Emergency Room Call Coverage Deferred Compensation Planning Strategy

(PYA Alert dated February 2, 2007)

Hospitals increasingly struggle with the challenge of securing emergency room call coverage and funding an adequate level of compensation for the physicians that agree to provide such coverage. Voluntary call coverage is quickly becoming a lost practice and standard call coverage shift pay can be expensive. Thus, hospital administrators have been forced to consider alternative compensation arrangements acceptable to both parties.

Fortunately, a common tax planning strategy is available that may help resolve this emergency room call compensation dilemma.

Strategy Overview: Hospitals can structure compensation arrangements with on-call physicians via a nonqualified deferred compensation plan (“NQDC” plan) to provide reasonable compensation on a tax-deferred basis to emergency room on-call physicians.

Benefits to Hospital: Compensating on-call physicians via a NQDC plan will allow the hospital to provide a valuable benefit to the physicians providing emergency room call coverage without having to currently fund the plan (such arrangements are available to provide benefits to physicians that provide services to the hospital despite the absence of an employer-employee relationship). Other benefits to the hospital of the NQDC strategy include:

• Vesting periods (typically 5 or 10 years) provide additional incentive for physicians to remain in service to the hospital and the community (if physician does not fulfill commitment to provide services before the vesting period is complete, all amounts previously credited to the physician under the plan are forfeited);
• NQDC plans can be utilized to provide benefits to targeted group of employees or independent contractors (i.e., such plans are not subject to nondiscrimination provisions);
• The structure of the arrangement can be customized (within specified parameters) to meet the specialized needs of the hospital; and
• Unfunded NQDC plans are not subject to most of the ERISA filing requirements for traditional retirement plans.
  

Benefits to Physicians: When structured properly, compensation deferred under a NQDC plan is not included in a participant’s gross income until the participant’s rights to such income vest. Also, the balances credited annually within the plan can grow tax free.

Plan Structure Requirements: The NQDC plan must be structured to strictly comply with all applicable tax requirements, including I.R.C. § 409A (and I.R.C. § 457(f) for tax-exempt hospitals).

We would be glad to discuss how an NQDC strategy to fund emergency room call coverage compensation may benefit your organization. PYA’s credentialed healthcare tax and advisory professionals are prepared to assist your organization’s needs from an initial analysis of key issues to a full turn-key solution including the structure of such an arrangement, tax implications and investment management matters via PYA’s affiliate, PYA Waltman Capital. Please contact Eddie Phillips or Marty Brown at (800) 270-9629 if you would like to discuss NQDC call coverage compensation strategies in further detail.

WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW.  THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION.  EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

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