Insurance-reimbursement constraints, payer mix, and an aging population have all played a part in the shortage of physicians in certain specialties in recent years. Hospitals and medical practices have responded to increased competition and strong demand for physicians by developing various recruiting incentives.
There are often hidden tax implications that affect physician-recruitment incentives, which should be considered in structuring these arrangements. This article will briefly discuss the recipient physician’s tax effects of some of these incentives.
While not as popular as they once were, income guarantees are occasionally offered as incentive to relocate a practice. The tax consequence of an income guarantee depends on the facts and circumstances of each contract. Gross income includes all income over which taxpayers have complete control, but loan proceeds do not constitute income.
In a 2002 case, an orthopedic surgeon was successful in proving that advances received from a hospital were non-taxable loans. In this case, the hospital guaranteed that the physician’s income would not be less than $33,334 per month. If, during the term of the agreement, the physician’s income exceeded $33,334 for any month, he was required to pay the excess to the hospital as repayment of the amount advanced. An amendment was signed the following year clarifying that, at termination of the agreement, the parties intended that the physician be required to repay the portion of the income guarantee not previously repaid. The court found that the advances constitute a loan because:
- The agreement provided for repayment to the extent his income for any month exceeded $33,334. Additionally, the agreement provided that the parties would agree on terms for repayment of any balance due at the termination of the agreement;
- His intent to repay was supported by the amendment, a signed promissory note, and his correspondence to the hospital after he ended his practice in the area; and
- The hospital’s intent to enforce was reflected in other documents and by court action after he ended his practice.
While the physician was successful in this case with the facts strongly in his favor, it was only after costs of litigation. Parties should ensure that documents are carefully drafted to show that amounts are advanced as a loan if that is the intent. Any amounts that are not properly structured and documented will be taxable to the physician in the year received.
There are similar issues to consider in physician-recruitment loans. A hospital may loan a physician funds to defray the costs of relocating a practice with the intent to forgive part or the entire loan in the future. Again, key to treating the advance as a loan vs. taxable income is the documentation. Presumably, all documentation shows that the physician has an unconditional promise to repay, and that any forgiveness provision is a condition subsequent and not guaranteed.
In a 2000 ruling, the IRS held that payments made by a firm as a recruiting inducement, secured by promissory note and bonus agreement, were compensation, not bona-fide loan proceeds. Although structured as loans (signed note, specific repayment schedule, interest charged, and security for loan), the IRS held that there was no unconditional and personal obligation to repay, as repayment was to be with guaranteed bonus payments which exactly matched the repayment amounts. An employee would be required to repay a portion of the advance only if he left the firm before the end of the required period of service. Also key was that the agreement did not require periodic cash payments. The obligation was satisfied by performance of services over a five-year period, with one-fifth of amount forgiven for each year services were performed.
Similar to physician-recruitment loans are loans made by hospitals or practices to supplement educational costs for advanced or specialty degrees. The requirements for these loans would mirror the above-discussed rules for relocation loans.
Also offered are relocation- or moving-expense allowances. As discussed below, if a relocating physician meets both distance and period-of-employment tests, the costs of moving household goods and personal effects as well as certain travel expenses are considered deductible moving expenses. The distance from the old residence to the new job location must be at least 50 miles more than the distance from the old residence to the former job location. The distance test also requires that the distance from the new residence to the new job location is not more than the distance from the former residence to the new job location.
If the taxpayer is an employee, the period-of-employment test is met by full-time work for 39 weeks during the 12 months after arriving at the new location. If self-employed, the taxpayer meets the test by working full time for 78 weeks during the 24-month period after arrival, of which not less than 39 weeks are during the first 12 months. Qualified moving expenses reimbursed by an employer are excludable from income and withholding taxes.
Reimbursement of closing costs and temporary living expenses by an employer is subject to withholding and reportable as wages on Form W-2. If the employer or a relocation service purchases the former home and the price is not in excess of the home’s fair market value, there is no taxable compensation to an employee.
In summary, physician-recruitment incentives can have very different tax results for the recipient physician, all dependent on the exact structuring and documentation of each arrangement. In addition to having your attorney review the documents, you should consult your tax adviser. A careful review of tax implications should be part of designing the recruitment package.
Terri Judycki, CPA, MST, is senior tax manager with the certified public accounting firm Meyers Brothers Kalicka, P.C. in Holyoke; (413) 536-8510.