Defined Benefit Plans for Physicians

Making a Comeback in 2008?

[By Staff Reporters]fp-book1

During the past decade, defined benefit plans have fallen out of favor due to excessive red tape, high administration costs, and IRS scrutiny. However, some experts claim that this trend may be about to reverse.

Suited for Older Doctors

For an older physician-executive who has little in retirement savings, a few young employees (or no employees), but adequate income to start setting a great deal of it aside, the defined benefit plan makes a great deal of sense in that contributions are not limited as they are in defined contribution plans.


However, there are other good reasons to reconsider a defined benefit plan.

For instance, a doctor-employer can take into consideration prior years of service and adjust the benefit formula to meet his or her needs. In certain cases, this could result in putting away everything a person makes each year.

The only snag is the interplay between the defined benefit and defined contribution limits that is mandated by Section 415(e) of the Internal Revenue Code. Defined contribution plans have annual contribution limits, while defined benefit plans have annual benefit limits. Under the pension changes signed into law in August 1996 as part of the minimum wage bill, Section 415(e) was eliminated on Jan. 1, 2000, removing this obstacle to the creation of new plans.

Limitations on Qualified Plans

Section 415 limits the amount of benefits that can be provided under qualified pension plans. These limits are indexed for inflation.

For 2007, a defined benefit plan cannot provide for the payment of benefits which exceed the lesser of $180,000 or 100% of the participant’s average compensation for the highest three consecutive years of service, i.e., the three consecutive years during which the participant had the greatest aggregate compensation. The amount of annual additions (i.e., employer contributions, employee contributions and forfeitures) that can be made to a defined contribution plan for 2007 is limited to the lesser of $45,000 or 100% of a participant’s compensation for the limitation year.

Over-Funding Risks

Defined benefit plans still suffer from the risk of over-funding. Excess accumulations can be effectively confiscated up to 50% between penalties, federal, state, and possibly local income tax. The likelihood of over-funding was exacerbated by some pension changes included in the General Agreement on Tariffs and Trade (GATT) passed in December 1994. These changes required use of the 30-year Treasury bond interest rate in calculating funding requirements.

Previously, lump-sum payouts were calculated using the Pension Benefit Guaranty Corporation [PBGC] interest rate, which was lower and more predictable than the T-bond rate. A higher rate results in a lower lump sum withdrawal at retirement.


One solution is to keep the pension plan in place when the doctor-business owner retires if interest rates have increased. The doctor should take the maximum annual benefit from the plan and wait for interest rates to drop so that he or she can withdraw the remainder of the balance in a lump sum.



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FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

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3 Responses

  1. Docs Delaying Retirement

    According to an AMGA survey, as reported by Victoria Stagg-Elliott in the AMNews on May 25 2009, the poor economy makes some physicians less inclined to leave medical practice; just as physician retirement is being delayed. Moreover, work-life balance remains a big issue.


    Doesn’t this seem to parallel the general population, as well?



  2. ME-P and CMP™ Advocates

    We are occasionally asked by readers and colleagues how the topics of medical practice management and personal financial planning for physicians are related?

    In other words; the raison de’tra of this ME-P blog, and many of our books, texts, and dictionaries; not to mention our institutional print journal guide;

    Well, it doesn’t take too much thought to see how the dots are connected. The above post shows exactly why … and confirms our integrated culture.

    Ann Miller; RN, MHA


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