Gates Advocates for Proactive Tax Planning for Medical Practices
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PYA Principal Greg Gates, CPA, recently addressed financial professionals who work with healthcare providers at the 2013 Tennessee Society of Certified Public Accountants Healthcare Conference. Gates discussed the importance of being a proactive tax advisor.
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Gates Advocates for Proactive Tax Planning for Medical Practices
- 1. Proactive Tax Planning for Medical Practices Tennessee Society of CPA‟s Healthcare Conference December 2, 2013 Presented by Greg B. Gates, CPA, J.D., Principal PYA GatesMoore Atlanta, GA Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 0
- 2. Characteristics of a Proactive Adviser • Bring ideas to “the table” (arrows in your quiver) • Contact clients with matters of benefit, interest, or concern • Return client calls and emails TIMELY • Annual review with staff – What are we doing for the client they can do for themselves – What are we not doing in advising the client that we should • Bottom line: Take a real interest in the client and do not take them for granted. P.S. – “Anybody” can prepare a tax return. Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 1
- 3. Overview of …. • Micro Captive Insurance Companies (CIC) • Cash Balance Retirement Plans Historically • 401(k) Safe Harbor Profit Sharing Plans • Medical Expense Reimbursement Plans (C Corporations) • Conversion from LLC to S Corporation • Deferred Income Tax Liability (C Corporations) Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 2
- 4. What a CIC is not …. • Offshore (but it can be) • A replacement for Professional Liability Insurance (Malpractice) • Life insurance Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 3
- 5. When meeting with a client regarding a CIC have everyone in the room who may be a participant or a „Naysayer‟ (“The confused mind always says „No‟.”) e.g. Attorney Investment Advisor Other? Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 4
- 6. Captive Insurance Companies - 831(b) Provides insurance coverage for various risks Medical Practice CIC Premium $‟s Physician Owners $350K* to $1.2 million of annual insurance premiums *Practical not statutory Physicians or Family Members Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 5
- 7. Qualifying Factors • First & foremost: this is an insurance company • $1.2 million ceiling on annual premium income • Design the insurance to fit practice needs • Viable for medical practices with “excess cash” Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 6
- 8. Introduction to 831(b) Captive Insurance Companies IRS 831(b) provides that: • Insurance companies with less than $1.2 million of annual premium pay $0 income tax on insurance “profits” (premium income) • Investment income is taxed as income to C-Corporation • 831(b) must be timely elected and cannot be revoked without the permission of the Secretary Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 7
- 9. IRC Sec. 831(b) – Code Language • 831(b) Alternative tax for certain small companies • (1) In general • In lieu of the tax otherwise applicable under subsection (a), there is hereby imposed for each taxable year on the income of every insurance company to which this subsection applies a tax computed by multiplying the taxable investment income of such company for such taxable year by the rates provided in section 11(b) • (2) Companies to which this subsection applies • (A) In general • This subsection shall apply to every insurance company other than life (including interinsurers and reciprocal underwriters) if – • (i) the net written premiums (or, if greater, direct written premiums) for the taxable year do not exceed $1,200,000, and • (ii) such company elects the application of this subsection for such taxable year • The election under clause (ii) shall apply to the taxable year for which made and for all subsequent taxable years for which the requirements of clause (i) are met. Such an election, once made, may be revoked only with the consent of the Secretary. Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 8
