Good day, this is Dr. Incorporated bringing you this week’s installment of the Truth About Employed Physicians. I want to thank you for all that you’ve done this week in your job as a physician.
Keep Doing the Right Thing
Regardless of where you’re located in this country, there are so many people who have been benefited from the work that you do taking care of patients every day. I know a lot of those patients don’t often offer their responses of gratitude to you, but I want you to know that as a fellow physician I know the hard work that you do. All those extra hours you put in, the attention to detail, the extra phone calls, the personal efforts that you make to speak to patients one on one to relay information that is very personal and pertinent to them, I want to thank you for that. I’m reminded this week of a patient who called to leave a message for me to express to me their gratitude for the work I’ve been doing with their children. It was a nice message because it wasn’t asking me for anything, it was just simply an expression of their appreciation for the work that I do for them that goes above and beyond the normal call of duty that we have as physicians. I hope maybe you’ve received a note or a verbal response like that from a patient this week. If you haven’t, keep doing the right thing for the right reason and keep working hard to take care of patients the way you’ve been called to. I want to express my gratitude to you for doing that.
Employer Benefits
This week’s truth is going to be talking about some of the benefits that we receive from our employers in terms of our employer packages. This week’s truth is:
Truth: There are 4 Employ Benefits That Are Not Beneficial To Physicians
We’re going to take some time today to unpack this a bit more, but those four benefits that I want to highlight this week are
- Your Retirement Program(s)
- Your CME Benefits
- Your Health Insurance
- Your Profession Deductions and Tax Strategies
Employment Versus Employment Lite Benefits
I love being an employed physician and I know many of you who are fellow employed physicians feel the same way; there are so many good things about being an employed physician in today’s healthcare environment. But one of the things that I want you to also recognize is that there are things that you give up in the process of choosing to be an employed physician and choosing to accept the benefit programs and packages that your employer offers to you. There are limitations to those, that’s why today we’re going to talk a little bit about those. I will also express to you that what I’ve discovered is that you can choose to remain employed, but by choosing an employee light contract or program as opposed to the traditional employment program, you can maximize some of these benefits. I’m going to elucidate to you today some of the limitations that you have in your traditional employment packages and then contrast that with some of the benefits that you can obtain by transitioning to an employment light type contractor program. I’m not pushing for one way or the other, but I certainly want to make you aware of those limitations.
Retirement Savings
Let’s talk about retirement savings first. It’s important for you to know and understand an acronym called ERISA: the Employment Retirement Income Security Act. This is an act that heavily influences what your employer can offer to you in terms of retirement plans, and it covers most employer-sponsored retirement plans. That includes 401k plans, pensions, deferred compensation, and profit-sharing plans. It does not cover retirement plans set up and administered by government entities and churches such as many of the 403 b plans. It also does not apply to simplified employee pension plans or set plans and it doesn’t apply to individual retirement accounts. But most of you have some sort of 401k or a Roth 401k program that your employer provides, which allows you to maximize savings for retirement and benefit from the tax breaks associated. The reward to you as an employer is by you participating in these programs you Receive tax-free money that goes into these programs. And due to the rising costs of living that exist in our country, etc. These are great programs for you to participate in. And I certainly encourage you to maximize your 401k or Roth 401k program. Contributing to these 401k programs allows you to use pre-tax dollars. Pre-tax monies mean that it flows directly from your paycheck into the plan before the taxes are deducted. As a result of this less of your income ends up getting taxed. The assessment of the tax is at the point of when the funds are removed from the account, which is usually at a lower rate for physicians in particular high-income earners. Right now your effective tax rate is likely to be much higher than it is when you eventually retire. Now, there is a thing called a Roth 401k program on which you can also contribute after-tax money to a 401k program. And after-tax means that the cash flows from your check into the plan after tax deductions. The trade-off of this qualified withdrawal is that you are down the road, you find that these funds are tax-free A Roth 401k plan is a particularly useful tool if you end up in a lower tax bracket after retirement Many physicians find these Roth type programs are really wise to invest in. But here’s the kicker that you need to know and understand: employees are limited by ERISA to the same rules for tax-advantaged savings as it applies to the lowest level employee in their company There’s a maximum of $19,500 that can be placed in these 401k programs and up to $6,000 can be applied if you’re over 50, in addition to the $19,500. These employee ERISA limits are typically not going to lead to enough savings on a pre-tax basis to allow you to reach the retirement lifestyle that you’re used to in your pre-retirement days. This is a little-known fact that basically the amount that your employer is going to be able to maximize with you and your partnership with them will typically only lead to you reaching about 50% of your retirement needs as a physician. This is a critical thing to understand. The bottom line is that your 401k program as a physician is likely to lead to a retirement shortfall.
