Don't overlook disability and pension benefits; make sure you understand documents; legalese can short-circuit best intentions
There are few subjects that bore people more than insurance and taxes.
There are many who find the topics so uninteresting that they procrastinatetheir way into real trouble.
At least a looming federal deadline keeps people attentive to their taxes.In the case of insurance, disinterest and procrastination can lead to lifetimesof financial insecurity and worse.
In this final article in this series on associate employment contracts,it will become clear that the properly drafted veterinary employment agreementneeds to consider both insurance and taxes before it can be considered complete.These questions come up most commonly in the area of negotiated employmentbenefits.
Times have changed
At a time when veterinarians are in short supply in some regions of thecountry, there is no reason to think that a reasonable benefits packageshould not reasonably be included in any associate compensation formula.
In the past, salary was pivotal and sometimes the only vital considerationin deciding whether or not to take a position. Today, extraneous concernssuch as the marriage penalty, tax bracket creep, alternative minimum taxand health insurer cost controls make every benefit count. The time to considerthese questions is before an employment contract is agreed to, not aftersome alert CPA discovers a problem.
When I speak to young veterinarians about insurance, they almost uniformlyexpress concern about insurance protection from frivolous accusations ofprofessional wrongdoing and malpractice.
Of course it is important to make sure that a practitioner is coveredfor malpractice. However, this is probably not the most important coveragethe veterinarian needs to consider in contract negotiations.
Personal disability coverage, the insurance coverage most commonly omittedfrom a veterinarian's employment contract, may be the most important.
Statistically speaking, a health or accident-related disability is vastlymore threatening than the prospect of death in the case of a professionalpractitioner. Many young veterinarians make certain they have life insuranceto protect their family against the loss of income due to death. Far toomany fail to secure disability protection.
Bluntly speaking, the death of a veterinarian/breadwinner often can beless economically devastating than a long-term illness.
Take, for example, a family of four. The father is a corporate middlemanager and the mother is a veterinarian. If either breadwinner is killedor suffers a short, but fatal illness, life insurance benefits may wellfill the economic gap for a substantial period of time. Even in the absenceof insurance, the remaining paycheck will only have to provide for threeremaining family members.
When the veterinarian in this example is disabled or suffers long-termillness, there is no lump-sum payment. Additionally, the unreimbursed costsof medical care, as well as the costs of food, clothing and other needscontinue unabated or even dramatically increase. The strain on the remainingpaycheck is enormous, particularly if the family started out with a significantmortgage or other debt burden.
Statutory disability coverage
Many veterinarians who elect to ignore the question of disability insurance,do so in the misguided belief that they are entitled to satisfactory disabilitybenefits from a mandatory state disability policy required of employersin many states. In fact, such coverage is frequently accessible. However,before a doctor decides to rely on that coverage, it is vital to ask theemployer or the state insurance department what the level of benefits wouldbe and how long that benefit would last. The answers can be alarming.
There is no question that disability coverage is expensive compared tolife insurance. Nonetheless, the decision to work without such coverageshould be made in a fully enlightened, well-informed way. The decision mustalso be made with detached objectivity.
For example, many veterinarians assume that they are most likely to bedisabled by an event occurring at work (which would be covered by WorkersCompensation insurance.) Certainly such injuries are a possibility. Whatis just as likely, however, is a skiing or snowboarding accident, an automobilecollision, a slip and fall in the snow or even a serious bagel-slicing accident.
All readers are advised to seriously contemplate the consequences ofa long-term disability and realistically assess the advisability of livingwithout disability coverage.
After making the analysis, it might be wise to approach a future or existingemployer and see if a reasonable policy can be obtained as part of the employmentagreement. Even if the employer will only consider paying part, it mightbe well worth asking him to cover the entire amount, subject to the acceptanceof a somewhat reduced salary.
As I've mentioned in prior articles, it doesn't matter how much moneyyou make, it only matters how much you get to keep. Never has this beentruer than now, when the cost of living seems to continuously increase.
More and more veterinary practices are offering tax-deferred pension,profit sharing or 401(k) arrangements to their employees as sign-up incentives.Before you are able to compare the magnitude of the benefit offered by suchan arrangement, it is important to know or reasonably predict, how muchyou would actually be able to participate in the plan.
An objective, self-examination needs to be made to determine how muchpay you can live without indefinitely. The opportunity to participate ina 401(k) plan or other deferred compensation arrangement is meaninglessif you can realistically expect to defer little or none of your income.
In the good old days, veterinary practices and other businesses weresufficiently profitable that management could and would offer somethingknown as a defined benefit pension plan. This worked something like SocialSecurity, only better. The employer put in money for a participating employeeeach week. At retirement time, where would be a pre-determined amount ofmoney coming to the employee for life. Those days and those plans are prettymuch over.
In the new world, 401(k) and similar plans have widely replaced older,more generous plans. The new arrangements frequently provide that an employerwill contribute, but only if the employee pays in pre-tax salary as well.Consequently, the plan can sound appealing. (" And Dr. Jones, yourcontract would include a 401(k) plan with a generous 30 percent match.")
Let's get real
If Dr. Jones has student loans, a mortgage, a car payment and two hungryhorses, there probably won't be much money left to defer and place in theplan. The plan sounds like a valuable benefit, but the employer may wellonly be kicking in 30 percent of the 2.5 percent salary most young doctorscan afford. Based on a $45,000 salary, the practice is really out only $338.
Now, what tax-planning strategy will help take advantage of this? Certainly,reducing discretionary spending is one way, particularly for a single veterinarianto increase the availability of cash to maximize deferral and consequentlymaximize an employer matching contribution. On the other hand, married,two earner couples have more flexibility in tax planning. Consider thisexample.
Dr. A is married to a teacher, Mr. A. The husband already has a job witha school district which offers a 403(b) plan with a 35 percent matchingcontribution. What should Dr. A's employment-hunting strategy be upon veterinaryschool graduation? Probably this: ignore any 401(k) benefit from a veterinaryhospital unless the employer match is immediate and greater than that ofher spouse.
Instead, she should take the highest salary income job available whichmeets her professional standards. Then, Mr. A should participate maximallyin the 403(b) gravy train at his job, taking full advantage of the employermatch. Dr. A's salary should be spent on family budget items as necessaryto compensate for the outsized deferrals into the husband's plan.
The situation could be reversed if the veterinary practice offered abetter matching program. It could also be a different result if the familyhad more excess cash to invest than the husband's plan permitted. In thatevent, however, the couple would need to seek a more sophisticated financialplan incorporating numerous other elements. That plan would be taken intoconsideration during Dr. A's salary and benefit negotiations.
Take home point
As we conclude this series on associate contracts, there is a very importantpoint to take home: If a contract term is confusing or complicated or boringor dripping with legalese, don't look at it as something to gloss over;look at it as something to investigate. Knowledge and understanding rarelycause negative consequences, but ignorance frequently does.