Georgia Physician Magazine

By Jay Geaslen

A Smart Strategy
Retirement funds may be protected against litigation.

Georgia's doctors are more concerned than ever over the threat of lawsuits. And it's no surprise. Fewer carriers have resulted in skyrocketing premiums and difficulty in obtaining professional liability insurance in certain high-risk specialties.

Assets of tax-qualified retirement plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) are generally not subject to garnishment, levy, attachment or other legal process and cannot be obtained by creditors in a bankruptcy proceeding. Although this protection is not available to a retirement plan covering only a sole proprietor, it could be advantageous to many medical practices. Knowing the current level of contributions that are afforded a retirement plan participant could help the practitioner protect more of his assets for retirement.

Tax legislation since 1999, particularly the Economic Growth and Tax Relief Reconciliation Act in 2001, has made significant changes, providing enhanced design opportunities in retirement plans. With so much liability protection afforded to qualified retirement plan assets, why do so many medical practices fail to take advantage of this? With smart planning, many practices could increase total contributions to physicians. In fact, practices may be able to double the amounts of contributions to doctors, with totals from $75,000 to more than $100,000 per doctor, per year - fully qualified, tax deductible, growing tax deferred and fully exempt. The IRS limits the amount of overall plan contributions that may be tax deductible on an annual basis. In addition, maximum limits regarding allocations to individual accounts exist. Careful design will enable one to maximize these limits.

Defined contribution plans: The basics
The most common qualified retirement plans are known as Defined Contribution (DC) plans. Many DC plans are profit sharing plans with and without 401(k) features. Most established practices have a combination of features and plans. The maximum level of contribution for DC plans in 2005 is $42,000 ($45,000 when combined with the $4,000 catch-up contribution afforded to plan participants aged 50 and older). A common design incorporates the maximum 401(k) salary deferral of $14,000 for 2005, coupled with an employer match based upon a percentage of payroll/income, plus a discretionary profit sharing contribution to eligible employees. The combination of these three elements generally allows the doctors in the practice to reach the total maximum contribution of $42,000.

Sound easy? Here's where things can get a bit dicey - design alternatives and opportunities abound.

Let's start with the 401(k) component. Again, we begin with the $143,000 maximum salary deferral for 2005. Most practices utilize a Safe Harbor non-elective contribution, generally opting for the fixed 3 percent of pay immediately vested contribution given to all plan participants. This Safe Harbor non-elective contribution allows the practice to pass its top-heavy requirements and Actual Deferral Percentage (ADP)/Actual Contribution Percentage (ACP) testing without running complicated discrimination tests. These tests generally compare the levels of contributions to (or assets in) the retirement plan of doctors with those of the staff, imposing maximum allowable differences before corrective action must be taken.

The remaining contributions come from the profit sharing component. This is generally where the lion's share of the employer contribution is made. For the average doctor in a practice who receives the maximum $42,000, $14,000 is salary deferral, roughly $6,150 is the Safe Harbor contribution and $21,850 is the profit sharing contribution. In order to pass required testing and raise the total contribution from doctors to this $42,000 total ($45,000 for doctors and eligible participants aged 50 and over), the practice generally finds it must contribute anywhere from 6.5 percent to 8.5 percent of payroll to staff.

Defined contribution plan design alternatives
So, what are your alternatives for DC plans? Many practices forgo 401(k) plans entirely, only providing staff with profit sharing contributions that are tied to a cliff-vesting schedule and funded after the end of the plan year. Several practices have reduced overall contributions by as much as 15 percent to 20 percent, or as much as $100,000 for an average-size practice, by adding a 401(k) component. For practices providing a non-elective 3 percent Safe Harbor contribution, employee demographics might make it more cost effective to revert to an employer fully elective match that is tied to a vesting schedule, and contribute targeted top-heavy profit sharing contributions to pass the plan's testing requirements. Design considerations generally tie profit sharing contributions to a last-day rule. That means that to be considered full-time and, therefore, qualify for employer contributions (whether they be match or profit-sharing), an employee must work at least 1,000 hours during a plan year and be employed by the practice on the last day of the plan year. Vesting schedules for match and profit sharing contributions can also vary, if need be.

Finally, many profit sharing contributions are made using traditional calculation methods. Again, the demographics of your practice may dictate the method of calculation that best suits it. Alternative methods include age-weighted, social security integration and cross-tested design plans. Cross-testing is a calculation method that tests DC contributions as if an annuity payable at retirement age. The testing method may enable a plan to provide differing levels of contributions to different groupings of employees. For example, in a recent design study, a neurology practice was able to save nearly 20 percent on its profit sharing contribution alone by employing cross-testing vs. the standard calculation method. This was accomplished by setting up four groups of employees - shareholder doctors, non-shareholder doctors, practice management and staff.

