Are You Leaving Money on the Table? Part II

Unfortunately, many physicians in private practice do not operate their practices with optimal after-tax efficiency. In fact, we often see doctors leaving tens of thousands of dollars “on the table” each year — which can equate to nearly $1 million of lost wealth over a career.

In part one of this article, we discussed common causes of “dollars left on the table” in a medical practice and one strategy to recapture those funds:

1. Using the ideal corporate structure.

Now we’ll discuss the other two strategies:

2. Maximizing tax-deductible benefits for the physician-owner(s)

3. Utilizing a captive insurance arrangement

The most important thing you can do is keep an open mind. Just because you have operated your practice a certain way for five, 10 or 20 years, you don’t have to keep doing the same thing. Changing just a few areas of your practice could recover $10,000 to $100,000 of “lost dollars,” annually.

2. Maximizing tax-deductible benefits

If you are serious about capturing “dollars left on the table,” tax-efficient benefit planning must be a focus. Benefit planning can definitely help you reduce taxes, but that is not enough. Benefits plans that deliver a disproportionate amount of the benefits to employees can be deductible to the practice, but too costly for the practice-owners. These plans can be considered inefficient. To create an efficient benefit plan, physicians need to combine qualified retirement plans (QRPs), non-qualified plans and “hybrid plans.”

Nearly 95% of the physicians who have contacted us over the years have some type of QRP in place. These include 401(k)s, profit-sharing plans, money purchase plans, defined benefit plans, 403(b)s, SEP or SIMPLE IRAs, and other variations. This is positive, as contributions to these plans are typically 100% tax deductible and the funds in these plans are afforded excellent asset protection.

However, there are two problems with this approach:

1. Many QRPs are outdated

2. QRPs are only one piece of puzzle.

First, most physicians have not examined their QRPs in the last few years. The Pension Protection Act improved the QRP options for many doctors. In other words, many of you may be using an “outdated” plan and forgoing further contributions and deductions allowed under the most recent rule changes. By maximizing your QRP under the new rules, you could increase your deductions for 2013 by tens of thousands of dollars annually, depending on your current plan.

Second, the vast majority of retirement planning for physicians begins and ends with QRPs. Most have not analyzed, let alone implemented, any other type of benefit plan. Have you explored fringe benefit plans, non-qualified plans or “hybrid plans” recently? The unfortunate truth for many physicians is that they are unaware of plans that enjoy favorable short-term and long-term tax treatment. These can have annual tax advantages that vary widely ($0 to $50,000) and also have varying degrees of long-term tax value as well. If you have not yet analyzed all options for your practice, we highly encourage you to do so.

3. Utilizing captive insurance arrangements

For practices with gross revenues over $3 million, a small captive insurance arrangement might be significant way to recapture “dollars left on the table.” Today, there are likely many risks in your practice that are going uninsured — from excess malpractice, economic risks, employee risks and litigation defense risks from any number of audit or fraud claims.

Like most physicians, you likely just save funds personally and hope that these risks don’t come to fruition. As a result of your de facto “self insurance,” you are not taking advantage of the risk management, profit enhancing and tax reduction benefits that are available to you with a captive.

By creating your own captive insurance company (CIC), you can essentially create a pre-tax war chest to manage such risks. If structured properly, the CIC enjoys tremendous risk management, tax and asset protection benefits. The potential tax efficiency, in fact, can be in the hundreds of thousands of dollars annually.

While an experienced law firm, captive management firm, and asset management firm are crucial, you as the captive owner can maintain control of the CIC throughout its life. It can then become a powerful wealth creation tool for your retirement.

Conclusion

Nearly every physician reading this article would like to be more tax efficient, especially with a new higher tax regime in place for 2013 and beyond. We hope these new tax rules motivate you to make tax and efficiency planning a priority, so you can recapture the “dollars left on the table.” We welcome your questions.

David B. Mandell, JD, MBA, is an attorney and author of five national books for doctors, including For Doctors Only: A Guide to Working Less & Building More, as well a number of state books. He is a principal of the financial consulting firm OJM Group, which works collaboratively with physicians and their CPAs nationwide. Carole C. Foos, CPA, works as a tax consultant for OJM Group. They can be reached at (877) 656-4362 or mandell@ojmgroup.com. You can also call for a free (plus $10 S&H) hardcopy For Doctors Only: A Guide to Working Less & Building More. If you would like a shorter free E-book download of our “highlights” version, you can download it here.

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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.