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|Question 343: Four doctors (obstetricians) jointly own a professional corporation that's a normal medical practice. It bills patients and pays a salary to the doctors and staff. But each doctor also gets paid by a local hospital for being on call for services at the hospital, getting an annual Form 1099 with respect to that income. If a doctor delivers a baby at the hospital while on call, the professional corporation bills the patient. Can an individual physician adopt a SEP based on his or her hospital income, and also participate in a 401(k) sponsored by the professional corporation?|
Of course they can set up a SEP to provide retirement contributions relating to the on-call fees. The real question, however, is whether the SEP must cover the employees of the professional corporation. If the sole proprietorships (the individual doctors receiving the 1099 income) are in an affiliated service group with the professional corporation, the SEP must cover all ASG employees who satisfy the eligibility requirements.
Suppose we treat Doctor X (one of the shareholders) as an A-Org and the corporation as a first service organization. Both are in the field of health, and so both are service organizations.The doctor individually is a shareholder in the corporation, so the ownership requirement is satisfied. The only remaining question is whether X's sole proprietorship regularly performs services for the corporation or is regularly associated with it in providing services to third parties.
I view Doctor X and the corporation as regularly associated in providing services to third parties. The hospital isn't paying the doctor simply to answer the phone. If a patient comes in ready to deliver a baby and the patient's own doctor is unavailable (or the patient does not have a doctor in the area), the on-call physician steps in. And that generates revenue for the professional corporation. It is fairly easy to argue a link between the two. Perhaps if the revenue that flowed to the corporation from the doctor being on call were trivial, one could argue that they were not "regularly" associated, but the threshold here (while a judgment call) is fairly small.
The questioner had a second question. Suppose the two businesses were not related. Would the doctor have a single 415 limit between the two plans? No. The doctor could easily get total contributions of $15,000 in the SEP and $50,000 in the 401(k) plan, for example. But if the businesses are in an ASG, then there is a single 415 limit.
Chapter 13 of my book, Who's the Employer, discusses affiliated service groups at length. The 7th edition was released today, and I am delighted it is available. Click here for more information.
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.