Jump to content
Sign in to follow this  
WestCoast

409A (and/or 457?) Issues as to Physician Employment Agreement

Recommended Posts

A NONPROFIT corporation operates a physician practice group. It provides physicians with a standard employment agreemnent which provides for severance payouts upon death, disability or ANY termination of employment (voluntary or involuntary), as long as the physician had at least 3 years of service at the time of such event. The severance is equal to the net collections the corporation receives from the physicians' services performed prior to termination during the 90-days following such termination. The severance is payable monthly in arrears, based on actual collections received for the preceding calendar month, and the first payment is made during the second calendar month after termination.

Query: Because the severance right is available upon a voluntary termination of employment, it will vest once the physician hits 3 years of employment. So, due to the corporation's nonprofit status, won't the deferred compensation be taxable at that point in time? And, if so, what is the amount that's taxable, as the post-termination collections won't be known at such time?

Thoughts? And thanks.

Share this post


Link to post
Share on other sites

This is the kind of arrangement that begs for relief from 457(f) under the new regs which have been promised for the past 5 years but have not yet made an appearance. Technically, I think the physician would be vested in and taxable on each dollar that comes in the door during the 90-day window following his/her 3-year anniversary, on the day that dollar comes in the door, but talk about a completely ridiculous result and certainly not one contemplated as being subject to 457(f) when Congress extended 457 to non-profits in 1986.

Share this post


Link to post
Share on other sites

Query: Because the severance right is available upon a voluntary termination of employment, it will vest once the physician hits 3 years of employment. So, due to the corporation's nonprofit status, won't the deferred compensation be taxable at that point in time? And, if so, what is the amount that's taxable, as the post-termination collections won't be known at such time? Thoughts? And thanks.

Even though the amount is payable for voluntary separations from service, you might be able to take the position that this is a severance plan under 457(e)(11) which is exempt from 457(f).

Notice 2007-62 promises in the future to come to a different result when IRS ultimately defines what is a bona fide severance plan for 457(e)(11). However, until it does that, this is one of those grey area where you certainly won't be the only one taking the position. Consult an attorney, of course, and do not rely on this e-mail posting.

Share this post


Link to post
Share on other sites

George, I think it is double-trigger vesting: termination is the first trigger, and each dollar that comes in the door is the second trigger for that dollar.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

×
×
  • Create New...