"Satellite Group" Setting 401(k) P-S Plan Issues

[billfgrady]

I'm wondering if anyone out there is familiar with a medical group structure known as the "satellite group" setting. If not, perhaps the truly ambitious among you would be kind enough to wade through to offer suggestions as to the following.

We act as Plan Administrator for the 401(k) Profit Sharing Plan of a group of hospital-based physicians. Unlike the traditional medical group structure, wherein each of the physicians is an employee of a single corporation, physicians engaged by our client are actually employed by their own individual satellite service corporations ("satellite service corporations"), which, in turn, are engaged as independent contractors by our client (the "group service corporation") to provide physician services on behalf of the group service corporation. However, it bears noting that the group service corporation is solely owned by the physicians who are engaged by the group through the satellite service corporations. There are no outside or "third party" owners. Each physician is only issued shares (roughly 7% ownership) of the group service corporation at the time when they become eligible to participate in the Plan. Each of the physicians is also the sole owner of their respective satellite service corporation and each has no employees.

The group service corporation adopted a 401(k) Profit Sharing Plan (the "Plan"). The Plan definition of "employer" includes all Affiliated Employers, regardless of whether the Affiliated Employers adopt the Plan (hence, the issue of shares for the individual physicians to become eligible to participate). In addition, any Plan participant who is actively employed during the Plan year (calendar year) is eligible to share in the discretionary profit sharing contribution. The profit sharing contribution is paid out quarterly as the group service corporation reconciles the amounts it owes in compensation to the various satellite service corporations. To illustrate, if a particular satellite service corporation is owed $100,000 in compensation for a given quarter, the group service corporation would pay compensation of, say, $93,000 directly to the satellite service corporation. Then, the group service corporation would cut a check for the $7,000 profit sharing contribution directly to the participant's broker (directed investment accounts) and deduct the $28,000 ($7,000 x 4 quarters) profit sharing contribution on its income tax return at the end of the Plan year. The 401(k) elective deferral portion of the participant's contribution is paid directly from the satellite service corporation and thus reflected on the W-2 that the physician receives from his or satellite service corporation.

One of the physicians is leaving the group and terminated the contract between his satellite service corporation and the group service corporation as of March 1, 2003. My understanding is that the satellite service corporation and the group service corporation are no longer "Affiliated Employers" as of March 1. In terms of compensation, the individual physician will likely be paid W-2 compensation from his satellite service corporation of approximately $75,000 for the period from January 1, 2003-February 28, 2003. However, you should appreciate that there is a back-up of receivables due to the lag between services and collection, such that compensation from the satellite service corporation to the individual physician will easily be in excess of $200,000 at Plan year end. The question is whether we need to take all of it into account.

1. Is the individual physician required to make a profit sharing contribution to himself for Plan year 2003? I am fairly comfortable the answer here is yes.

2. Is the individual physician allowed a profit sharing contribution based only on pre-termination compensation? Appreciate that the individual physician does NOT want to make a contribution of any amount for 2003 and that all of the other participants (all $200,000+ W-2 comp.) are getting $28,000 profit sharing contributions.

3. What if the individual physician remains a shareholder of the group service corporation until the end of the year? Would this require us to take into account the post-March 1 compensation? Even if neither the individual physician or his satellite service corporation will provide services to the group service corporation after March 1?

Any advice on any or all of these questions is much appreciated!

[billfgrady]

No brave souls?

[E as in ERISA]

I think that you consider all compensation of the doc (not his corp) through the date that his corp part of the plan.

I'm assuming that these are C-corps? So it's not self-employment income? And the timing of the recognition of the income by the company is irrelevant to the doc's recognition of income? The doc doesn't have income until actually paid by the corp?

And do you generally treat this as an affiliated service group? Or do you treat this as a multiple employer plan? It doesn't look a controlled group or companies under common control. And I'm assuming that it's not leased employees (because the group corp doesn't have control over the professional services of the docs)?

If it is a multiple employer plan, then you need to decide when doc's corp terminated its adoption of the plan. As long as the doc's corp is still technically an adopting employer, then the terms of the plan still control. And the doc's comp through that date would still be considered for accrual purposes.

If it is an affiliated service group, then that ASG status (with respect to that doc's corp) may be terminated when the contractual relationship between corps terminates. However, you need to make sure that the corp doesn't become a multiple employer plan when the affiliated service group relationship terminates.

