earnings from self-employment. Earlier this year, Congress enacted the Patient Protection and Affordable Care Act of 2010. As part of that Act, Congress provided certain employers with a tax credit for health insurance premiums paid for their employees. Congress also provided certain employers with a new and simple version of the old cafeteria-style plan for tax-advantaged health insurance and other benefits. The effect is to directly reduce the physician’s tax liability, beginning in 2011. The bad news of this legislation is the elimination of over-the-counter medication from certain pre-tax health plans, such as flexible spending accounts and health savings accounts, beginning in 2011. Moreover, tax filing and paperwork responsibilities increase significantly in 2012. In addition to issuing Form 1099-MISC to service providers, such as accountants and law firms, this filing requirement will now be imposed on purchases of equipment, supplies and other goods (where the total paid to a vendor is at least 0 in any year). Why is this important now? Because physician practices will be required to begin sending Form W-9 to their suppliers in order to obtain employer identification numbers. This process should begin soon, in order to avoid the last minute rush and backup tax withholding. Congress also added a mandatory provision regarding the health insurance coverage of children. Under the Act, any group health plan that provides coverage of dependent children must continue to make dependent coverage available for an adult child until the child turns 26 years of age. Conversely, the exclusion from taxable income for reimbursements for medical care expenses under an employer-provided accident or health plan (as well as the deduction for SE health insurance) is extended to a participant's child who is under age 27. Note the difference. Earlier this year, Congress enacted the Hiring Incentives to Restore Employment (HIRE) Act. Under this legislation, Social Security taxes are forgiven for wages paid on previously unemployed individuals hired after February 3, 2010, and before January 1, 2011, as long as the new hire does not immediately displace another employee. Finally, one of the potentially more invasive bills in 2010 has actually yet to pass. Designed chiefly to extend certain tax benefits through 2010, the bill includes a revenue raiser that could affect physicians, if passed. Known as the American Jobs and Closing Tax Loopholes Act of 2010, the bill includes a provision that would cause pass-through income of an S corporation to be subject to the self-employment tax. This would be a radical departure from existing tax law, and would upset the integrity of a great deal of tax planning on the part of physicians. Stay tuned. In late-October, the IRS announced its annual inflation adjustments for pension plans and other tax matters for 2011. As expected, there were virtually no changes. Thus, for example, the maximum Section 401(k) contribution amount remains ,500 for 2011, and the so-called catch-up contribution remains unchanged at ,500. The limitation for defined contribution plans remains unchanged for 2011 at ,000. Gift tax exclusion amount remains at ,000 for 2011. Finally, remember the Roth IRA. Traditional IRA, SEP and SIMPLE account balances, qualified retirement plan balances, and Section 403(b) tax-sheltered annuities may be converted to a Roth IRA. This opportunity has received a great deal of media attention lately, even though a conversion is taxable. This is due to the fact that the tax-free growth over the course of time, as well as the other benefits of a Roth IRA, may be more beneficial than the detriment of current taxes. This is particularly true in 2010, since the tax liability may be deferred to 2001 and 2012. Perhaps more important, under the Small Business Jobs Act of 2010, employer-sponsored Roth 401(k) plans may now permit in-plan conversions for certain types of accounts balances. Taxes play a major role in practice fiscal planning. Physicians are particularly vulnerable, as they typically fall within the proposed target zone of increased taxation in the near future. In all cases, physicians and their practice managers should stay well in touch with their tax advisors in order to keep the tax burden at a reasonable level. Joe Nicola is a director of taxes with Sisterson & Company in Pittsburgh, PA. He is also a member of the adjunct faculty in the business school at Duquesne University. He can be reached at 412-594-7006 or jpnicola@sisterson.com.

Physicians of non-profit hospitals are at a disadvantage over their for-profit colleagues when it comes to retirement planning

