Substantial risk of forfeiture, exposure to claims of creditors, large balance sheet accruals and embarrassing lump-sum payments on the front page of your local paper. Does this sound like an optimal retirement accumulation plan for your highly compensated physicians and executives?
Unfortunately, many within the healthcare C-Suite conclude that Section 457(f) is the only remaining alternative once all of the other “buckets” have been filled. Not so, but first let’s examine the underlying problems.
The maximum salary that retirement plan formulas are allowed to base benefits on is currently $265,000. Key people north of that line are not going to receive target contributions or benefits in the same percentage as those earning less. Section 457(b) allows an additional $18,000 pre-tax contribution but is quite restrictive in terms of access. Its brethren 457(f) has no limit, but shares restrictive access and the host of issues outlined above.
Regarding taxation, the entire 457(f) account balance becomes taxable upon termination of a “substantial risk of forfeiture” which is specifically tied to a future event such as separation from service. This leaves the executive or physician with an enormous tax burden and no flexibility in terms of planning.
Is there a better way? The good news is “yes” through creative use of time tested strategies used by for-profit and non-profits alike. Carefully designed “non-qualified” plans can remove ceilings, allow access, add flexibility, eliminate risk of forfeiture, avoid claims of creditors and provide an alternative tax strategy for long range planning.
In addition, such plans can be tied to performance for both executives and physicians. Many healthcare systems are examining this option to promote long range reward for achievement in value based initiatives, while keeping the lion’s share of current cash compensation focused on productivity.
When embarking on this journey, one size does not fit all. Every large system and practice has a different mix of underlying programs for their employed physicians and leadership team, a different puzzle to solve if you will. By locating the missing piece, you can greatly enhance your benefits for key people and align them with your vision of the future.
If you would like more information on this subject, or have a client who might benefit from a discussion about it, please contact Barry Koslow at bkoslow@mkaplanners.com or (781) 939-6050.
Securities offered through Advisory Group Equity Services, Ltd., Member FINRA/SIPC. 444 Washington Street, Suite 407, Woburn, MA 01801 (781)933-6100. Advisory services offered by Trust Advisory Group, Ltd., a Registered Investment Advisor.
This article should not be considered as providing accounting, business, financial, investment, legal, tax, or other professional advice or services. It is not a substitute for such professional advice or services, nor should it be used as the basis for any decisions or actions that may affect your business or you personally. This should only be one part of your research. You should seek authoritative guidance from a qualified accountant or attorney before taking any action.
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