'Professional Service Agreement' with 501c3 Hospital

[J Simmons]

More and more, I am seeing MDs who close their privately operated practice and become hospital-based. Some outright become employees of the hospital. Others are entering into 'professional services agreements' that pretend the arrangement is independent contractor and the MD gets payments that the MD then claims as self-employed income (or runs through the payroll of the MD's professional corporation). The hospital seems content because the FICA/self-employment taxes are getting paid, even if not off of the hospital's payroll.

The hospital also excludes the contracted MD, as a "non-employee", from its employee benefits and retirement plans. The MD is highly compensated and so the MD's exclusion from those plans does not create a coverage or nondiscrimination problem for the hospital.

However, such 'contracted' MDs that are in reality employees of the hospital would like their own retirement plans. An employee cannot sponsor his or her own retirement plan, so it appears that such MDs run a risk of having the IRS disqualify a plan if audited and the IRS takes the position that the MD is an employee.

Or, if the IRS recognizes the MD as self-employed, then would such a plan have to benefit also those hospital staff paid on the hospital's payroll, but over which the MD primarily directs and controls them, i.e., as employees of the MD?

If the hospital is tax-exempt, then it might have a 403b and/or 457b rather than a 401k. So that would make the MD's 401k not permissively aggregable with the hospital's plans, so as to 'piggy back' off of the contributions the hospital makes to the 403b and/or 457b in order to demonstrate nondiscrimination by the MD's 401k.

Perhaps a 457f arrangement whereby the 501c3 hospital and the MD would defer part of the MD's compensation, but of course, MDs like other workers don't like the "risk of forfeiture" necessary to delay the taxation.

What are others doing with these types of situations?

[mbozek]

The question of who is an employee or IC is determined under the IRS twenty factor test which was revised recently. Just google independent contractor or employee. The Factors determining the status of the service provider under the IRC are grouped into business, financial and type of relationship categories. There is still no fixed number of factors that definitively determines what category the service fit into. I haven't looked at the 20 factor test recently but I don't think it redifines the relationship of professionals who perform services for hospitals because I see a lot of bills from Doctors who perform designated services for hospitals such as emergency medical care or anesthesia under a separate professional entity. So I have a question- why is there a risk if a solo Doc performs professional services for a hospital when there is a growing trend toward outsourced professional medical practices performing medical services for a hospital as non employees. There are also corporate medical service providers employing doctors who are 100% owned by the hospital but are separate entities from the hospital because of insurance or state laws regulating hospitals.

[david rigby]

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

[J Simmons]

Thanks for your response. This is a situation where the migration is towards a closer relationship with the hospital. The MD had an independent practice, at his own location, with staff and privileges at the hospital, but now he's sold the separate facility, let go of his own staff, is now officed up at the hospital and all assistance to him is provided by staff on the hospital's payroll. All billings and collections are done by the hospital, which makes payment to the MD for his units billed (regardless of collected). About the only things remaining are his independent medical judgment (required by medical board) and that his payments are not run through the hospital's payroll. The arrangement in question points strongly, if not overwhelmingly, to the hospital, in light of the 20 factors, being now the MD's employer and the MD the employee of the hospital, despite the contract's protestations that it is an 'independent contractor' arrangement--much like the failed attempt by FedEx Ground that the 9th Circuit held a year ago in Alexander v FedEx did not overcome the realities that the ground delivery drivers were in fact employees of FedEx.

[QDROphile]

Whenever faced with a controlled group or affiliated service group question, I always ask, "What undesired or abusive practice are/were physicians engaged in that resulted in the current law to prevent the abuse/practice?" Advising under the circumstances is difficult -- both the judgment calls and communicating an unwelcome conclusion. It can get especially difficult if you firmly believe in an outcome but are asked to assist with an arrangement that is improper under that outcome. In a slightly different vein, I am unaware that the lawyers for Microsoft suffered any consequences for bad plan drafting relating to eligibility of what were determined to be employees, notwithstanding contracts that said otherwise.