Physicians News — Tue, 05 Jan 2010 15:50:28 +0000

By William L. MacDonald Tax-exempt organizations are subject to more stringent IRS rules than their for-profit counterparts in terms of how they can provide nonqualified deferred compensation plans for highly paid employees. Nonprofit organizations should analyze their deferred compensation arrangements to ensure that such arrangements comply with the restrictive tax requirements of Code Section 457. Code Section 457(f) generally provides that in order to defer an employee’s compensation to a future calendar year, the payment of that compensation must be contingent on the employee performing substantial services through a date in a future calendar year. When such a contingency is no longer present, the compensation will be taxed in the first calendar year. For example, if an organization establishes a deferred compensation arrangement that provides an employee an opportunity to defer compensation, the employee must make an election to receive the dollars deferred at some future date (i.e. 2 years) to avoid current taxation. However, under a typical nonqualified plan in this tax exempt environment, the employee generally will be taxed on the ,000 in the calendar year that the arrangement is established if the payment of that ,000 is not contingent on the employee performing substantial services for the organization in the two future calendar years. So why would an employee defer current income with the possibility of losing it? Certain arrangements are exempt from the substantial services requirement in Code Section 457, including eligible deferred compensation plans under Code Section 457(b), tax-sheltered annuity plans under Code Section 403(b), and qualified retirement plans under Code Section 401(a). However, there are limits on the amounts that can be deferred under these plans. Nonqualified arrangements without limits fall under Code Section 457(f); however, they cause this substantial service requirement discussed above. Deferred Compensation Alternatives Fortunately, alternatives are available for tax-exempt organizations that seek to set up such plans for their highly compensated employees, including their employed and contracted physicians. By subjecting employer-paid, tax-deferred compensation to “risk of forfeiture” (discussed later) or by paying the required taxes, tax-exempt organizations can develop workable alternatives for funding nonqualified deferred compensation plans. Nonqualified deferred compensation plans in tax-exempt organizations, unlike those in for-profit organizations, are subject to Code Section 457. Two types of deferred compensation plans exist under Code Section 457: eligible and ineligible. Under this code, contributions to an eligible plan (403(b)) are limited to the lesser of ,500 (as of 2009) or 100 percent of an employee’s annual compensation. In general, it is financially advantageous to highly compensated employees to maximize contributions to 403(b) and 401(k) plans. However, maximizing these contributions can be accomplished only at the expense of the Code Section 457 plan. Non-Profit Organizations Have Few Options for Deferred Compensation Considering there are few options, employees who choose to maximize contributions to Code Section 403(b), 457(b), and 401(k) plans can participate only in an ineligible Code Section 457(f) plan. Many organizations are taking advantage of the ability to maximize their contributions in both the 401(k) or 403(b) and a 457 plan. This coordination allows a person whose employer has a 401(k) or 403(b) plan and a 457 plan to defer the maximum contribution into two plans instead of being subject to a single limit amount. Thus, a participant can contribute the maximum ,500 for 2009 into their 401(k) and also the maximum ,500 into their 457(b). If that person is over age 50, they can also contribute the additional catch-up amount into each plan—meaning an additional ,000 into the 401(k) and another ,000 into their 457(b). With an ineligible plan, deferred compensation contributions have no limits. However, they are taxed in the current year unless the plan is subject to a substantial risk of forfeiture. It is important to understand why tax-exempt organizations are subject to Code Section 457 for both non-elective (employer-paid) and voluntary (employee-paid) deferred compensation plans. For-profit organizations pay taxes on the deferred compensation until it is paid to employees: tax-exempt organizations, by definition, are not subject to this taxation. In addition, the growth of assets held by tax-exempt organizations to fund nonqualified plans is non-taxable because the organization itself is exempt from taxes. By subjecting nonqualified deferred compensation plans to strict forfeiture requirements, the IRS intends to discourage the provision of tax-sheltered deferred compensation to highly paid employees at the expense of all other employees in the tax-exempt organization. Maximizing Retirement Savings Consider the limits discussed above, and let’s take a look at an example. Let’s assume that a 60 year old physician employed by a non-profit hospital is earning 0,000 annually and wants to significantly increase his deferrals during the next five years in anticipation of retiring upon reaching age 65. The physician participates in a Section 403(b) plan therefore he can contribute ,500 each year. Since he is over age 50, he can also make an additional contribution of ,000 each year. If his hospital offers a 457(b) plan, he can make an additional ,500 and the extra ,000 make up. He may want to think twice about contributions to the 457(b) plan, as those assets are subject to the hospital’s creditors and could be lost if the hospital becomes insolvent. Under the applicable rules, the physician can be fully vested in the additional deferral in the 457(b) plan, but the deferred amount (plus earnings on the deferred amounts) must remain unfunded or, alternatively, can be funded by the hospital in a "rabbi trust," the assets of which remain subject to claims of the hospital's general creditors. In addition, the physician may defer an unlimited amount of additional compensation pursuant to an "ineligible" Section 457(f) plan. If the physician elected to defer, for example, an additional ,000 in 2009, such amount would be deducted from the physician's 2009 income and invested in the plan (typically mutual funds) as the physician and his employing entity determine. The ,000 deferral (plus earnings on the deferral) would be subject to forfeiture if the physician voluntarily elects to terminate his employment prior to reaching age 65 (the targeted retirement date previously selected by the physician), the deferred amount and its earnings would not be subject to income tax until it is actually paid to the physician following the physician's retirement, in accordance with the payment arrangements the physician had previously elected. The problem, as we mentioned above, is that the physician has risk of losing these dollars if he leaves the hospital before a stated date, or the hospital becomes insolvent, therefore, we are not seeing them used as much today. Code Section 457 Guidelines Deferred compensation plans that are subject to Code Section 457(f) include defined contribution plans and benefits provided under individual and group agreements. Early retirement incentives can also be subject to Code Section 457(f). Substantial Risk of Forfeiture As mentioned earlier, ineligible Code Section 457(f) plans allow for tax-deferred compensation only when the deferred compensation is subject to substantial risk of forfeiture. Voluntary deferred compensation plans typically are not subject to forfeiture. Furthermore, tax-exempt organizations traditionally have provided portable retirement benefits to highly compensated employees. The dilemma in developing nonqualified deferred compensation plans for such employees in tax-exempt organizations is a way to achieve tax deferral for vested nonqualified benefits. There is no official guidance on what constitutes “substantial risk of forfeiture” beyond making the payment of deferred compensation conditional on the “future performance of substantial services.” Because of a lack of official guidance, the interpretation of substantial risk of forfeiture varies, and many look to Code Section 83, which also refers to substantial risk of forfeiture. Generally, deferred compensation that is based either on continued employment for a specified period or on the occurrence of a specific event, such as retirement, is considered subject to risk of forfeiture. Thus, after deferred compensation is vested, it is no longer considered subject to substantial risk of forfeiture. If deferred compensation is vested upon the occurrence of a specific event, such as eligibility for retirement, then eligibility for retirement triggers vesting and taxation of the benefit at that time, even if the employee does not retire. Is There an Alternative to Code Section 457(f)? Yes, one alternative is the Professional Security Plan (PSP). The PSP is a wealth accumulation benefit program designed for the highly compensated at nonprofit organizations. The purpose of the PSP is to provide a tax-advantaged savings and investment vehicle without the annual contribution limits imposed on qualified plans, such as the Code Section 401(k) and 403(b) limits, or the restrictions of Code Section 457. What is the Professional Security Plan (PSP)? What sets the PSP apart from traditional deferred compensation plans as well as qualified plans is the way participants are taxed. The participant makes contributions with after-tax dollars, but accumulates all earnings on the pre-tax amount. When money is withdrawn from the PSP, it comes out non-taxable. The 3 Phases of Your Money To see the advantages of the PSP, it is important to think of your money as having three distinct phases. In planning for retirement income, one should focus on the three phases of retirement income planning: the contribution phase, the accumulation phase, and the distribution phase. Understanding these phases will provide a better appreciation of the PSP's design. During the contribution phase, a portion of income is set aside for use in future years. We have always been told that “pre-tax” deferral is better than “after-tax”, but is that always true? By deferring pre-tax, we accept that all distributions at retirement will be taxed at ordinary income. Of course we have no control over the rate in the future. After tax strategies are one reason many people are investing in Roth type arrangements, so they can determine what the tax bite will be now. When you make an after tax contribution into any after tax arrangement, you have more control and full benefit security, since you control the asset. The next phase is the “accumulation” or “investment” phase. This is when your contributions grow. The old saying not to put all of your eggs in one basket rings true during this phase. Truly, investment diversification is important. However, of greater importance is having your money grow non-taxable. Compounding money tax-deferred is a good thing. The final phase is the “distribution” phase. How your tax deferred accumulation is taxed could make all the difference. The important thing to remember is, “It’s not how much you make, but how much you keep.” The distribution phase could be the most important phase of your retirement planning. No one knows what income tax rates will be when they retire. Going from a 35 percent tax bracket to a 50 percent tax bracket reduces your retirement income by approximately 25 percent. The PSP distributes income at retirement without taxation, thus taking the future tax risk out of the equation. Based on the history of U.S. and its top income tax rates, how likely is it they will continue to decrease? The PSP is an after tax strategy which provides the power of pre-tax savings (discussed later) without the contribution limits or age restrictions of qualified plans. To get the maximum value from retirement accumulation, participants should first maximize their pre-tax contributions into their 403(b), 457(b), and 401(k) plans. The PSP can be a great supplement to compete with your colleagues who work in the for-profit environment. How does the Professional Security Plan Work? The PSP achieves its tax-advantaged status as a result of being powered by an institutionally priced variable universal life (VUL) insurance policy generally not available to individuals. Do not confuse this policy with the one you would purchase from your insurance agent or financial planner – it’s much different. First, it’s “institutionally priced,” which means that the policy’s charges are lower than would be the case in comparable retail VUL products. For example, they have no surrender charges. What also makes the PSP unique as a wealth accumulation plan is the policy’s tax restoration loan feature, which allows a participant to take a non-recourse, “tax replacement” policy loan to make up for the taxes paid on the amount of after-tax deposit. Here is an example of the mechanics of the PSP. Let us say you were to receive a 0,000 bonus as income. You owe approximately ,000 in taxes, which leaves about ,000 left to invest. You could elect to invest the money in mutual funds, and assuming you were to earn 7 percent annual return, you would have to pay taxes on some portion of the gain depending on how the money was invested. Therefore, you would pay taxes each year on your gains. With the PSP, you would deposit the ,000 in your account, and the policy tax restoration loan feature would increase your balance to 0,000—the pre-tax amount of your bonus. Assuming you were to earn the same 7 percent return, your PSP account would accrue the gains on the entire 0,000 with no current taxation. Also, any asset reallocation between sub-accounts is not subject to taxation. Later, you could make non-taxable withdrawals of both principal and interest. You made an after-tax contribution, accumulated the money tax deferred and all withdrawals are non-taxable as well. In addition, the PSP provides the participant with a non-taxable life insurance benefit. The policy loan to restore the taxes would be deducted from the policy’s death benefit, along with the capitalized interest. This would reduce the death benefit somewhat, but the approach still compares favorably with the mutual fund investment example, which does not provide a death benefit. *Assumed 40% tax rate. ** Loan and source of loan is optional. If chosen, policy loan is non-recourse. Conclusion This article has addressed the applicability of Code Section 457(f) plans and many of the implications of Code Section 409A. The new world of nonqualified plans, including 457(f) plans, is very complex. Tax-exempt entities should examine after tax alternatives when retirement planning. Attracting, retaining, and rewarding personnel, especially physicians, of non-profit organizations has become more difficult and must be addressed if non-profits are to compete with for-profit businesses. The PSP can help level the playing field when it comes to attracting and retaining key talent. William L. MacDonald is Chairman, President & CEO of Retirement Capital Group, Inc. (www.retirementcapital.com). . . Obtain Medical Specialty Own-Occupation Disability Insurance On-line

