What if a physician in private practice could put incremental income into an income tax-deferred vehicle without having to include employees or even practice partners and direct the income into a broad array of investments, having the additional advantage of the gain being tax deferred without the restrictions of pension or profit sharing plans? Most physicians would jump on that opportunity.

 

And what if a physician could defer the income and gains on this incremental income until they needed the income to pay for a child’s college education or to take a special vacation, buy a vacation home, or new car for their spouse without penalties or restrictions? Every physician that has reached that level of taxable income that the IRS calls “highly compensated” which is about $150,000, is advised to find legitimate ways to avoid current income taxes. But the opportunities to shelter current income are very limited. This is especially true for physician practices as they typically are not eligible for traditional “executive benefits”.

 

In designing an alternative to traditional approaches to paying for call, our methodology creates an executive-like benefit for the physician, allowing the physician to defer current income taxes on the call pay. This arrangement applies to both private practicing and employed physicians.

 
With the traditional approaches to call pay, the incremental income seems to simply evaporate. We refer to the phenomenon as the “significant other conversation”. This conversation goes something like this: ”Honey, I thought that you said that you were going to get paid for call, where did that extra money go?” The ability to point to something specific that was gained from the call pay is very difficult.

 

Of all the things that a physician does, the one thing that impacts their families which their families are acutely aware of is call coverage. From taking two cars to the soccer game to not being able to have a glass of wine at dinner as well as holiday interruptions, et al, the families of physicians feel the impact of call. This is, as they say, a part of the “calling” but it never ceases to be a burden shared by those in the family without the medical degree.

 

Our approach to call pay is the only approach that provides a vehicle to allow the physician to share with their families an indefinable, specific benefit that can be a part of the physician’s personal financial objectives. Whether it is an event such as a vacation, another lifestyle enhancement, or a supplement to retirement income, the ability to take an incremental amount of income and accumulate it, defer taxes on it, and have it distributed at a specific time, has great appeal for those that step back and consider, “Why would I do it differently, even if I could?”

 

There is a lot of discussion today about income tax rates. Will income tax rates increase? There are two perspectives regarding the prospect of tax rates increasing that could be considered. First, an argument could be made for an increasing need to shelter current income from taxes if tax rates increase. However, what happens if a physician is in a higher tax bracket when the deferred income is distributed?

 

Predicting changes in the tax code is as precarious as trying to predict the market but there is evidence today that income taxes are not necessarily going to increase under the Obama administration. The Wall Street Journal reports that recent events point to the fact that Obama is moving toward the center in his position on public policies issues. In a recent Brooking Institute speech on the economy, the President put an unusual emphasis on Americans in business, specifically small business. The President claimed success in reducing taxes: “This fall, I signed into law more than $30 billion in tax cuts for struggling businesses,” and announced a new cut, the complete elimination of capital gains taxes on small business investments along with write-offs to encourage small businesses to expand in the coming year. He called it “worthwhile” to create new tax incentives. Essentially he is saying that he understands where jobs are created and that tax incentives helps fuel the economy.

 

However, whether tax rates increase or not, what we have learned from the success of 401(K) plans is that if we have a systematic way to set aside income, we generally are more successful at saving money. As such, the hospital’s opportunity to create such a vehicle for privately practicing and employed physicians will become increasingly appreciated as physicians take their call pay statements home and share with their spouses what they can do with the money…together.

 

One general surgeon said to us during an annual review of their call pay account, “I used the money to pay for my daughter’s wedding this spring and I wouldn’t have had the money if it hadn’t been for this program”. It is hard to measure the good will that is generated from experiences like this but what is interesting is that this physician was one of the ones that didn’t like the program in the beginning.

 

Nothing is perfect but we are taking a step in the right direction…

 

If you have any questions or would like to discuss this topic further please contact us by email at info@maxworthconsulting.com and we will notify the post author of your request.