- 10. Captive Insurance Company Policies • Everything a practice currently self-insures: – Deductibles (e.g., Medical Malpractice) – Excess losses above coverage limits • Loss of income as a result of: – Losing key employee – Loss of license/professional risks (professionals) – Weather – „Downtime‟ of clinical equipment, e.g., PET scanners, CT‟s, MRI‟s • Liability risks for which practice does not insure – Employee lawsuits – sexual harassment, wrongful termination, discrimination, etc. Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 9
- 11. Examples of Captive Insurance Policies Written • Professional Liability Coverage • General Liability Gap • HIPAA/Billing Audit Liability • Professional Misconduct • Contractual Liability • Directors and Officers Liability • Cyber Liability • Punitive Damages • Environmental Liability • Loss of Key Employee • Employment Practices • Employee Dishonesty Do Not Insure Things That Are Not Pertinent e.g., Patent Infringement If You Have No Patents Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 10
- 12. The Ground Rules • Premiums and policies must be market-comparable • Actuarial support needed • Insurance formalities complied with Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 11
- 13. Real Life Example - Results Do Nothing with $1.2M Captive 831(b) • No risk management, asset protection, buy-out/retirement benefits of CIC • Risk management, asset protection, buy-out/retirement benefits of CIC • Earn money, income taxes • Create trust to own CIC (or have family members own) • Taxable/tax deferred investments • CIC invests in tax deferred investments • Die, pay estate taxes • Tax efficient withdrawals from CIC Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 12
- 14. Tax Planning Benefits 1. Deductibility of premiums paid by Medical Practice – IRC 162 – Assuming premiums are market comparable – determined by an actuary 2. CIC is not taxed on first $1.2 million of annual premium income 3. Distributions from CIC taxed at capital gain rates 4. Can transfer wealth if owners of CIC are family members 5. And… Asset Protection Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 13
- 15. Captive Insurance Companies - 831(b) Provides insurance coverage for various risks Medical Practice CIC Assets Protected CIC Premium $‟s Physician Owners $350K* to $1.2 million of annual insurance premiums *Practical not statutory Physicians or Family Members Dividends (Tax Savings) If Owners Are Family Members (Wealth Transfer) Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 14
- 16. CIC team of Advisors • Knowledgeable attorney • Actuary • CPA (need tax return and audit) Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 15
- 17. Cost for Establishment and Maintenance of CIC • $80,000 to establish • $55,000 annual maintenance – Audit fee of $8,500 – Tax Return fee of $2,500 • Capitalization – Cash or letter of credit Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 16
- 18. Greater Tax Deferral Using Cash Balance Plans Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 17
- 19. Why Cash Balance and Why Now? 1) The new tax targets • >$250,000 2) Catch-up • • Make up for 401(k) losses Make up for QDRO‟s Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 18
- 20. Qualified Plans Defined Contribution 401(k) Profit Sharing Cash Balance Hybrid Defined Benefit Traditional Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 19
- 21. How Does Cash Balance Differ from a DB Plan? Defined Benefit Plans • Complex formula (contribution is actuarially determined) Cash Balance Plans • Account balance, $100,000 • Unfamiliar/archaic • Familiar: 401(k) • Age-sensitive • Less age-sensitive Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 20