What does the plan say about which corps are in the plan? Did the doc's corp sign as an adopting employer? Did the doc's corp do anything to officially terminate that? Or does the plan do that automatically?

[IRC401]

Any time that I read about a bunch of doctors in a plan with no non-HCEs, I suspect that I'm missing some facts, and I see no reason to be brave when the situation doesn't smell right.

[E as in ERISA]

Some types of doctors -- like anesthesiologists -- don't have office hours for patients and don't have staff.

[billfgrady]

KATHERINE: Thank you for your responses to my questions. Your last response was right on point: these physicians are hospital-based anesthesiologists. Any administerial functions are usually performed by off-site physician accounting firms (i.e., billing, insurance matters, etc.) And there are no "patients" per se, so the physicians don't need staff to answer phones, schedule appointments, etc. Thus, no NHCEs.

Here are answers to the questions you posed.

1. The satellite service corporations are C-corporations. The group corporation is an S-corporation.

2. The income earned by a physician is not self-employment income.

3 and 4. Each physician does not have income until paid by his or her satellite service corporation.

5. We treat this as an affiliated service group, as opposed to a multiple employer plan. "Employer" is defined by the Plan as the group service corporation and "any successor which shall maintain this Plan; any predecessor which has maintained this Plan; and all Affiliated Employers." "Employee" is defined by the Plan as "any person who is employed by the Employer or Affiliated Employer, and excludes any person who is employed as an independent contractor." An "Affiliated Employer" is "any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes any Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414©) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o)."

6. Again, we do not treat this as a multiple-employer plan. In fact, there is NO language to the effect of, "Employees of Affiliated Employers shall not be eligible to participate in this Plan unless such Affiliated Employers have specifically adopted this Plan in writing." This is language that we would typically include in a multiple employer plan.

7. The physicians are not leased employees of the group service corporation.

8. See answers 5 and 6 with respect to what the Plan says about which corporations are in the Plan.

9. The satellite service corporations do not adopt the Plan of the group service corporation. See answer 6 for more on this.

10. Upon termination, the service agreement between the satellite service corporation and the group service corporation is terminated and the physician is redeemed as a shareholder of the group service corporation as of the same date. This is the extent of how these relationships are terminated.

11. The Plan does not automatically terminate the relationship between a satellite service corporation and the group service corporation.

Here is where I am with all of this right now:

A. When is the ASG terminated? I'm certain that this is when the service agreement between the satellite service corporation and the group service corporation terminates or, if earlier, when the physician's share(s) of the group service corporation is redeemed.

B. Is the individual physician limited a profit sharing contribution based only on pre-termination compensation? Not sure, but I'm thinking the answer here is no, particularly if you consider that the compensation is due solely from services that were performed prior to termination. In the past, we have considered all W-2 compensation paid to the physician for that year, even if it is paid post-termination. "Compensation" is defined in the Plan, in part, as a "Participant's wages as defined in Code Section 3401(a) and all other payments of compensation by the Employer or an Affiliated Employer (in the course of the Employer's trade or business) for a Plan Year which the Employer is required to furnish the Participant a written statement under Code Sections 6041(d), 6051(a)(3) and 6052." I think this practice is consistent with the above definition.

C. Do we run afoul of the "regularly performs services for" test in Reg. s. 1.414(m)-2(b)(2) because the physician stops performing services for the group service corporation after March 1? No because 100% of the satellite service corporation's (and, accordingly, the physician) income is derived from services performed for the group service corporation.

Thanks again for your help with this.

[E as in ERISA]

I think that it is ultimately a document interpretation question.

It would be a lot cleaner if there were adoption agreements by the ASG members -- and if they had board resolutions and amendments terminating that participation when they ceased to be ASG members -- and if the document was clearer about how much compensation was taken into account during a year when that occurs. But absent that clarity, it is a matter of document interpretation. And while your document does not clearly state that all compensation should be included in the year of termination of the ASG, it does not necessarily prevent you from taking the position either.

One thing I should note, however. You need to remember to distinguish between the physician and his corporation. The corporation may be have earned the fees as of the date of the cessation of the ASG arrangement. But that doesn't mean that the physician has earned it as of that date. He probably has a separate compensation schedule set up for himself -- for various legal and tax reasons. It appears that you are only going to be considering the physician's taxable wages during the year, so you'll probably be alright in the end. But your justification for counting all income should not be based on the fact that the physician had earned those amounts as of the date of termination -- that is probably not true. You're going to have to be comfortable that it is valid to interpret your document as allowing compensation for the full year to be counted.