Apr 1998 Table of Contents

THE SALARIED FP

Benefit Programs: Look Before You Leap



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Fam Pract Manag. 1998 Apr;5(4):67-71.

Whether you're looking for a better salaried position or just now thinking about moving from private to employed practice, you have a lot to consider before you make your switch. Too often, physicians see the advantages of a salaried position, such as more predictable patient flow, better hours, trained professionals to negotiate contracts and staff to deal with insurance companies — not to mention a guaranteed salary and maybe some stock options — and then make the leap.

Is it a good deal? Maybe, but take a good look first. Reduced hassles, competitive salaries and stock options are important, but they don't tell the whole story of what a doctor can expect to get from an employer. You also need to examine the relative value of your benefits and your likely after-tax spendable income to know whether a deal is as good as it looks.

Salary vs. compensation

There's a significant difference between your salary and your compensation. The Employee Benefit Research Institute, which studies the structure of benefit programs relative to payroll, recently reported that employee benefits other than salary amounted to 42 percent of employee compensation. Physicians negotiating contracts should look long and hard at both the proposed salary and the value of their benefits. A dazzling salary can be eaten away by expensive health insurance cost sharing, reduced life insurance coverage or small retirement contributions.

Remember also that a salary guarantee is only as good as the guarantor and that stock in a health care organization is only as good as the market's attitude toward that stock. The value of stock and an employer's ability to meet the guarantees of your contract can shift as quickly as the publication of an unfavorable article in The Wall Street Journal or the announcement of a federal probe. Just ask Columbia/HCA. The larger the entity you join, the less control you have over its destiny and, therefore, your own destiny.

Additionally, there's always a difference between gross taxable income and net spendable income. Because of the favorable tax laws applicable to some benefits, you need to look closely at whether you might do better financially by negotiating a lower salary but better benefits.

To give yourself an edge in negotiations, you need to know the basics of benefits. Every compensation package should include group health insurance, long-term disability protection, life insurance and, of course, a retirement plan.

Group health insurance

Although some physicians have grown to distrust the health insurance industry, all must be smart health insurance consumers. This component of your benefits can be a significant part of your compensation package. Variations in state laws and demographics affect the design of health insurance options, but here are several factors to consider when evaluating the health insurance that potential employers may offer:

  • The range of options, including HMO, PPO and indemnity plans;

  • The track record of claims payment;

  • The list of approved physicians and other providers;

  • The ease of access to referral specialists;

  • The cost, both to the employer and to you.

Remember that cost and premium aren't necessarily the same. Low-premium HMO programs that have weak provider lists can lead you to go “out of network” — and absorb large out-of-pocket expenses. Your share of the premium and your expected out-of-pocket expenses should be identified before you sign an employment contract.

Your employer should also make available the pretax benefits of a flexible spending account as a way to pay your out-of-pocket costs. Higher-income individuals rarely can take advantage of a deduction for health care expenditures on their individual income tax returns. So it's vital to pay for as many of these with pretax dollars as possible. A flexible spending account can be a mechanism to help you achieve this 30 percent to 40 percent savings. But beware: You lose any money left in your flexible spending account at each year's end.

Disability coverage

Disability income insurance is an essential benefit for professionals whose trade is their time and skill. Both group and individual plans exist, and there are real differences between the two types of policies.

Traditionally, large organizations provide group disability coverage, which is usually issued without medical underwriting and guarantees income protection while you are employed by that organization. Unfortunately, it usually stops when your employment stops and is more restrictive than individual policies.

Individual contracts are owned by the insured, have more generous definitions of disability, are subject to medical underwriting and have fixed premiums. They are priced higher than group coverage, but they do a far better job of insuring against disability. In your employment agreement, lobby for a creative combination of group and individual coverage.

A special note: If you have an individual disability policy and are changing employers, it's rarely a good idea to drop that coverage and substitute a group policy. Disability insurers are narrowing their definitions, creating restrictions on access to higher amounts of coverage and increasing the premiums on new policies. Existing policies aren't subject to these changes and are generally broader and better than what you can buy in the current market. You should discuss continuing your individual policy as part of your employer-sponsored program. Note also that if you pay the premium on a disability policy, the benefits are tax-free on receipt; if the employer pays the premium, the benefits are taxable.

Life insurance

Group term life insurance premiums paid by employers for policies with death benefits of up to $50,000 aren't taxed as your income. Premiums they pay on insurance exceeding $50,000 are taxable to you, so large amounts of group life insurance lose some of their value as a benefit because of taxation.

Most small practices provide only the threshold of $50,000 of coverage and allow for permanent policies with cash-value accruals. These premiums are paid through the corporation under mechanisms such as deferred compensation or split-dollar life insurance, where benefits and costs are shared between the employer and employee with significant tax advantages. (Split-dollar coverage is a permanent policy in which the employer advances premiums that are repaid at termination or death, and the employee directs the insurance proceeds to his or her beneficiary.) Most large entities provide only group term insurance, which is lost at retirement or termination and whose premiums for policies above the threshold are taxed to you as income during employment.

Look for more sophisticated plans that offer permanent group insurance, such as group universal or variable life or split-dollar policies. With these plans, you and the employer share the premium and you retain ownership of the coverage. These plans are usually set up for selected groups of employees and allow for individual contributions to create supplemental tax-deferred accounts for personal needs, such as tuition or retirement income.

Retirement plans

A retirement plan is the most highly regulated of your benefits, and it can be a physician's most valuable individual asset. So don't treat it casually.

Retirement plans are divided into two categories, “qualified” and “nonqualified.” The qualification relates to the allowance of a tax deduction for the employer sponsoring the plan. With a qualified plan, the employer can't be selective about the employee groups the plan covers. Non-qualified plans can differ among employee groups, but the employer can't deduct its contribution to the plan. Funds in each type of plan can be tax-deferred and, properly structured, offer you significant compound growth.

Larger entities usually provide 401(k)-type retirement plans, which are at least partially funded by employee contributions. Due to government restrictions on 401(k) contributions, the actual amount contributed before taxes (and thus compounding tax-deferred) is usually less in a 401(k) plan than in the traditional pension and profit-sharing combination plans offered by most small medical practices. Physicians working for larger employers may have smaller retirement contributions and, therefore, less accumulated wealth at retirement. This is often accepted as a trade-off for equity created by stock ownership in the organization. Equity growth may be real, but don't take a Pollyanna-like approach to estimating its value.

Be careful

During your benefit negotiation process, take advantage of the expertise that benefit brokers, accountants, attorneys and insurance advisers can offer. It may cost you a bit up front, but it pays in the long run. Without such expertise, people actually sign employment agreements with language such as “Benefits available will be the standard package provided to all senior employees.” That simple sentence leaves control over your benefits (42 percent of compensation) to the whims of managers and human resources directors who have obligations to shareholders and sometimes are not concerned about the contentment and retirement security of individual physician employees.

Instead, invest the time, effort and expense it takes to get the best deal you can from your new employer. After all, contract negotiation is the time when the employer is most interested in attracting you and therefore is most flexible and accommodating. But most important, to ensure your financial future, look at all the details of a contract before you leap.

David Morris is a founding partner in Franklin/Morris Associates, an insurance and employee benefits firm based in Baltimore.


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