- 22. 2013 Contribution Limits 401(k) Profit Sharing & Cash Balance Plans 401(k) with Tax Age Profit Sharing Cash Balance TOTAL savings* 60 - 65 $56,500 $220,000 $276,500 $110,600 55 - 59 $56,500 $201,000 $257,500 $103,000 50 - 54 $56,500 $153,000 $209,500 $83,800 45 - 49 $51,000 $117,000 $168,000 $67,200 40 - 44 $51,000 $90,000 $141,000 $56,400 35 - 39 $51,000 $68,000 $119,000 $47,600 30 - 34 $51,000 $52,000 $103,000 $41,200 *Assuming 40% tax bracket, taxes are deferred Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 21
- 23. How Do Cash Balance Plans Work? Cash Balance 401(k) Contribution Earnings Contribution Interest Crediting Rate (~5%) Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 22
- 24. Plan Investments Earnings …next year‟s contribution Earnings …next year‟s contribution 7-year make-up Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 23
- 25. Investment Dynamics Too high: • • • Lower contribution Smaller tax deduction Potential excise tax TARGET RETURN Too low: • Greater expense / larger contribution required • Underfunding limitations Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 24
- 26. CASE Small Practice CASE STUDY: STUDY: Small Business Owners Age Compensation Doctor 1 62 $ 250,000 Doctor 2 41 250,000 49 63 31 29 41 25 33 48 22 30 $ 89,000 88,000 53,000 50,000 48,000 39,000 40,000 35,000 15,000 14,000 Employees Jones Keeler Marion Baldwin Dupre Ophir Smith Sabotin Parotta Keebler Plan options? Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 25
- 27. All IRS-governed Plans: 2 basic rules Employees Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 26
- 28. The The Give to Get Give to Get O w n ers A ge C o m p en sa tio n Above the line E m p loyees Below the line Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 27
- 29. CASE STUDY: Basic Plan Profit Doctors 401(k) TOTAL Sharing CONTRIBUTION 5% of pay Doctor A Doctor B $ 22,500 17,000 $ 12,250 12,250 $ 34,750 29,250 $ 64,000 Employees 5% of pay Jones Keeler Marion Baldwin Dupre Ophir Smith Sabotin Parotta Keebler 4,450 4,400 2,650 2,500 2,400 1,950 2,000 1,750 750 700 Subtotal $ 23,550 Total Comparability $ 23,550 $ 87,550 Percent to Doctors 73% Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 28
- 30. CASE STUDY: New Comparability CASE STUDY Doctors 401(k) Profit * Sharing TOTAL CONTRIBUTION 13% of pay Doctor A Doctor B $ 22,500 17,000 $ 33,000 33,000 $ 55,500 50,000 $ 105,500 Employees 5% of pay Jones Keeler Marion Baldwin Dupre Ophir Smith Sabotin Parotta Keebler 4,450 4,400 2,650 2,500 2,400 1,950 2,000 1,750 750 700 Subtotal $ 23,550 Total Percent to Doctors $ 23,550 $ 129,050 82% * Assume new comparability (cross-tested) plan Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 29
- 31. CASE STUDY: Cash Balance Options CASE STUDY: Cash Balance Options Doctors Age 401(k) Profit Sharing Doctor A 62 $ 22,500 $ 33,000 Doctor B 41 17,000 33,000 Employees Jones Keeler Marion Baldwin Dupre Ophir Smith Sabotin Parotta Keebler Cash Balance $0… $ 213,000 $0… 69,000 7.5% of pay 49 63 31 29 41 25 33 48 22 30 $ 6,675 6,600 3,975 3,750 3,600 2,925 3,000 2,625 1,125 1,050 $ 650 650 650 650 650 650 650 650 650 650 Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 30
- 32. CASE Cash Balance Actual CASE STUDY:STUDY: Cash BalanceActual Profit Doctors TOTAL Sharing 401(k) Cash Balance CONTRIBUTION Doctor A $ 22,500 $ 33,000 $ 213,000 $ 268,500 Doctor B 17,000 33,000 25,000 75,000 Employees 7.5% of pay Jones Keeler Marion Baldwin Dupre Ophir Smith Sabotin Parotta Keebler 6,675 6,600 3,975 3,750 3,600 2,925 3,000 2,625 1,125 1,050 $ 650 650 650 650 650 650 650 650 650 650 7,325 7,250 4,625 4,400 4,250 3,575 3,650 3,275 1,775 1,700 Subtotal $ 35,325 $ 6,500 $ 41,825 Total Summary of Cash Balance Contribution Doctors Staff – Additional PSP Cash Balance $238,000 92.7% 11,775 6,500 $ 18,275 7.3% $ 385,325 89% Percent to Doctors Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 31
