With the average medical school debt now exceeding $200,000 and nearly 35% of physicians approaching retirement age, healthcare organizations are facing unprecedented recruitment challenges. Gone are the days when a competitive salary alone could attract top talent. Today's physicians expect sophisticated compensation packages that help address their financial burdens while providing long-term stability.

Let's look at a common scenario: A hospital system offers a newly recruited surgeon a $50,000 forgivable loan, promising complete forgiveness after five years of service. Seems straightforward, right? However, without proper structuring, this well-intentioned recruitment tool could create unexpected tax burdens for both the physician and the organization.

The Evolution of Medical Recruitment Packages

Consider Dr. Sarah Johnson's experience. She received multiple offers from different healthcare systems, but what caught her attention wasn't just the base salary, it was their creative approach to helping with her $300,000 in student debt. Like Dr. Johnson, many new physicians are evaluating compensation packages based on their total financial impact, including tax implications.

Modern recruitment packages have evolved to address the changing needs of medical professionals, particularly new physicians facing significant student debt. But these creative compensation strategies often come with tax surprises. Let's break down the key components and their implications.

Forgivable Loans

While forgivable loans might appear to be an attractive alternative to traditional bonuses, the IRS takes a particular interest in these arrangements. Their current position is clear: when loan forgiveness is contingent on continued employment, the amount is typically considered compensation at the time the loan is made, not when it's forgiven.

Key Considerations from the IRS Perspective:

• Intent of the Loan: The IRS wants to know if this was a real loan or just a disguised bonus. To qualify as a bona fide loan, there must be a clear and unconditional intent for the employee to repay the amount.
• Unrestricted Control: Advances where the employee has unrestricted control over the funds and the loan lacks characteristics of a genuine debt are considered compensation and included in gross income.
• Substance of the Agreement: The loan agreement must have sufficient substance to be regarded as bona fide debt. This includes clear repayment terms, interest rates, and conditions for forgiveness.

Tax Implications and Employer Responsibilities:

• If the loan is deemed compensation, it must be reported as wages and subjected to income tax withholding and employment taxes.
• Employers should ensure that loan agreements are carefully structured and documented to withstand IRS scrutiny. Consulting with a tax advisor will help you navigate these complexities and avoid unintended tax consequences.

Sign-on Bonuses with Clawback Provisions

While forgivable loans are one popular method of easing financial burdens, sign-on bonuses remain a go-to incentive in many recruitment packages. But just like loans, they can trigger complicated tax situations, especially when clawback provisions are involved.

Tax Implications:

• At the time of issuance, the bonus is considered taxable income and subject to income tax withholding and employment taxes.
• If the employee fails to meet the retention requirement and repays the bonus, the timing of repayment plays a critical role in tax treatment.

Repayment Timing and Tax Treatment:

• Same Year Repayment: When the bonus is repaid in the same tax year, the employer can recover the net amount (after taxes) from the employee. The employer will adjust their 4th quarter 941 to reflect the repayment (reduction) in wages and request a refund of the federal withholding and applicable FICA taxes. The employee’s W-2 will be issued as if the bonus check was never paid.
• Subsequent Year Repayment: If the repayment occurs in a later tax year, the employee must repay the gross amount (before taxes) and sign an affidavit to not file for a refund of the Social Security and Medicare FICA Taxes. The employer is required to file Form 941-X to correct Social Security and Medicare taxes and issue a W-2c for the affected year that shows a reduction of the Social Security and Medicare Wages and related taxes (boxes 3, 4, 5 and 6) only. The employer is then required to repay the FICA taxes to the employee when they receive a refund from the IRS. No adjustment is made to Federal or State Wages or Withholding and the employee will not amend their tax return.

IRS Publication Guidance:

• According to IRS Publication 525, employees repaying bonuses in a subsequent year may deduct the repaid amount as a miscellaneous itemized deduction on their tax return.

Documentation Requirements:

• Employers should retain detailed records of repayments, including signed affidavits from employees acknowledging repayment terms and amounts. Proper documentation ensures compliance with IRS regulations and streamlines the correction process if needed.

Student Loan Assistance and Educational Benefits

Another tool growing in popularity, especially with younger physicians, is student loan assistance. The CARES Act temporarily allowed employers to provide up to $5,250 per year in tax-free student loan assistance under an Educational Assistance Program. Here’s what a compliant program looks like in practice:

• Provides up to $5,250 annually in student loan payments for each physician
• Tracks payments through their educational assistance program
• Maintains detailed records of each payment to ensure compliance
• Has already begun planning for post-2025 program adjustments

Starting January 1, 2026, these benefits will return to taxable status—meaning organizations need to start planning now for this transition. Some forward-thinking healthcare groups are already:

• Modeling the tax impact on their 2026 compensation packages
• Developing alternative recruitment strategies
• Planning communication approaches for existing staff
• Building the increased cost into future budgets

What to Keep in Mind:

• Amounts under the $5,250 threshold are tax-free and not reportable as income through December 31, 2025.
• Any assistance exceeding this limit is considered taxable and must be reported as wages.
• Employers should track these payments carefully to ensure compliance with IRS rules outlined in Publication 970 and 525.

The current tax advantages for student loan assistance programs, established under the CARES Act, will expire December 31, 2025.

Remote Work Considerations

Beyond financial incentives, workplace flexibility has become a key differentiator in recruitment, particularly with the rise of remote and hybrid roles. But even flexible arrangements come with tax implications of their own.

Tips for Employers:

• Verify state income tax withholding requirements for remote employees based on their work location.
• Employees should notify their tax advisor to ensure compliance with applicable state tax laws.

Best Practices for Healthcare Organizations

To navigate these complexities effectively:

1. Document Everything: Maintain records of all compensation arrangements and their tax treatment.
2. Communicate Clearly: Ensure employees clearly understand the tax implications of their compensation packages.
3. Stay Current: Tax laws and regulations change frequently, so regularly review your compensation structure.
4. Seek Expert Guidance: Partner with tax professionals who understand healthcare-specific compensation issues.

Looking Ahead

While forgivable loans, sign-on bonuses, and student loan repayment programs are essential tools for attracting top-tier talent in healthcare, they come with tax and reporting complexities that require careful management. Proactively addressing these implications can help minimize financial surprises and ensure both compliance and transparency.

Whether you’re crafting an offer for a new physician or reviewing your current incentive programs, we’re here to help you move forward. Lutz is unique in that we bring healthcare experts and tax advisors under one roof, working together seamlessly to provide the clarity and guidance you need to make informed decisions. Please contact us with any questions.