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A “Need-to-Know” Glossary for all Medical Professionals

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• 5- and 10- year averaging: A special tax treatment for qualified plan lump sums. 
• Annuity: A distribution of a retirement plan in equal amounts over a physician’s lifetime.
• Deferred compensation plan: A nonqualified compensation plan, often tied to a physician-executive bonus plan, allowing for payments in the future, such as retirement.
• Defined benefit plan: The traditional [older] legacy pension plan. The benefit is defined in a formula that is often based on the final years of physician employment. The benefit is paid as a single life annuity for single doctors without dependents. Married physicians must take a 50% or greater survivor annuity unless waived in writing by the spouse.
• Defined contribution plan: A popular [newer] retirement benefit in recent times. The most popular version of this type of plan is the 401(k) or 403 (b), plan. The amount of contribution is defined, not the final benefit. The final benefit depends on how well a doctor employee’s investments perform. Another important feature is that the physician employee must choose the investments to which to allocate his or her contributions (and often the employer’s contributions). Plans typically offer three or more selections, and the doctor-employee decides on the percentage of money to be invested in each.
• Employee stock ownership plan (ESOP): A benefit plan that offers company stock to the doctor as the investment. Available plans are leveraged ESOPs, which are highly complex financial arrangements, usually in the form of profit-sharing.
• Hybrid pension plan: A plan that has features of both a defined contribution plan and a defined benefit plan:

1. Money purchase plan: A plan in which an employer agrees to contribute a specified amount to the plan on behalf of each physician employee. The amount available at any time is determined by the contributions and how well the investments perform.

2. Target benefit plan: A plan in which an employer agrees to contribute a specified amount to the plan. This plan features a formula that sets up a target benefit for each physician employee. The target benefit plan is meant to be similar to a defined benefit plan, but without the actual guarantee of the final benefit. The final benefit ultimately is determined by how well the investments perform.

• Individual retirement account (IRA): A personal retirement savings plan for individual physicians. Several types are listed below:

1. Regular deductible/nondeductible IRA: Amounts of IRA contributions that is either deductible or non-deductible for individual income tax purposes. Earnings on these IRAs are tax deferred, meaning that taxes on earnings are paid at the time of withdrawal.

2. Roth IRA: Amounts of contributions to Roth IRAs are nondeductible. Earnings on Roth IRAs are never taxable.

3. Educational IRA: Amounts contributed to Educational IRAs are nondeductible; however, earnings are not taxable if withdrawn to pay qualified educational expenses. Anyone can contribute an indexed amount per year to an Educational IRA for a child under age 18, provided the total contributions for a child do not exceed per year limits. The account must be designated as an Educational IRA from its inception.

4. Conduit IRA: A rollover IRA consisting only of a single qualified plan that may be rolled into another qualified pension plan.

5. Inherited IRA: An IRA of a deceased physician.

6. Rollover IRA: An IRA consisting of a qualified plan(s) that has been “rolled over” into it.

• Keogh plan: A plan for self-employed physicians and partnerships. A Keogh plan can be a defined benefit, a defined contribution, or a hybrid plan. 
• Lump sum distribution: A distribution of all of the money in a doctor participant’s qualified benefit plan account. This generally occurs at one time or at least in one calendar year. 
• Pension: An employer retirement plan providing payments at retirement. It is usually based on an employee’s compensation and doctor length of service. 
• Qualified benefit plan: A specific plan that is qualified by the IRS to receive special tax advantages. Typical plans are defined benefit, defined contribution, ESOP, profit-sharing, and thrift plans.
• Recalculation / Non-recalculation: Methods of determining the use of life expectancy tables for mandatory withdrawals at age 70½. 
• Simplified employee plan (SEP): An IRA plan that is simplified and easy to administer for self-employed physicians. These plans are sometimes referred to as SEP-IRAs.
• Supplemental executive retirement plan (SERP): A nonqualified plan, primarily but not exclusively for executives, that provides for lost qualified pensions due to IRS restrictions.
• Tax-deferred annuity (TDA) or 403(b) plan: This typically is a defined contribution plan available to teachers, hospitals, nurses, doctors and not-for-profit organizations. An organization must sponsor the plan. Once sponsored, insurance companies offer annuities through the company. Employees then select which insurance company will receive their contributions. The contributions are almost always on a pre-tax basis.

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Filed under: Glossary Terms, Retirement and Benefits |