How do you know whether any of these options makes sense for your practice? It's worth having a retirement plan design audit performed for your practice by a qualified plan specialist who works with medical practices. This will enable you to decide whether any of these alternatives makes sense for you. If your plan design is already using an optimal formula, the review will be a confirmation and give you peace of mind regarding a major asset. Over the last 10 years, I've worked with numerous clients to design effective retirement plans. For ERISA-qualified designs, I collaborate with a team of specialists including an actuary, who is both a Fellow of the Society of Actuaries and an Enrolled Actuary, and a DC plan professional with the Certified Employee Benefits Specialist (CEBS) designation.

Your retirement plan on steroids
The strategies mentioned will fine-tune the qualified retirement plan design for most practices. If your practice is already contributing the maximum $42,000 for doctors, and you don't wish to reduce the level of benefits to staff, what else can you do? Consider establishing a cash balance defined benefit plan in addition to your defined contribution plan, and cross-test between the two plans. For many practices, shareholder doctors in the practice have been able to increase their total contributions to both plans to as much as $75,000 to $100,000. Again, since these are ERISA-qualified benefits, the assets are considered exempt assets in a lawsuit both federally and at the state level. Most medical practice clients are able to achieve these significantly higher contributions for doctors with no appreciable increase in contribution to staff. The best way to illustrate both plans is via a case study (see p.18).

Weigh your options to maximize your plan design
If the doctors in your practice are concerned about protecting their assets in potential lawsuits and increasing their 2005 401(k)/profit sharing plan contributions, the first step is to review your plan design. To protect your major tax-deductible, tax-deferred and exempt-asset investments, make sure you are taking full advantage of your retirement benefits. It's important for you to understand all the implications of adopting any plan design changes. Armed with an understanding of your objectives; your practice's census data; and copies of your plan document, summary plan description and 2003 Form 5500; a specialist in retirement plan designs should be able to review your situation to determine if plan design alternatives could potentially benefit you and your practice. Taking maximum advantage of the savings in a tax-qualified plan subject to ERISA is a smart strategy that has the added value of protecting your retirement assets in a lawsuit. It could be just what the doctor ordered. nGP

Case Study: An illustration of a cash balance defined benefit plan and a defined contribution plan
The medical practice in our study currently has an integrated discretionary profit sharing plan and a 401(k) plan with an employer match. The practice is comprised of 18 physicians (12 shareholder physicians) and 90 support staff/technicians. The staff receives a 3 percent Safe Harbor contribution, plus an annual discretionary profit sharing contribution, averaging 13 percent of payroll total annual staff contribution. With this current design, the doctors were able to defer/contribute approximately $40,000 each in 2003. The design ultimately adopted by the practice combines the existing Safe Harbor 401(k) with a cross-tested profit sharing plan (with three groupings of employees) in concert with a cash balance defined benefit plan. If 10 percent of payroll was contributed to staff, the total doctor contributions increased to the following for 2004:

Age	Defined Contribution Amount	Defined Benefit Amount	Total Contributions Amount
36-38	39-46	47-55	56+
$35,000	$38,000	$41,000-$44,000	$44,000
$23,000	$33,000	$37,000	$55,000
$58,000	$71,000	$78,000-$81,000	$99,000

Ultimately, the practice in this study chose to continue to match the average 13 percent of payroll to staff, with the doctors maximizing their contributions based upon that higher level rather than the lower 10 percent used in the preliminary design. While the total benefits to the doctors were not appreciably different between the 10 percent and 13 percent levels of contribution to staff, the practice decided not to reduce the current benefits to staff. Levels in 2005 will be adjusted to reflect the $14,000 salary deferral maximum, the $4,000 catch-up amount for those aged over 50 and a slightly higher level of contribution to the cash balance plan based upon doctorsÕ attained age. These contributions may be fully deductible to the practice, will grow tax deferred to retirement for the participants (this should be reviewed with tax counsel before implementation), and are considered exempt assets in a lawsuit. Contributions that are deductible are limited to the greater of the minimum funding requirement of the defined benefit plan or 25 percent of compensation without regard to 401(k) contributions. The demographics of the plan will need to be assessed to ensure these deductibility limits are maximizing without being exceeded.