A traditional physician employment contract is part of your conditioning during training.
Through medical school and residency, you align yourself with healthcare corporations (yes medical schools are a BIG business) and sign up for the associated corporate benefits packages. You end up trusting in their collective wisdom and the beneficence of the packages given to you and your peers.
This all sets in motion a mindset that continues when you graduate from a residency:
1. Align your Professional Life with a trusted healthcare corporation, and sign up to work for them under a fair market value arrangement.
2. Let that same trusted corporation resource your benefit plan as part of your compensation package and trust that it is built to maximally benefit your personal life.
This is the pattern that you are conditioned to follow in your training and is reinforced by the same employed medical educators that influence you. You are trained to do what they do professionally, and this includes their job choices. What they do is sign employment contracts with big business healthcare and blindly accept their benefits package. In this context, the blind then lead the blind (you).
There was a day and time when big company retirement pension plans and healthcare plans were truly a benefit. They were robust and excellent. I can recall my first hospital employee contract that included free medical care at that facility including labs, x-rays, ER, outpatient visits, etc. This was included in my benefits package and I paid nothing for it out of my paycheck. It was truly a benefit.
Those days are gone. A relic of the past. Now a good portion of costs for many benefit programs are shared by you and your employer, and it seems more and more of it is paid by the individual.
This includes pensions that used to be a bedrock benefit for employees. Now only 4% of private sector employers offer any kind of defined benefit plan, which is down from 60% in the early 1980s. Pensions have now transitioned to newer tax-advantaged retirement funds like 401(k)’s are offered as replacements and are filled more and more by the employee rather than the employer. At this time, only 50% of employers offer any sort of matching program for employees with 401(k) funds. You are paying for more and more of this yourself.
Most of you don’t realize that your benefits package offered by your employer, lacks any ability to be individualized. By definition, as a large corporation, the benefits they offer can’t be individualized due to federal laws like ERISA that sets boundaries in place for all corporate employees regarding retirement and health plans. While ERISA is important for equality purposes, the downstream effects on you as a high-income earner are significant, especially concerning your retirement plan.
Before I started my PC, I was pleased as a punch that I had maxed out my retirement benefits with my employer. I had no idea what I was shooting for, or if it would be “enough”. I was ignorant about what I would need and didn’t know how to calculate my net worth. But it just made sense to max out all of my corporate retirement options assuming this would all add up to be enough. But after I formed my PC and began to pay for all of my retirement plans, I realized how the caps placed on those prior employer accounts, due to ERISA, would have never gotten me to the totals needed to support my desired retirement lifestyle.
When you are a traditional employee you will be limited to the amount you can save in tax-advantaged contributions to your retirement accounts. The 2022 cap with ERISA is currently $61,000 (a combination of employer and individual contributions).
Using some simple math if you maxed this out with every paycheck, the 30-year total (without growth or interest) is $1,830,000. Although that is a lot of money it will only get about halfway to the estimated needed nest egg for most physicians which is $3-5 million.
When I was a traditional employee I used to naively believe that maxing out my retirement contributions would be enough. I think many of you assume the same thing as you trust in the wisdom of our federal government and your employer to organize this for you. I think this is especially common early in your career and is easily missed if you don’t monitor your net worth regularly.
One of the greatest benefits to opening your PC is that both you and your spouse (if they are employed by you) now have the opportunity to set up an individual defined benefit plan (like a cash balance plan) that allows for tax-advantaged contributions well over $200,000 annually (amount is based upon actuarial tables).
This is over 3x the amount in comparison to a traditional employee and easily provides the estimated $3-5 million that you will likely need for retirement.
The amount that you can contribute will be proportional to the size of your 1099 income that flows into your Private Corporation.
Retirement shortfall is an emerging problem in the employed physician world where it is estimated that most employer programs will only meet 25% -50% of a physician’s retirement needs as noted above. But through my PC, I will easily hit the needed Net Worth mark needed a full 10 years ahead of schedule. Financial Independence in my 50’s feels good!
When you own your Professional Corporation (PC), you have regained total control over your benefits which can be individualized in a package for your benefit. Now that is novel, a benefits package that helps you reach your personal goals.
