Ryan E. Riggs, CFP, ChFC

Physician business owners may be able to adopt a retirement plan from a number of available plans, varying on types and specific features depending upon their objectives. A given plan design or type may also be more suitable than another depending upon the ages of the owner(s) as well as the disparity in ages between the owners and the other employees. 
Here is some information on the various types of plans available:



The most common type of defined contribution plan is a profit sharing plan with 401K features.  This type of plan maintains an individual account for each plan participant that is paid out as each participant retires or terminates employment.   A participant’s account generally consists of the sum of all (actual) contributions and investment returns allocated to such account. An employer may make a total annual deductible contribution to a plan of up to 25 percent of the total compensation of all participants.  The account of a plan participant, in turn, may receive an annual allocation of its share of the employer total contribution, and the employee 401K contributions.  Such total annual allocation may not exceed the lesser of 100 percent of a participant’s compensation or $52,000 (for 2014).  An additional $5,500 401K catch-up contribution may be made by a participant age 50 or older.  Employer contributions to a profit sharing plan may vary from one year to the next at the discretion of the employer.  The plan document, however, specifies a method or formula for allocating the contributions to the individual account of each plan participant.  Profit sharing plans may be suitable for new companies or for companies with revenues that fluctuate from year to year. 

A profit sharing plan may or may not have a 401K feature.  Contributions to a profit sharing plan with a 401K feature may include employee salary deferral contributions, employer matching contributions, and safe harbor contributions as well as employer profit-sharing contributions.  Such a plan must meet specific IRS requirements and because of this, it is generally advisable for the sponsoring employer to engage the services of a third-party administrator.  These plans may also be suitable for companies that want more of the contributions to go toward the owner(s) who have much higher compensation than the other (rank-and-file) employees.



The two most common types are the traditional defined benefit pension plan that provides a specific periodic retirement benefit, and a cash balance pension plan described below.  Most traditional defined benefit plans specify the retirement benefit for a plan participant as a percentage of average compensation prior to retirement.  Such retirement benefit generally is in the form of a periodic payment payable for life.  Contributions generally must be made to the plan (by the employer) each year as determined by an enrolled pension actuary.    The maximum annual retirement benefit that may be paid to a plan participant may not exceed the lesser of 100 percent of the highest three consecutive year average compensation or $210,000 (for 2014) for life.  Traditional defined benefit pension plans have become less popular nowadays due to the required contributions that must be made by the employer each year.  As the number of participants grows and if the investment returns of the plan assets fall below the enrolled pension actuary’s assumptions, the employer may then be required to make larger contributions regardless of whether the company needs tax deductions for the year.     The risk on adverse investment returns is usually borne solely by the employer (through higher contributions). These plans may be suitable for a company with older owner(s) and with stable profits  as well as in need of larger tax deductible contributions than can be contributed to a defined contribution plan. 

A cash balance plan specifies an individual account for each participant that consists of the sum of a defined hypothetical employer annual contributions and specific hypothetical annual interest rate credited to each account.  The amounts credited are “hypothetical” as they do not necessarily equate to the actual employer contribution and/or investment return, but rather are based on the amounts specified in the plan document.  It looks similar to a defined contribution plan, but like a traditional defined benefit plan, contributions annually usually must be made by the employer as determined by an enrolled pension actuary.  Required contributions to a cash balance plan may be higher than the contribution that may be made into a profit-sharing plan with or without a 401K salary deferral contribution feature.  Just like a traditional defined benefit plan, cash balance plans may be adopted in addition to a profit sharing plan with a 401K feature for a higher contribution.   These plans are potentially suitable to smaller practices (less than 20 employees) with high stable profits and with eligible employees consisting of older owner(s) and younger rank-and-file employees,  and to which the employer desires to make potentially larger tax deductions than may be made to a defined contribution plan.

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A closer look at how retirement plans differ, how they work, and how to determine what is right for your practice. 

Picking the Right Retirement Plan for Your Medical Practice

Over the years there have been many changes to disability policies offered to physicians. Whether you purchased your policy in residency or as an attending physician it is critical to ensure it has certain provisions and rich language that deliver the most benefits.

Here are a few key policy areas to pay attention to:

 Many consider this definition to be the most important part of a disability policy as this language will decide how claims will be paid.  I will limit the discussion to the two most common definitions: own-occupation or “own-occ” and modified own occupation.

Own-occupation (also referred to as “true” own-occupation) is the most liberal definition available.  A policy with this definition will pay a benefit if you are disabled and “unable to perform the material and substantial duties of your occupation.”  This definition makes it possible for you to work in another occupation or medical specialty earning the same or more income, and collect your full disability benefit. 

A policy with a modified own occupation definition will pay a benefit if you are disabled and “unable to perform the material and substantial duties of your occupation and you are not gainfully employed.”  Therefore, you must choose not to work to continue receiving full disability benefits, even if you are able to work in another occupation or medical specialty.  This is a common definition found in group coverage and is often seen in individual policies.

