Many practices have incentive plans to aid in physician retention. A common option for retiring physicians is often structured as a deferred compensation plan.

Although there are different types of plans, this blog is directed toward non-qualified deferred compensation (NQDC) plans. A NQDC plan can be more flexible and customizable for employees and executives. It is a great tool to attract and retain key employees.

Often, these plans are negotiated at the time of hire or when becoming an owner of the practice (likely included in an employment or shareholder agreement). If this applies to your physicians, here are some questions to ask:

• When was your plan last updated? (If not updated since October 2004, you may not be compliant with updated IRS rules. However, some plans can be grandfathered if you meet certain requirements.)
• Are you reporting and withholding appropriately for payroll and federal/state income tax? (Note- the timing and amounts paid may differ from your normal payroll practices. W-2 reporting may also differ.)

As deferred compensation amounts are earned, vested, and reasonably estimated, certain payroll taxes (Social Security and Medicare) should be reported and paid. However, a tax benefit for the employee is they will not pay income tax on the funds until the monies are received. This special timing rule may save the employee and the employer some payroll tax costs, as most deferred compensation recipients are generally earning wages in excess of the Social Security wage base prior to retirement.

If this applies to your retiring physicians, here are some high-level suggestions:

1. 1. Review your employment agreement and compensation plan to ensure you are following these documents.
   2. Verify with legal counsel the NCDQ plan document meets IRS requirements (specifically, 409(A) requirements).
   3. Verify payroll administration is on board with the proper payroll reporting requirements:
      • Confirm any “earned” amounts that can be reasonably estimated are reported in the year vested as Social Security wages (Box 3 of Form W-2) and Medicare wages (Box 5 of Form W-2) with the respective employee withholdings and the employer match.
      • When the retiree receives payment of NQDC funds, be sure the proper federal and state income tax withholdings are calculated and withheld (at supplemental wage withholding rates at the time of payment).

If you currently have a NCDQ plan, be sure you understand the agreement and reporting requirements. Most of these plans are complex, and guidance may be needed. Don’t let these complex rules and regulations deter you from offering these plans to your physicians - they are often a good retirement payment option. For further information or if you have any questions, please contact us.

Contributor: Susie Krause