Your Practice: Finding the Right Retirement Plan

Physicians News — Tue, 05 Jan 2010 15:18:51 +0000

By Peter Rohr Despite the economy’s ups and downs, it is essential that physicians who are business owners look beyond their near-future investment goals and consider their long-term retirement plan. Taking the time to establish a company-sponsored retirement plan may be one of the most important decisions physicians can make. Not only does finding the right plan help to attract and retain talented medical professionals, but a plan can also enable one to build personal wealth by reducing current tax obligations. There is a simple approach practice owners can take when establishing and maintaining a retirement plan. Putting off establishing a plan due to perceived complexity or excessive costs is unnecessary. Working with a Financial Advisor and tax professional is a strategic and effective way to craft a plan that helps ensure flexibility for your practice, rewards for your employees and potentially, an increase in your personal wealth. Below you will find several standard plans that physician business owners can choose, each with their own benefits and requirements. It is important to note that retirement plans need not be static – physicians should be encouraged to make changes to their retirement plan as their practice evolves. SIMPLE IRA If a physician’s business has 100 or fewer employees and the owner wishes to offer employee salary-deferral contributions, consider the Savings Incentive Match Plan for Employees (SIMPLE) IRA plan for retirement savings. Many other retirement plans necessitate filing requirements and cause owners to incur administrative costs; however, the SIMPLE IRA is not subject to many of these complex and cost-inducing processes. Eligible employees can contribute upwards of ,500* each year by way of practical payroll withdrawals that may reduce their taxable income. Employees age 50 and older may be eligible to contribute additional “catch up” contributions of up to ,500*. With a SIMPLE IRA, small business owners are required to contribute either a non-elective two percent contribution for each eligible employee, regardless of participation, or a matching contribution of up to three percent of each participating employee’s compensation on an annual basis. Although employer contributions are generally tax deductible, owners may have concerns about ongoing financial commitments in an uncertain economic climate. If concerned with a long-standing commitment, owners can utilize a convenient alternative plan, a Simplified Employee Pension (SEP) IRA, discussed below. SEP IRA Some retirement plans afford business owners more flexibility to alter their contributions on a yearly basis. A SEP IRA plan may be particularly suitable for a business if the practice’s profits vary from year to year. Employers can make annual contributions that are generally tax-deductible for each eligible employee up to the lesser of ,000 or 25 percent of a maximum of 5,000*. Less regimented than other plans, the SEP IRA allows the employer to change their contributions based on their business’ performance. Tax Credit SIMPLE and SEP plans have become even more appealing to small business owners due to the tax credit created by the Economic Growth and Tax Relief Reconciliation Act of 2001. If a business owner establishes a SEP or SIMPLE plan and has 100 or fewer employees, he or she may be eligible for a non-refundable income tax credit. This credit can be equivalent to upwards of 50 percent of the first ,000 administrative and retirement education expenses for each of the first three years of the plan. Profit-sharing Plans If mindful about the business’ cash flow, business owners should consider a profit-sharing retirement plan. This plan’s administrative costs may be higher than other options, but there are additional benefits. A profit-sharing plan allows flexibility in annual employer contributions and can be established for businesses of any size. Business owners are afforded the ability to decide how much to contribute to the plan, if at all. If contributing, a business owner sets the percentage of each participant’s compensation to contribute to the plan each year. This contribution is generally business tax deductible. Profit-sharing plans are subject to compliance testing and IRS Form 5500 filing. 401(k) Plans The 401(k) plan is one of the most well-known types of employee benefit plans. With 401(k) accounts, employees may reduce taxable income by making salary-deferral contributions to a controlled savings investment vehicle. Employer contributions are optional, generally tax deductible and can be made either through employer matching or profit sharing contributions. Due to newly enacted tax laws which increase annual contribution limits, the 401(k) plan became even more desirable. It is important for physicians to keep in mind that 401(k) plans are subject to compliance testing and IRS Form 5500 filing. Defined Benefit Plan Popular among large corporations during the 80’s, Defined Benefit plans have since been replaced by more affordable large-scale plans. However, small business owners may find these plans more attractive, especially those approaching retirement age. A small business owner may be able to make substantial contributions to quickly build a retirement nest egg with this plan. Younger employees should consider some potential drawbacks to Defined Benefit plans. Because they have many years to save before retirement, their contribution limits are lower than more senior employees. If younger employees cannot pay their contributions on time, then they should switch their plan, as contributions are compulsory. In addition, Defined Benefit plans have several filing requirements including IRS Form 5500 and Pension Benefit Guaranty Corporation (PBGC) reporting requirements and premium payments. Retirement Plan Alternatives If averse to formally sponsoring a retirement plan, physician business owners can still allow employees the opportunity to contribute to their IRA through payroll deduction. Though not an employer-sponsored retirement plan, this retirement savings vehicle gives employees the ability to contribute up to ,000* to their IRA. Employees age 50 and older may be eligible to contribute additional “catch up” contributions of up to ,000*. The most important thing to remember when determining an employee retirement plan is to keep open lines of communication to increase the likelihood of participation. One way to ensure employees understand their options is to offer pre-enrollment and enrollment education seminars. Additionally, physician business owners should create a checklist for employees to guarantee that they will have proper documentation for their application including a current copy of the Summary Plan Description and all other credentials required by law. If a physician’s practice has already established an employee retirement plan, it is still essential to reassess the plan on an annual basis to ensure the owner and his or her employees are enjoying the maximum benefits from the plan. With changes in a practices’ success, the business may grow or shrink, and every plan outlined above caters to different models of business. When first starting out, practice owners may find that an SEP IRA or SIMPLE IRA is the most appropriate choice. As cash flow improves, or as employees are added, owners may want to consider changing to a profit-sharing or 401(k) plan. As the practice evolves, physician business owners should review revenue streams from the past several years, as well as future business plans, with a financial and a tax advisor to determine if the designated retirement plan still complements the business’ needs and goals. At the same time, business owners should work with tax and legal advisors to ensure that the retirement plan meets all applicable legal requirements and regulations. At times, retirement planning may seem like a daunting task, particularly for busy physicians, but, if well prepared and maintained, it can be one of the most important moves you can make for yourself, your business and your employees. The most important thing to remember is that no one has to face this task alone – take advantage of working with a Financial Advisor to help develop a personalized plan that meets your business and personal goals. ### Peter A. Rohr is a Senior Vice President–Investments and Private Wealth Advisor with the Private Banking and Investment Group at Merrill Lynch in Philadelphia. He can be reached at (215) 587-4731 or peter_rohr@ml.com. Neither Merrill Lynch nor its Financial Advisors provide legal or tax advice. You should consult with your own legal/tax advisors regarding your particular situation. . . Obtain Medical Specialty Own-Occupation Disability Insurance On-line

The Pension Protection Act spawns the creation of the Super 401(k) Plan

Physicians News — Mon, 08 Jun 2009 19:01:52 +0000

By Roccy DeFrancesco, JD, CWPP, CAPP, MMB

Most doctors are not aware of the fact that industry altering legislation was passed in 2006 called the Pension Protection Act (PPA). What’s so incredible about the PPA? It allows for significantly increased contributions to a tax-deferred retirement plan for business owners and an ability to be even more discriminatory against the rank-in-file employees.

If it’s that incredible and was passed at the end of 2006, then why don’t doctors who own/run medical practices know about it? Poor service from pension consultants would be the main reason. If you have not been made aware of the changes that I will discuss in this article, you should either start looking for a new pension consultant or at the very least give a hard time to your current consultant(s).

Higher Contributions

After the PPA, the 25% of payroll limit has been dramatically changed. Prior to the act, whether you had a defined contribution plan (401(k)/profit sharing) or a defined benefit plan, your total contributions for all employees could not exceed 25% of payroll. Now, even if you max out a 401(k)/profit sharing plan, you can still add on top of that a contribution to a defined benefit plan (such as a cash balance plan).