ERISA Will Lead To A Retirement Shortfall
A lot of physicians don’t realize this, they basically are maximizing their 401 k and stacking away that money, ultimately trusting in the process of accumulating that money that it will lead to a nest egg that will allow them to retire at a level they want. Today’s ERISA caps make it really difficult to reach that goal. It’s also difficult for physicians to often save enough money with after-tax savings to really reach that goal as well. So what’s the solution? employed physicians can work with their financial planners to become super savers. They can work with their employer-sponsored program, typically in a 401k, to bank away as much pre-tax as possible, and then you’re going to augment those post-tax savings in a program that allows you to reach your projected goal.
How to Fix The Shortfall
My recommendation is for you to consider converting to an employee light contract, for you to form your own PC, and to craft an individualized retirement program that allows you to reach your projected needs. When I made this move I was able to restructure my retirement savings from the ERISA limitations of $56,000 pre-tax to nearly a $200,000 pre-tax retirement savings program through a 401k defined benefit plan for my wife and me that nearly increased our retirement program to four times that what I was receiving through my employer and allowed me to more comfortably reach the desired destination that I had in retirement.
Understand Your Situation
This is a pretty big deal for most physicians and the bottom line I want you to understand as an employed physician is that your current employment program for retirement likely will not allow you to reach your desired destination at retirement. I want you to think about this, maybe work with your tax or financial planner to think through more strategically how you can reach the goals that you will have in retirement. Consider bulking this up through the various programs your planner can help you with, or consider transitioning to an employee lite program that allows you to maximize your retirement savings.
CME
The second area that physicians can get frustrated with is CME restrictions. I know many of you are given an X amount of money for CME per year that can range anywhere from $2,000 to $3,000 to $4,000 per year. I know from my prior experience with my employer that those numbers are relatively small. They go on to add additional restrictions to those about where you can travel both inside and outside the country and begin to nitpick at how those CME reimbursement fees are given to you in terms of where you can go and what you can use that money for. It gets to be a source of frustration for many physicians, they find those CME dollars really don’t stretch very far, especially given some trips that physicians like to take to nice locations and staying in nice places–many times taking their family with them on those CME activities.
Pre-Tax CME Without Limits
What I’ve come to realize is that by forming my own Corporation and engaging in an employment-like contract, I now can travel anywhere I want, where ever there’s an accredited CME afforded to me, and that includes anywhere in the world. So the cost of the trip really becomes a little bit irrelevant to me, and the location of the trip becomes a little bit irrelevant to me in terms of restrictions, and I can really choose along with my wife where we want to go and do our CME. Yes, I do need to take into account the cost of this in terms of the global budget of my corporation, but it really affords me a great deal of freedom to choose to go where I want. There are no financial restrictions to this, my corporation pays all the CME for me with pre-tax dollars, and really turns out to be a great benefit to me.
One of the things I like to do is use a company called Sea Courses out of Canada, to go to some more exotic locations, because they afford a program that includes my spouse and allows her to attend the program for free with me. It’s a nice benefit, in that all the CME expenses are covered through my corporation, but again, my spouse is allowed to attend these with me for free, which is really enjoyable as well. In your current employment structure as a standard, employed physician, as you know, spouses are often not included in those and you have to pay for those out of pocket. There’s still a benefit, and your company is covering a good deal of the overhead associated with that travel and expenses, and adding your spouse in is is a small element, but it’s nice to be able to how’s this all within your own corporation and allow your spouse to come in a covered fashion.
Health Insurance
Let’s talk a little bit about health insurance. The reality is that your employer is asking you to pay more and more the expenses associated with health care From the premiums to the deductibles, more and more of that is being allocated to you. What you’re beginning to realize as physicians is that it really costs a lot to receive health care in this country, even for you as a physician. Man, I can remember 20-25 years ago when I signed up for my first employee contract with our hospital, my little hospital covered virtually all our expenses at the hospital. X-rays, labs, in-patient care, ER care, physician office expenses, everything was covered free. I even had catastrophic coverage on top of that. But those days are gone.
