How to Structure Cash Balance Plans for Physician Groups [Top Strategies]


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We know that physicians are great candidates for cash balance plans. This is because they have high and consistent incomes.

But the issue we see with physicians is that they often have various entity structures. Many operate as sole proprietors or have individual sole S-corporations. But some operate in a group structure.

Group structures can take a variety of different forms. We have seen them structured as partnerships, S-corporations, and C-corporations. The older the physician practice, the more likely they are to be in a C-corporation structure.

Depending on the entity structure, there can be issues and pros and cons with different ways to structure the cash balance plans. This post will look at typical physician group structures and guide you on how these plans can be structured. Let’s jump in.

Large Physician Group Structure

Let’s assume there is a group of five physicians. They have a contract with a hospital to provide specific medical services. The contract is with an LLC that is structured as a partnership. The physicians employ six employees to assist them with the practice.

Of the six employees, four are physician assistants, and two are billing and administrative. The physician assistants each make $150,000 yearly, while the two administrative task employees earn $50,000 annually.

All the hospital buildings are done at the partnership level. However, based on services performed to the partnership, each physician has their own S Corp. that builds the partnership. So the partnership basically has a net zero profit at the end of the year. Income comes in, it pays for its staff and other administrative expenses, and the physicians take out their share based on earnings. So not any profit at the partnership level.

However, each physician now has taken their billings to their S-Corps. At this level, they pay themselves a W-2 and have any individual expenses that they may have, like auto, tax fees, and any other administrative costs not paid by the partnership.

It’s all based on a structure like this. What is the best way to set up the plan? Should there be one plan that covers all entities? Or should each physician have a cash balance plan? I will take a look at a couple of options.

First, we know a control group and affiliated service group issue. As such, testing will have to be passed for all employee contributions.

The good news is that because the physician assistants are paid $150,000 a year, they are considered HCEs and can be excluded from the plan. Of course, the two administrative staff must be included in the plan design because they will need to receive a meaningful benefit, past gateway, and another testing. But let’s assume for the argument that they receive 10% of their pay as a contribution towards the plans.

Small Physicians Group Structure

Let’s look at another physician group structure. Let’s assume the following:

  • Three physicians have a contract with a hospital.
  • The entity with the contract is an LLC taxed as a partnership.
  • Each physician has a 1/3 ownership in the LLC partnership.
  • There are no other employees other than the three doctors.

Let’s take it a step further and assume the following:

  • The physicians provide services to the LLC partnership and receive payment in return.
  • Payment goes is made to S-Corporations that are set up by each physician.
  • Each physician owns 100% of their respective S-Corporation.
  • The respective owners will then pay their own specific expenses within that S-corporation.

So basically, we are left with three physician owners with high incomes.

Since there are no additional employees, we are left with three highly compensated employees (HCEs). The good news is that we can exclude the HCEs from the plan if we look at eligibility. But the one problem we have is that if there are at least two eligible employees. Then you need to include two employees in the plan, or you need to provide a meaningful benefit to 40% of the employees, with a minimum of two employees receiving a benefit.

Let’s assume one of the physicians wants to set up a defined benefit plan and contribute to their S Corp. Can this physician open up a plan without contributing to the other two? Well, answer this question.

The answer, unfortunately, is no. The reason is that defined benefit plan rules require that if there are two or more eligible employees, at least two employees must receive a meeting for benefit.

So in this situation, because we have an affiliated service group relationship, even though the physicians are all HCEs, we must include at least two of them in the plan.

In addition, they need to receive at least a meaningful benefit. As such, one physician could possibly receive a contribution of $200,000, while another one might be able to receive only $3,000. Since this is technically an owner-only plan, you don’t have to contribute to a profit-sharing plan to pass compliance testing.

So the result here is that it can be challenging for one party because the other physicians do not want to contribute. It’s very likely that one physician would not like to make such a small contribution to the other, even though it might make economic sense based on their tax situation.

The IRS has a two pronged test under 401(a)(26) that requires:

  1. The smaller of 50 people or 40% of the eligible employees receive a benefit under the plan; and
  2. These benefit must be “meaningful”.

Pros & Cons of Plan Structure

Advantages of a Plan at Group Level

  • Lower overall administration costs
  • Testing only at the consolidated level
  • Contributions deducted at the partnership level

Advantages of a Plan at Individual Level

Here are some of the advantages of doing a plan at individual level:

  • More control over individual contributions
  • Each physician can control own investments and is not “pooled” at the entity level.
Paul Sundin

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