Age	401(k) only	401(k) w/Profit Sharing	Cash Balance/Defined Benefit Plan	Super 401(k) Total
65	,500	,000	8,000	9,000
60	,500	,000	1,000	2,000
55	,500	,000	8,000	9,000
50	,500	,000	6,000	7,000
45	,500	,000	,000	7,000
40	,500	,000	,000	8,000
35	,500	,000	,000	,000
31	,500	,000	,000	,000

The changes to the PPA have given rise to what is called a “Super 401(k) Plan” which is code for a maximum contribution plan that uses both, a 401(k)/profit sharing plan and a defined benefit plan. Prior to the act, if the 401(k)/profit sharing plan contributions for a business reached 25% of payroll, you could not add on a defined benefit plan to increase contributions. Now, after the act, this is possible; look at the Super 401(k) totals on the right of the chart and see how much more money can now be contributed to a qualified retirement plan.

Flexibility in Contributions

One other significant benefit to the PPA is that it changed the way employers were forced to calculate contributions to defined benefit plans. One of the biggest dilemmas when helping design a “maximum contribution” qualified retirement plan is what to do when you have an older doctor who’s not terribly interested in contributing to a retirement plan and a younger doctor who very much wants to “max out” a plan?

Prior to the PPA, when using a defined benefit plan, by design, the older you are, the more money an employer must contribute to the plan. For example, if you had two doctors both earning 0,000 a year, if the younger doctor (45-years old) wanted to tax-defer ,000 to the plan this year and the older doctor (age 60) only wanted to contribute the same ,000, you were in real pickle. As the table indicated above, the older doctor’s calculated contribution would be 1,000 which is much higher than the ,000 the younger doctor wanted to contribute.

Under the PPA, you can now choose to equalize the values. Therefore, even a 65-year old doctor could have the same level benefit as 35-year old. This is a very positive change to the laws which makes using a defined benefit plan or a Super 401(k) Plan much more viable.

Summary

If you are looking to maximize contributions to an income tax-deferred qualified retirement plan, there is no better time to do so with the passage of the PPA. The PPA allows for higher contributions and more flexibility in design (which also allows for designs that allow you to legally discriminate in favor of highly-compensated employee owners).

If you have not been approached by your pension consultant to discuss your planning options under the PPA, you should have and I recommend that you become proactive and take steps to find out how the PPA can help you craft a more doctor-friendly plan in your practice.

If you would like a FREE asset protection CD, please e-mail roccy@physiciansfortress.com.

Docs Beware: What’s Wrong With A/R Financing Plans

Physicians News — Thu, 16 Dec 2010 14:31:10 +0000

By Joseph P. Nicola, Jr., CPA, JD, CVA

Physicians of non-profit hospitals are at a disadvantage over their for-profit colleagues when it comes to retirement planning

Physicians News — Tue, 05 Jan 2010 15:50:28 +0000

Your Practice: Finding the Right Retirement Plan

Physicians News — Tue, 05 Jan 2010 15:18:51 +0000

The Pension Protection Act spawns the creation of the Super 401(k) Plan

Physicians News — Mon, 08 Jun 2009 19:01:52 +0000

By Roccy DeFrancesco, JD, CWPP, CAPP, MMB

Higher Contributions

Age	401(k) only	401(k) w/Profit Sharing	Cash Balance/Defined Benefit Plan	Super 401(k) Total
65	,500	,000	8,000	9,000
60	,500	,000	1,000	2,000
55	,500	,000	8,000	9,000
50	,500	,000	6,000	7,000
45	,500	,000	,000	7,000
40	,500	,000	,000	8,000
35	,500	,000	,000	,000
31	,500	,000	,000	,000

Flexibility in Contributions

Summary

If you would like a FREE asset protection CD, please e-mail roccy@physiciansfortress.com.

Docs Beware: What’s Wrong With A/R Financing Plans

Physicians News — Thu, 16 Dec 2010 14:31:10 +0000

By Joseph P. Nicola, Jr., CPA, JD, CVA

Taxation affects many people. Recently, the subject has become the focus of much political attention, most notably involving the Bush tax cuts. The debate directly affects many physicians, whose income levels are the primary target of the possible staggering tax increases when the Bush cuts sunset on December 31, 2010. Most significant among those are the return of 39.6 percent tax rates on earnings and dividends, and 20 percent tax rates on long-term capital gains. Neither the Obama Administration nor Congress has been clear on the extent to which the Bush cuts will be retained. As such, year-end tax planning requires an extraordinary effort to engage in transactions that optimize one’s tax posture under either scenario. Fortunately, Congress provided some relief by way of legislation this year to enhance that process. In September, for example, Congress enacted the Small Business Jobs Act of 2010, and many of its provisions favorably affect physicians. For equipment purchases in 2010 and 2011, the Section 179 expense election increased from $250,000 to $500,000. Equally important, Congress also temporarily expanded these rules to include certain leasehold improvements (up to $250,000), and extended 50% bonus depreciation to 2010, permitting large depreciation expense in the year of the equipment purchase. The effect is to significantly reduce taxes. In addition to these provisions, Congress changed the computation of self-employment income as it pertains to health insurance costs. For the taxable year beginning in 2010, the self-employment health insurance deduction for individuals is deductible in determining net earnings from self-employment. Earlier this year, Congress enacted the Patient Protection and Affordable Care Act of 2010. As part of that Act, Congress provided certain employers with a tax credit for health insurance premiums paid for their employees. Congress also provided certain employers with a new and simple version of the old cafeteria-style plan for tax-advantaged health insurance and other benefits. The effect is to directly reduce the physician’s tax liability, beginning in 2011. The bad news of this legislation is the elimination of over-the-counter medication from certain pre-tax health plans, such as flexible spending accounts and health savings accounts, beginning in 2011. Moreover, tax filing and paperwork responsibilities increase significantly in 2012. In addition to issuing Form 1099-MISC to service providers, such as accountants and law firms, this filing requirement will now be imposed on purchases of equipment, supplies and other goods (where the total paid to a vendor is at least $600 in any year). Why is this important now? Because physician practices will be required to begin sending Form W-9 to their suppliers in order to obtain employer identification numbers. This process should begin soon, in order to avoid the last minute rush and backup tax withholding. Congress also added a mandatory provision regarding the health insurance coverage of children. Under the Act, any group health plan that provides coverage of dependent children must continue to make dependent coverage available for an adult child until the child turns 26 years of age. Conversely, the exclusion from taxable income for reimbursements for medical care expenses under an employer-provided accident or health plan (as well as the deduction for SE health insurance) is extended to a participant's child who is under age 27. Note the difference. Earlier this year, Congress enacted the Hiring Incentives to Restore Employment (HIRE) Act. Under this legislation, Social Security taxes are forgiven for wages paid on previously unemployed individuals hired after February 3, 2010, and before January 1, 2011, as long as the new hire does not immediately displace another employee. Finally, one of the potentially more invasive bills in 2010 has actually yet to pass. Designed chiefly to extend certain tax benefits through 2010, the bill includes a revenue raiser that could affect physicians, if passed. Known as the American Jobs and Closing Tax Loopholes Act of 2010, the bill includes a provision that would cause pass-through income of an S corporation to be subject to the self-employment tax. This would be a radical departure from existing tax law, and would upset the integrity of a great deal of tax planning on the part of physicians. Stay tuned. In late-October, the IRS announced its annual inflation adjustments for pension plans and other tax matters for 2011. As expected, there were virtually no changes. Thus, for example, the maximum Section 401(k) contribution amount remains $16,500 for 2011, and the so-called catch-up contribution remains unchanged at $5,500. The limitation for defined contribution plans remains unchanged for 2011 at $49,000. Gift tax exclusion amount remains at $13,000 for 2011. Finally, remember the Roth IRA. Traditional IRA, SEP and SIMPLE account balances, qualified retirement plan balances, and Section 403(b) tax-sheltered annuities may be converted to a Roth IRA. This opportunity has received a great deal of media attention lately, even though a conversion is taxable. This is due to the fact that the tax-free growth over the course of time, as well as the other benefits of a Roth IRA, may be more beneficial than the detriment of current taxes. This is particularly true in 2010, since the tax liability may be deferred to 2001 and 2012. Perhaps more important, under the Small Business Jobs Act of 2010, employer-sponsored Roth 401(k) plans may now permit in-plan conversions for certain types of accounts balances. Taxes play a major role in practice fiscal planning. Physicians are particularly vulnerable, as they typically fall within the proposed target zone of increased taxation in the near future. In all cases, physicians and their practice managers should stay well in touch with their tax advisors in order to keep the tax burden at a reasonable level. Joe Nicola is a director of taxes with Sisterson & Company in Pittsburgh, PA. He is also a member of the adjunct faculty in the business school at Duquesne University. He can be reached at 412-594-7006 or jpnicola@sisterson.com.

