Risky Non-Qualified Deferred Compensation Plans

Are They Worth the Risk to Physician Executives?

By Staff Reporters

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The use of nonqualified deferred compensation plans in corporate healthcare administration has grown substantially in the past 10 years; for several reasons.

Reasons for Popularity

For example, senior physician-executives are becoming subject to lower contribution and benefit limits in qualified plans, are involved in more mid-career change hires, are being subjected to greater emphasis on performance-based compensation, and may experience higher income tax rates in a potential democratic administration in 2009.

Any financial advisor who works with senior physician-executive clients participating in such plans must thoroughly understand how nonqualified plans work and how they can affect every aspect of an executive’s finances.

Advantages

The advantage of tax deferral offered by nonqualified plans may, however, be more than offset by the risks to which the funds in these plans are subjected. Physician-executives should carefully evaluate their exposure to a retirement income shortfall, which may result from having a major portion of one’s retirement nest egg tied to unsecured capital. Individual indemnity insurance may need to be purchased to protect against this risk.

Guidelines

Some useful guidelines for the physician-executive and his/her financial consultant follow:

  • Review nonqualified plan documents, especially when plan provisions require client action or change.
  • Summarize the provisions of previously signed deferral agreements and other nonqualified plan statements, especially amount, timing, and method of payouts.
  • Analyze financial security under various retirement scenarios.
  • Review current estate plan instruments to determine if trusts are funded with nonqualified plan assets.
  • Update the asset allocation model to reflect any constraints imposed by the nonqualified investments.
  • Plan for potential constructive receipt.
  • Modify projected annual cash flows to allow for additional Medicare tax payments.
  • Quantify future payments from all nonqualified plans and the effect on marginal tax rates.

Assessment

The risks involved in the tax deferral offered by nonqualified plans occur because a senior physician-executive may:

  • Bet his or her long-term security on the viability of a single company.
  • Become over-dependent on unsecured funds.
  • Incur extra estate taxes because of failure to properly plan for plan distributions.
  • Fail to diversify because of limited investment alternatives in the plan.
  • Become subject to the constructive receipt problem and possibly to FICA tax at an earlier than expected time.

Conclusion

Please comment and opine on the above relative to the current tax structure, as well as a potential future change by political fiat?

Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

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