- 33. Is the Cash Balance Plan Is the Cash Balance Plan tax-efficient? Tax-efficient? No Plan $385,325 Plan 11% to employees versus Uncle Sam 40% tax ($154,130) 40% tax bracket 60% to Owners ($231,195) 89% to Owners ($343,500) +$112,305 Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 32
- 34. Practical Illustration Total Profit Sharing %'s Cash Balance Hypothetical for Account Balances Summary Practice 1 Totals Doctors Staff Total $105,750.00 56% 82,846.29 44% $188,596.29 100% $ Practice 2 Totals Doctors Staff Total $198,000.00 42% 271,082.97 58% $469,082.97 100% $ Combined Doctors Staff Total $303,750.00 46% 353,929.26 54% $657,679.26 100% $ $ $ $ Additional Cash Balance Adjusted Cash Balance for Account Balances %'s Total for both Plans %'s 150,000.00 11,200.41 161,200.41 -$ 1,623.66 1,623.66 $ 150,000.00 12,824.07 162,824.07 92% 8% 100% $ 255,750.00 95,670.36 $ 351,420.36 73% 27% 100% 300,000.00 34,381.80 334,381.80 -$ 4,123.55 4,123.55 $ 300,000.00 38,505.35 338,505.35 89% 11% 100% $ 498,000.00 309,588.32 $ 807,588.32 62% 38% 100% 450,000.00 45,582.21 495,582.21 -$ 5,747.21 5,747.21 $ 450,000.00 51,329.42 501,329.42 90% 10% 100% $ 753,750.00 405,258.68 $ 1,159,008.68 65% 35% 100% Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 33
- 35. Why Cash Balance Plans Appeal to Medical Practices 1. There is direct tracking of contribution (what goes in, plus interest, comes out). 2. Portable: If doctor retires or leaves the practice, rolled to IRA or the new plan 3. There can be contribution flexibility among partners. 4. Liability among partners can be minimized. 5. There are options if cash flows decrease. Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 34
- 36. Seven Basic Features You Need to Know You Need to Know Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 35
- 37. Feature #1 The cash balance contribution is required. Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 36
- 38. Feature #2 Feature #1 Assets are portable. Cash Balance Plan IRA $ Rollover Other Qualified Plan Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 37
- 39. Feature #3 Feature #2 Contribution flexibility among partners Doctors can have different amounts contributed for them. Cash Balance Contribution Doctor 1, age 50: $112,000 Doctor 2, age 50: $0 Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 38
- 40. Feature #4 Feature #3 Contribution amounts can change, but use caution. What are doctors most concerned about these days? Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 39
- 41. Feature #3 Feature #4 - Continued What if the cash flows decrease? 1. Reduce 401(k) and/or Profit Sharing. 2. Amend plan to change contribution amounts. (3 years) 3. Freeze plan. 12/31 1/1 Plan amendment deadline (1,000 hours/~June 15) Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 40
- 42. Feature #4 Feature #5 Funding of the Plan Funding deadline Plan year 12/31/13 1/1/13 3/15/14 Funding extension 9/15/14 Filing of the practice tax return Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 41
- 43. Feature #6 Feature #5 Participation requirement (How many people need to be in the CB Plan?) • 40% of eligible participants Example: 8/20 = 40% OR • 50 total Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 42
- 44. Feature #6 Feature #7 Non-discrimination testing primarily satisfied in the Profit Sharing Plan Owners (gateway contributions 5%-7.5%) 401(k) Profit Sharing Cash Balance TOTAL CONTRIBUTION Doctor 1 $ 22,500 $ 33,000 $ 213,000 $ 268,500 Doctor 2 17,000 33,000 25,000 75,000 Employees 7.5% of pay Jones Keeler Marion Baldwin Dupre Ophir Smith Sabotin Parotta Keebler 6,675 6,600 3,975 3,750 3,600 2,925 3,000 2,625 1,125 1,050 $ 650 650 650 650 650 650 650 650 650 650 7,325 7,250 4,625 4,400 4,250 3,575 3,650 3,275 1,775 1,700 Subtotal $ 35,325 $ 6,500 $ 41,825 Total $ 385,325 89% Percent to Owners Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 43
- 45. Conclusion: • See What Arrows Are In Your Quiver. • Pull Them Out To Suit Clients Needs. Be Proactive! Prepared for Tennessee Society of CPA’s Healthcare Conference December 2, 2013 Page 44