Physicians News » Wealth Management Blog

Physicians News — Thu, 16 Dec 2010 14:31:10 +0000

By Joseph P. Nicola, Jr., CPA, JD, CVA

Physicians of non-profit hospitals are at a disadvantage over their for-profit colleagues when it comes to retirement planning

Physicians News — Tue, 05 Jan 2010 15:50:28 +0000

Your Practice: Finding the Right Retirement Plan

Physicians News — Tue, 05 Jan 2010 15:18:51 +0000

The Pension Protection Act spawns the creation of the Super 401(k) Plan

Physicians News — Mon, 08 Jun 2009 19:01:52 +0000

By Roccy DeFrancesco, JD, CWPP, CAPP, MMB

Higher Contributions

Age	401(k) only	401(k) w/Profit Sharing	Cash Balance/Defined Benefit Plan	Super 401(k) Total
65	,500	,000	8,000	9,000
60	,500	,000	1,000	2,000
55	,500	,000	8,000	9,000
50	,500	,000	6,000	7,000
45	,500	,000	,000	7,000
40	,500	,000	,000	8,000
35	,500	,000	,000	,000
31	,500	,000	,000	,000

Flexibility in Contributions

Summary

If you would like a FREE asset protection CD, please e-mail roccy@physiciansfortress.com.