 The renewability provision of a policy is a critical component of any disability policy.  A guaranteed renewable policy states the insurance company cannot cancel or change provisions as long as the premiums are paid on time.  Non-cancelable policies do not allow your insurer to raise premiums for the entire policy life.  Policies that are both guaranteed renewable and non-cancelable are preferable because they offer you more protection. 

 Not all injuries or illnesses result in a total disability.  Most policies will require the residual disability rider for you to collect on a benefit if you are not totally disabled.   An illness or injury may limit your ability to work full time in your occupation, which usually results in decreased income.  Having the residual rider will allow you to continue receiving benefits proportionate to your loss of income if you are able work in your occupation on a part-time basis.

You must qualify by experiencing a loss of income of 15 percent or 20 percent, depending on the policy provision, to receive a residual benefit.  For the first 12 months residual disability benefits are payable, many companies will pay a dollar-for-dollar benefit up to the policy’s monthly benefit.  After the first 12 months, benefits would then be paid in proportion to the income loss. 

This provision is usually built in to the residual disability benefit rider, but some companies offer it as a separate rider.  This benefit helps with financially recovering from a disability after returning to work if you experience a loss of income of at least 15 percent or 20 percent, depending on the policy provision.  Some companies will pay benefits for up to the full benefit period.  That way, if you have recovered and returned to work, you will still be able to collect a benefit until your income has reached 86 percent or 81 percent of your  pre-disability earnings.

 A cost of living adjustment (COLA) rider will allow your disability benefits to keep pace with inflation.  This rider is usually triggered after receiving benefits for a year.  COLAs that provide the most benefit are compounded annually with no cap on the monthly benefit.

This rider allows you to increase your coverage as your income increases even if your health changes.   Young physicians who expect their income to increase should consider this rider because they will not have to do another blood or urine exam or answer medical questions to increase their coverage.  Knowing the special option dates and amount of coverage available to increase is important.

As highly skilled professionals, you should consider purchasing a true own-occupation policy with strong provisions.  Make sure that you find a policy that will meet your individual needs.  Speaking with a qualified professional insurance agent who specializes in disability for physicians can help you determine which is the right policy based on your particular specialty and insurance goals.
 
 

Understanding the terms and provisions within your disability policy will help you determine if you have the right coverage for your needs. 

Physician Disability Policy Check Up: Are You Covered Appropriately?

You may have been told that your medical practice pays for your long-term disability insurance, so you are covered in the event a disability occurs.  But you may be surprised to find that your group coverage does not provide enough benefit to cover your monthly living expenses if you become too sick or injured to work.

Here are four potential drawbacks of group disability protection to consider:


Many employers offer group long-term disability coverage that consists of insuring 60 percent of salary up to a certain monthly benefit cap.  You may find, however, that your group coverage only insures 60 percent of your base salary, and does not include bonus or other income provided by ownership in the practice.  If a portion of your income is comprised of bonus or ownership income (also known as K-1 distribution if you file as an S-Corp) then you may be underinsured.  In addition, many group policies have a limit on the monthly benefit up to a certain amount such as $10,000 per month or $15,000 per month.  This amount may be considerably less than the maximum eligible benefit to cover your income. 

Take a close look at how the benefits are listed and what portion of your income is insured.  The costs to a group disability plan are typically much less than the costs of purchasing an individual policy.  As a result, these policies are typically limited and restrictive in the definition of disability, and have limited contract provisions.


Another drawback of group coverage is that your policy may be canceled by the insurance company or moved to a new carrier.  In addition, premiums may be subject to adjustments based on the claims history of the group.  Most physicians do not know that rates may increase as they get older, usually occurring in five year age bands.


Often, group coverage is paid by the practice and the premium is tax deductible by the business.  As a result, the benefit is completely taxable to the recipient.  Rather than receiving 60 percent of their gross income, many physicians find that they are more likely to receive around 40 percent due to taxes.  Suppose you are making $400,000 and you became disabled.  If your group monthly benefit is $15,000 you could likely only see $9,000 after taxes.  This could mean not having enough money to pay for monthly living expenses.


Another problem to consider is that, if you change employers and your employer does not offer disability coverage, you may have to purchase individual coverage. However, you may not be able to qualify for an individual policy. That could hold you back from a great practice opportunity. Another risk you may face is switching to a practice that provides coverage but its plan requires you to be on the plan for one year before paying a disability benefit caused by a preexisting condition.

Knowing the provisions of your group  plan and whether it covers the income you want to protect is important.  Check with your human resources director and get a copy of your plan to have it reviewed by an insurance professional.  What you may assume to be a good benefit may not provide the full protection you may expect. 

One option to consider: Supplementing with an individual disability policy 


Because there is a “gap” in group long-term disability coverage due to taxes, many insurance carriers will allow you to make up the difference with individual coverage.  The benefit, when purchasing an individual policy, is paid on a tax-free basis which can help you get back to the 60 percent of your gross monthly income.  The tax-free benefits are a result of the premiums being paid with after tax dollars.  An individual policy may also offer a better contract in regards to the definition and the provisions that are available. 

Four potential drawbacks of group disability protection, and what physicians should do about it. 

Author | Ryan E. Riggs, CFP, ChFC

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