Those are the days of old, no longer do they exist. You have an increasing amount of your paycheck that goes towards health care expenses, and then the deductibles are pretty large as well when it comes to this. One of the things that I’ve found when I reorganized myself into an employee-like contract and form my own PC was that I was able to structure my PC to cover a good portion of my expenses. My own PC covers my private health care insurance for me and my family. That’s a great benefit to me. Yes, this is taxable as a wage in most instances, but it’s a great benefit that I receive through my corporation.
Out of Pocket Healthcare Benefit
My company also pays all my out-of-pocket expenses, including the deductibles. It also provides an HSA program for me that allows me to save pre-tax dollars in an account that can be used as a mini-retirement account in the future. Basically, my out-of-pocket expenses for health care through my own company become very minimal through the combination of these processes, which is much different than you receive in a standard employment benefits package for healthcare, even as a physician.
Professional Deductions and Tax Strategies
The last thing I’ll mention to you is professional deductions and tax strategies. By forming my own PC as an S corporation and employing myself in a PC, I now can unlock many benefits uniquely available to small businesses that are not available to you as an employee of a large healthcare corporation. I will add here that many of the owners and administrators of these large health care corporations are granted the benefits I’m going to mention to you, but as an employee, you are not afforded those benefits.
Lower Marginal Tax Rate
The first I’ll highlight is that you are able to lower your marginal tax rate by lowering your wages. Your household income remains unchanged in a business structure on which your income flows to you through the wages from your own corporation paying you. But now it also flows through the PC or the company’s distributions to you as well. Your total income in your home doesn’t go down, but your own personal wages do go down, which allows you to be taxed at a lower rate, and overall reduces your taxes in your household.
As I mentioned previously, healthcare insurance and health care coverage are greatly improved through a PC or an S Corp.
Employment of Spouse and Children
Number three: You can employ your spouse and children in your corporation. This has many tax advantages as this income is brought into your home. By opening this door, you’re opening the door to enhanced household retirement savings, college savings, and even private school offering coverage for your children.
Home Office Expenses and Dwelling Unit Reimbursement
Number four: there’s a home office expense. Now, this can be a little tricky but done properly. With the advice of your accountant, you can certainly outsource some of the expenses associated with home office expenses. Again, for physicians, this can be a little tricky, I encourage you to work closely with your accountant, but there are some opportunities here. Number 5 is a little-known benefit is that you can also rent your home to your PC. When structured properly, you can rent your own home at fair market value to your PC 14 times per year to be reimbursed to you tax-free. This is called a Dwelling Unit Rental plan that is typically embedded in your corporation through an attorney familiar with the process. The power is that this is reimbursed to you tax-free. This is called a dwelling unit reimbursement program, and it’s a little-known benefit that can amount to a significant tax-free income to you each year when structured properly through your tax attorney or through your tax accountant.
Business Travel Expenses
The sixth benefit is that you can have reimbursement of your business-related travel expenses. You can track your professional related expenses very simply through an app on your phone called MileIQ or others that are similar to it, and then submit those miles for reimbursement through your corporation (note: this can’t be added up in terms of your normal business travel from your home to your office, but for physicians, there’s a lot of traveling that we do, depending on your specialty to provide care at the hospital, your clinic and other locations and this can be tracked through simple apps like MileIQ and then really lead to a significant amount of tax reimbursement to you each year).
Cell Phone and Digital Access
You can also reimburse your own cell phone expenses. And through using these and an accountable plan, you can really outsource an expense out your digital access such as Internet data and cell phones to be reimbursed.
Automobile Expenses
You can also begin a vehicle leasing or depreciation program for your vehicle that is used for company business (medical profession). Depending on how your corporation is organized, you may be able to pass these expenses on through your PC through leasing in a depreciation program that allows you to expense out your vehicles, which is a pretty significant saving.
Larger and More Robust Retirement Programs
And lastly, as I mentioned previously, you can have significant retirement savings through opening your own small business PC and then funneling your retirement accounts in an individual way through those small business plans. In this business model, you can take advantage of maximum IRA, 401K, and qualified plans to help you reach your retirement goals
There are a lot of benefits that you have to be an employed physician. But there are some benefits that don’t favor you in those plans. I encourage you to just take some time to reflect on this and take some time to think about how you might consider individualizing these plans and then maximizing this for yourself and in the future. It’s not as difficult as you might think.
This is a truth that you need to know as an employed physician and I encourage you to think about these things.
I look forward to hearing your thoughts and responses in regard to this and I hope you have a great week. Leave written comments here or leave a voice message at our speak-pipe attached to this blog.