Physicians fear having to resource their benefit plans due to time and knowledge constraints. No worries, there are plenty of companies that help small businesses do this. Hire one. For example, SimpliMD is a comprehensive physician agency that helps doctors do this. This is easier than you think.
The fact is that as a traditional employee you pay a growing portion of your employer’s benefit plan and yet have little or no control over how it is organized to meet your needs. The result is that you pay for things you don’t need, you will come up short on your tax-advantaged retirement funds, and miss out on fringe benefits that you could use. Although your employer’s benefit plan is turnkey for traditional employees, and usually comprehensive, it has significant limitations because it cannot be individualized for you and your family. Those limitations may not seem all that significant on the surface but as we will unpack it does have important implications for you.
When you transition to a PC-employment lite contract you will now gain full control over the sourcing and creation of a benefit plan that is designed to individually benefit you and your household. In contrast to large employers, small businesses can provide their owners a host of unique benefits that include automobile expenses, unrestricted continuing medical education, cell phone-digital services, business expenses, home office expenses, private school reimbursement, employment of spouse and children, health, life, disability insurance, as well as unique retirement plans that allow for larger contributions than traditional employment contracts. Each benefit can be crafted around the needs of you and your family. Therefore your business only pays for the benefits you need.
Ultimately the fringe benefit plan offered to you from your PC should be designed specifically to benefit you and your household, and in turn, they are underwritten by the tax-advantaged framework of your individual-PC business structure.
When you sign a traditional employment contract, you also lose control over your income flow and therefore give away a lot of your hard-earned income to taxes and benefit plans that are organized for the masses, not for you individually.
In this arrangement, you have lost another piece of autonomy in your life. Control over your benefits. By taking over control of your benefits through your PC, you have cut another tie with those who try to control you.
Traditional employment contracts result in giving away millions of dollars during your career, in part due to the restricted benefit programs offered.
The fact is that you are a business, and you subjugate your right to organize yourself as a PC by engaging in a traditional contract with your employer.
Physicians are afforded unique treatment in the US tax code as simultaneously being an individual and a business corporation through what is called a Professional Corporation (PC).
When you form your PC, you now have two entities to flow your hard-earned income through, and this leads to individualized benefits and increased tax strategies.
So how do you regain control over your benefits, and also lower your effective tax rate through your PC?
You organize an employment lite contract (PSA) between your current employer and your PC and in the process take over control of your benefits. In this arrangement:
1. Your PC pays you an IRS-compliant reasonable salary for your professional services that are contracted out to your large corporate employer in a PC-employment lite agreement. Through the power of individual small business ownership, you will be able to lower your effective tax rate on this salary.
2. Your PC will now pay for your fringe benefits and this can be highly individualized to meet your household needs. Most PCs are set up as S-corps and can be organized to provide your desired benefits. I suggest you work with an attorney experienced with setting up PCs for physicians to maximize all of your tax-advantaged benefits.
3. Maximizing your benefits through your PC will reduce your out-of-pocket expenses as the business expense will ultimately reduce your pass-through (if you are an S-corp) taxation on your income. This ultimately reduces your household expenses for benefits (remember traditional employees pay for more and more of their benefits themself) and does it in a tax-efficient manner.
4. You can dramatically increase your tax-advantaged retirement funding through a defined benefit program such as a cash balance plan. This grows your net worth in a much more tax-friendly fashion.
5. Your PC can be used to employ household members such as a spouse and children. This allows you to keep more of your business’s resources within your home and opens up some unique benefit plans like a solo 401(k) for your spouse, Roth IRAs for your children, and private school tuition reimbursement benefits, just to name a few.
6. Your PC can pay for your entire CME expenses that occur anywhere in the world, assuming the CME is legitimate. This is one of my favorite benefits and I particularly like using CME Away out of Canada because they have a “spouse travels for the free program”. My wife and I have gone on several of these trips and thoroughly enjoyed the high-quality CME, as well as the business-covered travel costs.
All of these individualized benefits are possible when your form your PC and wisely leverage your dual tax code status as an individual and a business.
Now that you are aware of what is possible, you can reap the benefits of being both an individual AND a corporation.
Employed physician, you are more than an individual taxpayer, you are a business, and you should have your corporation (PC) to maximize your benefit and tax strategies.
Dr. Inc.