Docs Beware: What’s Wrong With A/R Financing Plans

Physicians News — Tue, 05 Jan 2010 15:50:28 +0000

By William L. MacDonald Tax-exempt organizations are subject to more stringent IRS rules than their for-profit counterparts in terms of how they can provide nonqualified deferred compensation plans for highly paid employees. Nonprofit organizations should analyze their deferred compensation arrangements to ensure that such arrangements comply with the restrictive tax requirements of Code Section 457. Code Section 457(f) generally provides that in order to defer an employee’s compensation to a future calendar year, the payment of that compensation must be contingent on the employee performing substantial services through a date in a future calendar year. When such a contingency is no longer present, the compensation will be taxed in the first calendar year. For example, if an organization establishes a deferred compensation arrangement that provides an employee an opportunity to defer compensation, the employee must make an election to receive the dollars deferred at some future date (i.e. 2 years) to avoid current taxation. However, under a typical nonqualified plan in this tax exempt environment, the employee generally will be taxed on the $50,000 in the calendar year that the arrangement is established if the payment of that $50,000 is not contingent on the employee performing substantial services for the organization in the two future calendar years. So why would an employee defer current income with the possibility of losing it? Certain arrangements are exempt from the substantial services requirement in Code Section 457, including eligible deferred compensation plans under Code Section 457(b), tax-sheltered annuity plans under Code Section 403(b), and qualified retirement plans under Code Section 401(a). However, there are limits on the amounts that can be deferred under these plans. Nonqualified arrangements without limits fall under Code Section 457(f); however, they cause this substantial service requirement discussed above. Deferred Compensation Alternatives Fortunately, alternatives are available for tax-exempt organizations that seek to set up such plans for their highly compensated employees, including their employed and contracted physicians. By subjecting employer-paid, tax-deferred compensation to “risk of forfeiture” (discussed later) or by paying the required taxes, tax-exempt organizations can develop workable alternatives for funding nonqualified deferred compensation plans. Nonqualified deferred compensation plans in tax-exempt organizations, unlike those in for-profit organizations, are subject to Code Section 457. Two types of deferred compensation plans exist under Code Section 457: eligible and ineligible. Under this code, contributions to an eligible plan (403(b)) are limited to the lesser of $16,500 (as of 2009) or 100 percent of an employee’s annual compensation. In general, it is financially advantageous to highly compensated employees to maximize contributions to 403(b) and 401(k) plans. However, maximizing these contributions can be accomplished only at the expense of the Code Section 457 plan. Non-Profit Organizations Have Few Options for Deferred Compensation Considering there are few options, employees who choose to maximize contributions to Code Section 403(b), 457(b), and 401(k) plans can participate only in an ineligible Code Section 457(f) plan. Many organizations are taking advantage of the ability to maximize their contributions in both the 401(k) or 403(b) and a 457 plan. This coordination allows a person whose employer has a 401(k) or 403(b) plan and a 457 plan to defer the maximum contribution into two plans instead of being subject to a single limit amount. Thus, a participant can contribute the maximum $16,500 for 2009 into their 401(k) and also the maximum $16,500 into their 457(b). If that person is over age 50, they can also contribute the additional catch-up amount into each plan—meaning an additional $5,000 into the 401(k) and another $5,000 into their 457(b). With an ineligible plan, deferred compensation contributions have no limits. However, they are taxed in the current year unless the plan is subject to a substantial risk of forfeiture. It is important to understand why tax-exempt organizations are subject to Code Section 457 for both non-elective (employer-paid) and voluntary (employee-paid) deferred compensation plans. For-profit organizations pay taxes on the deferred compensation until it is paid to employees: tax-exempt organizations, by definition, are not subject to this taxation. In addition, the growth of assets held by tax-exempt organizations to fund nonqualified plans is non-taxable because the organization itself is exempt from taxes. By subjecting nonqualified deferred compensation plans to strict forfeiture requirements, the IRS intends to discourage the provision of tax-sheltered deferred compensation to highly paid employees at the expense of all other employees in the tax-exempt organization. Maximizing Retirement Savings Consider the limits discussed above, and let’s take a look at an example. Let’s assume that a 60 year old physician employed by a non-profit hospital is earning $300,000 annually and wants to significantly increase his deferrals during the next five years in anticipation of retiring upon reaching age 65. The physician participates in a Section 403(b) plan therefore he can contribute $16,500 each year. Since he is over age 50, he can also make an additional contribution of $5,000 each year. If his hospital offers a 457(b) plan, he can make an additional $16,500 and the extra $5,000 make up. He may want to think twice about contributions to the 457(b) plan, as those assets are subject to the hospital’s creditors and could be lost if the hospital becomes insolvent. Under the applicable rules, the physician can be fully vested in the additional deferral in the 457(b) plan, but the deferred amount (plus earnings on the deferred amounts) must remain unfunded or, alternatively, can be funded by the hospital in a "rabbi trust," the assets of which remain subject to claims of the hospital's general creditors. In addition, the physician may defer an unlimited amount of additional compensation pursuant to an "ineligible" Section 457(f) plan. If the physician elected to defer, for example, an additional $50,000 in 2009, such amount would be deducted from the physician's 2009 income and invested in the plan (typically mutual funds) as the physician and his employing entity determine. The $50,000 deferral (plus earnings on the deferral) would be subject to forfeiture if the physician voluntarily elects to terminate his employment prior to reaching age 65 (the targeted retirement date previously selected by the physician), the deferred amount and its earnings would not be subject to income tax until it is actually paid to the physician following the physician's retirement, in accordance with the payment arrangements the physician had previously elected. The problem, as we mentioned above, is that the physician has risk of losing these dollars if he leaves the hospital before a stated date, or the hospital becomes insolvent, therefore, we are not seeing them used as much today. Code Section 457 Guidelines Deferred compensation plans that are subject to Code Section 457(f) include defined contribution plans and benefits provided under individual and group agreements. Early retirement incentives can also be subject to Code Section 457(f). Substantial Risk of Forfeiture As mentioned earlier, ineligible Code Section 457(f) plans allow for tax-deferred compensation only when the deferred compensation is subject to substantial risk of forfeiture. Voluntary deferred compensation plans typically are not subject to forfeiture. Furthermore, tax-exempt organizations traditionally have provided portable retirement benefits to highly compensated employees. The dilemma in developing nonqualified deferred compensation plans for such employees in tax-exempt organizations is a way to achieve tax deferral for vested nonqualified benefits. There is no official guidance on what constitutes “substantial risk of forfeiture” beyond making the payment of deferred compensation conditional on the “future performance of substantial services.” Because of a lack of official guidance, the interpretation of substantial risk of forfeiture varies, and many look to Code Section 83, which also refers to substantial risk of forfeiture. Generally, deferred compensation that is based either on continued employment for a specified period or on the occurrence of a specific event, such as retirement, is considered subject to risk of forfeiture. Thus, after deferred compensation is vested, it is no longer considered subject to substantial risk of forfeiture. If deferred compensation is vested upon the occurrence of a specific event, such as eligibility for retirement, then eligibility for retirement triggers vesting and taxation of the benefit at that time, even if the employee does not retire. Is There an Alternative to Code Section 457(f)? Yes, one alternative is the Professional Security Plan (PSP). The PSP is a wealth accumulation benefit program designed for the highly compensated at nonprofit organizations. The purpose of the PSP is to provide a tax-advantaged savings and investment vehicle without the annual contribution limits imposed on qualified plans, such as the Code Section 401(k) and 403(b) limits, or the restrictions of Code Section 457. What is the Professional Security Plan (PSP)? What sets the PSP apart from traditional deferred compensation plans as well as qualified plans is the way participants are taxed. The participant makes contributions with after-tax dollars, but accumulates all earnings on the pre-tax amount. When money is withdrawn from the PSP, it comes out non-taxable. The 3 Phases of Your Money To see the advantages of the PSP, it is important to think of your money as having three distinct phases. In planning for retirement income, one should focus on the three phases of retirement income planning: the contribution phase, the accumulation phase, and the distribution phase. Understanding these phases will provide a better appreciation of the PSP's design. During the contribution phase, a portion of income is set aside for use in future years. We have always been told that “pre-tax” deferral is better than “after-tax”, but is that always true? By deferring pre-tax, we accept that all distributions at retirement will be taxed at ordinary income. Of course we have no control over the rate in the future. After tax strategies are one reason many people are investing in Roth type arrangements, so they can determine what the tax bite will be now. When you make an after tax contribution into any after tax arrangement, you have more control and full benefit security, since you control the asset. The next phase is the “accumulation” or “investment” phase. This is when your contributions grow. The old saying not to put all of your eggs in one basket rings true during this phase. Truly, investment diversification is important. However, of greater importance is having your money grow non-taxable. Compounding money tax-deferred is a good thing. The final phase is the “distribution” phase. How your tax deferred accumulation is taxed could make all the difference. The important thing to remember is, “It’s not how much you make, but how much you keep.” The distribution phase could be the most important phase of your retirement planning. No one knows what income tax rates will be when they retire. Going from a 35 percent tax bracket to a 50 percent tax bracket reduces your retirement income by approximately 25 percent. The PSP distributes income at retirement without taxation, thus taking the future tax risk out of the equation. Based on the history of U.S. and its top income tax rates, how likely is it they will continue to decrease? The PSP is an after tax strategy which provides the power of pre-tax savings (discussed later) without the contribution limits or age restrictions of qualified plans. To get the maximum value from retirement accumulation, participants should first maximize their pre-tax contributions into their 403(b), 457(b), and 401(k) plans. The PSP can be a great supplement to compete with your colleagues who work in the for-profit environment. How does the Professional Security Plan Work? The PSP achieves its tax-advantaged status as a result of being powered by an institutionally priced variable universal life (VUL) insurance policy generally not available to individuals. Do not confuse this policy with the one you would purchase from your insurance agent or financial planner – it’s much different. First, it’s “institutionally priced,” which means that the policy’s charges are lower than would be the case in comparable retail VUL products. For example, they have no surrender charges. What also makes the PSP unique as a wealth accumulation plan is the policy’s tax restoration loan feature, which allows a participant to take a non-recourse, “tax replacement” policy loan to make up for the taxes paid on the amount of after-tax deposit. Here is an example of the mechanics of the PSP. Let us say you were to receive a $100,000 bonus as income. You owe approximately $40,000 in taxes, which leaves about $60,000 left to invest. You could elect to invest the money in mutual funds, and assuming you were to earn 7 percent annual return, you would have to pay taxes on some portion of the gain depending on how the money was invested. Therefore, you would pay taxes each year on your gains. With the PSP, you would deposit the $60,000 in your account, and the policy tax restoration loan feature would increase your balance to $100,000—the pre-tax amount of your bonus. Assuming you were to earn the same 7 percent return, your PSP account would accrue the gains on the entire $100,000 with no current taxation. Also, any asset reallocation between sub-accounts is not subject to taxation. Later, you could make non-taxable withdrawals of both principal and interest. You made an after-tax contribution, accumulated the money tax deferred and all withdrawals are non-taxable as well. In addition, the PSP provides the participant with a non-taxable life insurance benefit. The policy loan to restore the taxes would be deducted from the policy’s death benefit, along with the capitalized interest. This would reduce the death benefit somewhat, but the approach still compares favorably with the mutual fund investment example, which does not provide a death benefit. *Assumed 40% tax rate. ** Loan and source of loan is optional. If chosen, policy loan is non-recourse. Conclusion This article has addressed the applicability of Code Section 457(f) plans and many of the implications of Code Section 409A. The new world of nonqualified plans, including 457(f) plans, is very complex. Tax-exempt entities should examine after tax alternatives when retirement planning. Attracting, retaining, and rewarding personnel, especially physicians, of non-profit organizations has become more difficult and must be addressed if non-profits are to compete with for-profit businesses. The PSP can help level the playing field when it comes to attracting and retaining key talent. William L. MacDonald is Chairman, President & CEO of Retirement Capital Group, Inc. (www.retirementcapital.com). . . Obtain Medical Specialty Own-Occupation Disability Insurance On-line

Physicians News » Wealth Management Blog

Physicians News — Thu, 16 Dec 2010 14:31:10 +0000

By Joseph P. Nicola, Jr., CPA, JD, CVA

Physicians of non-profit hospitals are at a disadvantage over their for-profit colleagues when it comes to retirement planning

Physicians News — Tue, 05 Jan 2010 15:50:28 +0000

Your Practice: Finding the Right Retirement Plan

Physicians News — Tue, 05 Jan 2010 15:18:51 +0000

The Pension Protection Act spawns the creation of the Super 401(k) Plan

Physicians News — Mon, 08 Jun 2009 19:01:52 +0000

By Roccy DeFrancesco, JD, CWPP, CAPP, MMB

Higher Contributions

Age	401(k) only	401(k) w/Profit Sharing	Cash Balance/Defined Benefit Plan	Super 401(k) Total
65	,500	,000	8,000	9,000
60	,500	,000	1,000	2,000
55	,500	,000	8,000	9,000
50	,500	,000	6,000	7,000
45	,500	,000	,000	7,000
40	,500	,000	,000	8,000
35	,500	,000	,000	,000
31	,500	,000	,000	,000

Flexibility in Contributions

Summary

If you would like a FREE asset protection CD, please e-mail roccy@physiciansfortress.com.