[J Simmons]

Whenever faced with a controlled group or affiliated service group question, I always ask, "What undesired or abusive practice are/were physicians engaged in that resulted in the current law to prevent the abuse/practice?" Advising under the circumstances is difficult -- both the judgment calls and communicating an unwelcome conclusion. It can get especially difficult if you firmly believe in an outcome but are asked to assist with an arrangement that is improper under that outcome. In a slightly different vein, I am unaware that the lawyers for Microsoft suffered any consequences for bad plan drafting relating to eligibility of what were determined to be employees, notwithstanding contracts that said otherwise.

Yea, in trying to determine the extra reach beyond the literal application of a law, discerning the "spirit" of the law suggests examining the purpose behind the adoption of the written words. But courts don't typically scale back on a literal application of those written words, if unambiguous, just because the abuse sought to be prevented by them is narrower than the words themselves provide. Sound advice to a client usually runs contrary neither to the literal wording or the spirit behind their enactment. I don't know if Microsoft fired those attorneys after getting rapped on the corporate noggin' or not, but it cost Microsoft nonetheless.

Have you provided advice or plan services to a client situated like the MD situation I describe? If so, in what plan direction, if any, did you go?

[rcline46]

I think you can rely on the written opinion of the hospital's ERISA attorney(s) that the docs are or are not employees. Even if wrong, you are shielded from any consequences. Make sure you put into writing that you are relying on such opinion.

[QDROphile]

Mr. Simmons is probably either the hospital's or the doc's lawyer. In either case he won't be able to rely on the determination by another person, at least not without disclaimer.

I have been involved in situations with elements similar to what you describe. I advised that separate arrangements would fail if challenged and the IRS tends to scrutinize physicians with good reason. The nonqualifed options tend to be unacceptable, as you suggest. A 457(f) arrangement will not provide the long-term tax deferral that is desired. Generally, the greed arrangements are covered by the common law rule of "tough" and there are no clever substitutes that satisfy the greed standards.

There can be issues other than payroll and benefits related to these sketchy arrangements.

The assumption is that the employer is not a government entity or instrumentality.

[mbozek]

How are the Docs payment treated by the hospital? Did he file a w-4? If hospital is treating him as an IC why is this question being raised?

One basic question that needs to be answered is does the hospital determine what he does and how he does it? Or does he have control of what he does and when he does it? It seems that the question of the docs employment needs to be addressed to the Hospital's tax dept.

What does the Doctor's contract to provide services state is his employment status?

There is precedent for treating doctors performing services for hospitals as IC. Google :courts approve of treating doctors as independent contractors, Barry Frank, Practical tax strategies July, 2003

[J Simmons]

How are the Docs payment treated by the hospital? Did he file a w-4? If hospital is treating him as an IC why is this question being raised?

One basic question that needs to be answered is does the hospital determine what he does and how he does it? Or does he have control of what he does and when he does it? It seems that the question of the docs employment needs to be addressed to the Hospital's tax dept.

What does the Doctor's contract to provide services state is his employment status?

There is precedent for treating doctors performing services for hospitals as IC. Google :courts approve of treating doctors as independent contractors, Barry Frank, Practical tax strategies July, 2003

There are rulings that go both ways. It is a fact sensitive determination. We've already reviewed more than 15 IRS PLRs and court rulings, sorted the factors and analyzed them. This situation clearly smacks of employment despite the paper proclaiming it to be an "independent contractor" arrangement. That is the conclusion arrived at separately and independently by two benefits attorneys and an employment attorney that have all had the benefit of a complete, exhaustive investigation of all the facts of the particular situation. So, the question is refined down to what tax-advantaged retirement savings options are available to the MD who is a common law employee of the 501c3 hospital, which has excluded this and other "IC" MDs from its 403b and 457b offerings.

Do you know of any tax-advantaged retirement savings options are available to the MD?