Docs Beware: What’s Wrong With A/R Financing Plans

Physicians News — Tue, 05 Jan 2010 15:18:51 +0000

By Peter Rohr Despite the economy’s ups and downs, it is essential that physicians who are business owners look beyond their near-future investment goals and consider their long-term retirement plan. Taking the time to establish a company-sponsored retirement plan may be one of the most important decisions physicians can make. Not only does finding the right plan help to attract and retain talented medical professionals, but a plan can also enable one to build personal wealth by reducing current tax obligations. There is a simple approach practice owners can take when establishing and maintaining a retirement plan. Putting off establishing a plan due to perceived complexity or excessive costs is unnecessary. Working with a Financial Advisor and tax professional is a strategic and effective way to craft a plan that helps ensure flexibility for your practice, rewards for your employees and potentially, an increase in your personal wealth. Below you will find several standard plans that physician business owners can choose, each with their own benefits and requirements. It is important to note that retirement plans need not be static – physicians should be encouraged to make changes to their retirement plan as their practice evolves. SIMPLE IRA If a physician’s business has 100 or fewer employees and the owner wishes to offer employee salary-deferral contributions, consider the Savings Incentive Match Plan for Employees (SIMPLE) IRA plan for retirement savings. Many other retirement plans necessitate filing requirements and cause owners to incur administrative costs; however, the SIMPLE IRA is not subject to many of these complex and cost-inducing processes. Eligible employees can contribute upwards of $11,500* each year by way of practical payroll withdrawals that may reduce their taxable income. Employees age 50 and older may be eligible to contribute additional “catch up” contributions of up to $2,500*. With a SIMPLE IRA, small business owners are required to contribute either a non-elective two percent contribution for each eligible employee, regardless of participation, or a matching contribution of up to three percent of each participating employee’s compensation on an annual basis. Although employer contributions are generally tax deductible, owners may have concerns about ongoing financial commitments in an uncertain economic climate. If concerned with a long-standing commitment, owners can utilize a convenient alternative plan, a Simplified Employee Pension (SEP) IRA, discussed below. SEP IRA Some retirement plans afford business owners more flexibility to alter their contributions on a yearly basis. A SEP IRA plan may be particularly suitable for a business if the practice’s profits vary from year to year. Employers can make annual contributions that are generally tax-deductible for each eligible employee up to the lesser of $49,000 or 25 percent of a maximum of $245,000*. Less regimented than other plans, the SEP IRA allows the employer to change their contributions based on their business’ performance. Tax Credit SIMPLE and SEP plans have become even more appealing to small business owners due to the tax credit created by the Economic Growth and Tax Relief Reconciliation Act of 2001. If a business owner establishes a SEP or SIMPLE plan and has 100 or fewer employees, he or she may be eligible for a non-refundable income tax credit. This credit can be equivalent to upwards of 50 percent of the first $1,000 administrative and retirement education expenses for each of the first three years of the plan. Profit-sharing Plans If mindful about the business’ cash flow, business owners should consider a profit-sharing retirement plan. This plan’s administrative costs may be higher than other options, but there are additional benefits. A profit-sharing plan allows flexibility in annual employer contributions and can be established for businesses of any size. Business owners are afforded the ability to decide how much to contribute to the plan, if at all. If contributing, a business owner sets the percentage of each participant’s compensation to contribute to the plan each year. This contribution is generally business tax deductible. Profit-sharing plans are subject to compliance testing and IRS Form 5500 filing. 401(k) Plans The 401(k) plan is one of the most well-known types of employee benefit plans. With 401(k) accounts, employees may reduce taxable income by making salary-deferral contributions to a controlled savings investment vehicle. Employer contributions are optional, generally tax deductible and can be made either through employer matching or profit sharing contributions. Due to newly enacted tax laws which increase annual contribution limits, the 401(k) plan became even more desirable. It is important for physicians to keep in mind that 401(k) plans are subject to compliance testing and IRS Form 5500 filing. Defined Benefit Plan Popular among large corporations during the 80’s, Defined Benefit plans have since been replaced by more affordable large-scale plans. However, small business owners may find these plans more attractive, especially those approaching retirement age. A small business owner may be able to make substantial contributions to quickly build a retirement nest egg with this plan. Younger employees should consider some potential drawbacks to Defined Benefit plans. Because they have many years to save before retirement, their contribution limits are lower than more senior employees. If younger employees cannot pay their contributions on time, then they should switch their plan, as contributions are compulsory. In addition, Defined Benefit plans have several filing requirements including IRS Form 5500 and Pension Benefit Guaranty Corporation (PBGC) reporting requirements and premium payments. Retirement Plan Alternatives If averse to formally sponsoring a retirement plan, physician business owners can still allow employees the opportunity to contribute to their IRA through payroll deduction. Though not an employer-sponsored retirement plan, this retirement savings vehicle gives employees the ability to contribute up to $5,000* to their IRA. Employees age 50 and older may be eligible to contribute additional “catch up” contributions of up to $1,000*. The most important thing to remember when determining an employee retirement plan is to keep open lines of communication to increase the likelihood of participation. One way to ensure employees understand their options is to offer pre-enrollment and enrollment education seminars. Additionally, physician business owners should create a checklist for employees to guarantee that they will have proper documentation for their application including a current copy of the Summary Plan Description and all other credentials required by law. If a physician’s practice has already established an employee retirement plan, it is still essential to reassess the plan on an annual basis to ensure the owner and his or her employees are enjoying the maximum benefits from the plan. With changes in a practices’ success, the business may grow or shrink, and every plan outlined above caters to different models of business. When first starting out, practice owners may find that an SEP IRA or SIMPLE IRA is the most appropriate choice. As cash flow improves, or as employees are added, owners may want to consider changing to a profit-sharing or 401(k) plan. As the practice evolves, physician business owners should review revenue streams from the past several years, as well as future business plans, with a financial and a tax advisor to determine if the designated retirement plan still complements the business’ needs and goals. At the same time, business owners should work with tax and legal advisors to ensure that the retirement plan meets all applicable legal requirements and regulations. At times, retirement planning may seem like a daunting task, particularly for busy physicians, but, if well prepared and maintained, it can be one of the most important moves you can make for yourself, your business and your employees. The most important thing to remember is that no one has to face this task alone – take advantage of working with a Financial Advisor to help develop a personalized plan that meets your business and personal goals. ### Peter A. Rohr is a Senior Vice President–Investments and Private Wealth Advisor with the Private Banking and Investment Group at Merrill Lynch in Philadelphia. He can be reached at (215) 587-4731 or peter_rohr@ml.com. Neither Merrill Lynch nor its Financial Advisors provide legal or tax advice. You should consult with your own legal/tax advisors regarding your particular situation. . . Obtain Medical Specialty Own-Occupation Disability Insurance On-line

Physicians News » Wealth Management Blog

Physicians News — Thu, 16 Dec 2010 14:31:10 +0000

By Joseph P. Nicola, Jr., CPA, JD, CVA

Physicians of non-profit hospitals are at a disadvantage over their for-profit colleagues when it comes to retirement planning

Physicians News — Tue, 05 Jan 2010 15:50:28 +0000

Your Practice: Finding the Right Retirement Plan

Physicians News — Tue, 05 Jan 2010 15:18:51 +0000

The Pension Protection Act spawns the creation of the Super 401(k) Plan

Physicians News — Mon, 08 Jun 2009 19:01:52 +0000

By Roccy DeFrancesco, JD, CWPP, CAPP, MMB

Higher Contributions

Age	401(k) only	401(k) w/Profit Sharing	Cash Balance/Defined Benefit Plan	Super 401(k) Total
65	,500	,000	8,000	9,000
60	,500	,000	1,000	2,000
55	,500	,000	8,000	9,000
50	,500	,000	6,000	7,000
45	,500	,000	,000	7,000
40	,500	,000	,000	8,000
35	,500	,000	,000	,000
31	,500	,000	,000	,000

Flexibility in Contributions

Summary

If you would like a FREE asset protection CD, please e-mail roccy@physiciansfortress.com.

Docs Beware: What’s Wrong With A/R Financing Plans

Physicians News — Mon, 08 Jun 2009 19:01:52 +0000

By Roccy DeFrancesco, JD, CWPP, CAPP, MMB

Higher Contributions

Age	401(k) only	401(k) w/Profit Sharing	Cash Balance/Defined Benefit Plan	Super 401(k) Total
65	$20,500	$51,000	$188,000	$239,000
60	$20,500	$51,000	$181,000	$232,000
55	$20,500	$51,000	$138,000	$189,000
50	$20,500	$51,000	$106,000	$157,000
45	$15,500	$46,000	$81,000	$127,000
40	$15,500	$46,000	$62,000	$108,000
35	$15,500	$46,000	$47,000	$93,000
31	$15,500	$46,000	$38,000	$84,000

Flexibility in Contributions

Prior to the PPA, when using a defined benefit plan, by design, the older you are, the more money an employer must contribute to the plan. For example, if you had two doctors both earning $500,000 a year, if the younger doctor (45-years old) wanted to tax-defer $81,000 to the plan this year and the older doctor (age 60) only wanted to contribute the same $81,000, you were in real pickle. As the table indicated above, the older doctor’s calculated contribution would be $181,000 which is much higher than the $81,000 the younger doctor wanted to contribute.

Summary

If you would like a FREE asset protection CD, please e-mail roccy@physiciansfortress.com.

Physicians News » Wealth Management Blog

Physicians News — Thu, 16 Dec 2010 14:31:10 +0000

By Joseph P. Nicola, Jr., CPA, JD, CVA

Physicians of non-profit hospitals are at a disadvantage over their for-profit colleagues when it comes to retirement planning

Physicians News — Tue, 05 Jan 2010 15:50:28 +0000

Your Practice: Finding the Right Retirement Plan

Physicians News — Tue, 05 Jan 2010 15:18:51 +0000

The Pension Protection Act spawns the creation of the Super 401(k) Plan

Physicians News — Mon, 08 Jun 2009 19:01:52 +0000

By Roccy DeFrancesco, JD, CWPP, CAPP, MMB

Higher Contributions

Age	401(k) only	401(k) w/Profit Sharing	Cash Balance/Defined Benefit Plan	Super 401(k) Total
65	,500	,000	8,000	9,000
60	,500	,000	1,000	2,000
55	,500	,000	8,000	9,000
50	,500	,000	6,000	7,000
45	,500	,000	,000	7,000
40	,500	,000	,000	8,000
35	,500	,000	,000	,000
31	,500	,000	,000	,000

Flexibility in Contributions

Summary

If you would like a FREE asset protection CD, please e-mail roccy@physiciansfortress.com.

Docs Beware: What’s Wrong With A/R Financing Plans

Physicians News — Fri, 05 Jun 2009 15:33:47 +0000

By Roccy DeFrancesco

Have you been pitched an “asset protection” plan where you can protect the most valuable asset of your medical practice and build a tax-free retirement with the same plan? If you have, you’ve been pitched one of the most abused plans in the marketplace today (and if you have not been pitched this plan yet, you will be soon).

Doctors have been getting pitched this “asset protection” concept for years and due to an increase in activity by sales people hitting pushing the plan, I thought it was time to put out a cautionary article on it.

History of A/R Financing

This topic has been around for nearly 20-years in one form or another.

It is a favorite of some life insurance agents who love it because it helps them sell huge life insurance policies. Unfortunately, most of the time the purchasing doctors have no idea what they are getting into and many times the plans are sold in a non-full disclosure manner.

What is an A/R Financing Plan? It is a concept where a medical practice or company simply borrows money against their Account Receivables (A/R) and “invests” the borrowed money for retirement purposes (into cash value life insurance).

The “sales” pitch is two-fold: 1) The doctor needs to protect the medical practice’s A/R from creditors (patients); and, 2) the doctor can create a large retirement nest egg using a cash value life insurance policy funded with the borrowed money.

The financial viability of this plan is absolutely marginal and it is an extremely risky plan to implement. Additionally, the sales pitch is typically delivered (intentionally or not) in a non-full disclosure manner.

The Sales pitch (this illustrates why I do not like this concept)

Life agent: Doctor, did you ever think about the fact that your A/R is the largest asset of your medical practice and that it is an asset which is subject to the claims of creditors?

Doctor: No, I never thought about that before.

Life Agent: Also, did you ever think about the fact that your practice’s A/R is its largest asset that is just sitting around as a “stagnant asset” (meaning it is an asset that is not building you wealth).

Doctor: No, I never thought about that before.

Life agent: Doctor, would you like me to show you how to protect your A/R from creditors and show you how to create significant wealth for retirement at the same time?

Doctor: Absolutely.

Then the life insurance agent pulls out a life insurance illustration showing the physician how pouring $300,000 of borrowed fund (assuming the real A/R of the practice is $300k) into a cash value life insurance can generate enormous amounts of “tax-free” income in retirement. It sounds like a no lose proposition, asset protect a large vulnerable asset (the A/R) and create a large tax-free retirement nest egg.

Total Nonsense

This sales approach is total nonsense in my very informed opinion. Understand that I used to sue doctors for a living when I practiced law, I ran an orthopedic clinic for three years, and I’m licensed to sell malpractice insurance to doctors (not to mention that I wrote a book called The Doctor's Wealth Preservation Guide where I show doctors how to do “real-world” asset protection).

To be brief, here are just a few of the problems with this sales approach:

1) The A/R is hardly at risk in a medical malpractice lawsuit. Ask around, have you ever heard of anyone actually losing their A/R in a medical malpractice suit? The answer will be no. There are multiple reasons why that I don’t have time to go into in this newsletter.

Think of this though, a doctor has personal medical malpractice liability coverage AND the medical practice has its own separate coverage with a separate policy and limits. The medical practice policy costs only 10-20% of what it costs the doctor for his/her policy. Why? Is it because insurance companies want to lose money? No, it’s because the practice has very little liability in your typical medical malpractice case (therefore, the practice’s assets are not typically at risk in a medical malpractice lawsuit).

To bring this into perspective, the A/R in a medical practice is more at risk to a sexual harassment lawsuit of an employee or a slip and fall of a patient than a medical malpractice lawsuit.

2) The doctor, may times, is told to write off the interest. This is footnoted in most sales presentations. It’s footnoted because most vendors who offer this concept will not “officially” tell a client the interest can be written off. Typically, this issue is left to the local CPA who has no idea that you really can’t write it off (see Title 26, 264(a) of the code). If you can’t write off the interest with this concept, it becomes much risky from a pure financial standpoint.

3) Much of the time the projections are not real-world. This concept is pitched to doctors of many ages, but it is most common to be sold to a 35-55 year old. The illustrations typically show a static loan interest rate based on “current rates.” As you know, interest rates currently are very low. Only 20 years ago commercial interest rates were north of 15%. But many illustrations given to clients show today’s interest rates projected out 20+ years (which is not realistic).

Further, the life insurance illustration is typically illustrated with an 8-9%+ rate of return (which is NOT a conservative illustration to say the least).

Lawsuits

While I’m not going to go into specifics in this newsletter, I want to let you know that there have been lawsuits over this sales technique and a few high profile near misses. The Texas Medical Association looked at educating their doctor members on this topic until a huge lawsuit was threatened by one if its members who was involved with an A/R Financing plan.

What does that mean? It means that doctors are buying this concept because it sounds like a no lose proposition. Then 1-2 years into the deal, they figure out that it’s not what they thought it was and that they were sold the plan in a non-disclosure manner. Then they are suing the life insurance agent or other advisor who recommended it.

Conclusion

DO NOT believe all the hype with this topic. In the “real world” you’re A/R is hardly at risk in a medical malpractice lawsuit. When you run conservative illustrations about the interest expenses and the rate of return in the investment recommended, you’ll find that the plan is far too risky to implement for the potential benefits that can be provided in retirement.

If you want to bring a grow wealth in a tax-favorable manner, you should look at concepts like the Super 401(k) Plan or even a Captive Insurance Companies, which are time tested tools that you can rely on to grow your wealth.

If you would like a FREE asset protection CD, please e-mail roccy@physiciansfortress.com.

Roccy DeFrancesco, JD, CWPP, CAPP, MMB Author: The Doctors Wealth Preservation Guide http://www.physiciansfortress.com