Exit – Stage Left…Out the Door

Optimizing a Health Care Firm for Growth, Transitions, and Exits 

As we all progress in life stages, the time will come for many to turn our eyes toward greener pastures. Recently, we had the good fortune to advise a long time client  (20+ years), who was the founder of a multi-owner dental group, on the planning and execution of the transition of one of its founders into the early stages of retirement.

In 1997, this founder came to us asking how we could help build his single person dental group into a business that could last beyond his practicing years. We set into motion a plan whereby we incorporated his sole proprietor business into a corporation and then hired his first associate, added additional partners, and subsequently enjoyed many years of successful healthcare practice. That first associate is now one of the leaders in this dental practice.

Over the last 23 years, we have assisted this group with different services, including multi-owner compensation formulas, benchmarking against industry statistics, annual tax planning for all the owners, and successful transitioning in of new partners. Also, we have guided them on the path to wealth accumulation by assisting in the operation of their retirement plan, moving this group from a qualified simple plan to a tax-qualified 401k with attributes including matching employees’ contributions, profit sharing, and employee deferrals.

The final stages of this founder’s work-life included a dual payout plan, which included a salary consulting agreement and a deferred compensation agreement set up to run sequentially.

When a deferred compensation plan is earned, the IRS tax code under Section 409 allows you to elect and accelerate the reporting of the Medicare and Social Security taxes in the year earned. Based on this tax regulation, the strategy is to accelerate the deferred compensation plan into the final year of work, thereby avoiding future Social Security wage taxation on this income.

We proposed to the doctor group a savings of $17,900 for the employer and $10,000 for the employee.  We achieved the savings by avoiding unnecessary social security taxes and by paying taxes on the value of the payment plan relating to the final year of work.

Even though Medicare and advanced Social Security taxes get paid earlier than required, the amounts are significantly reduced if the plan has enough tax leverage to it.

If this sounds like a plan that could benefit your professional health care firm, please call us to discuss options for you.

Tom Pesch is a Principal in the Audit and Accounting Department of the Eden Prairie office of Olsen Thielen CPAs and has more than 35 years of experience in accounting, auditing, and consulting for closely-held and family-owned businesses.  He is a Certified Management Accountant (CMA), Certified Public Accountant (CPA), and Chartered Global Management Accountant (CGMA).  He works closely with entrepreneurs advising in financial reporting and tax-related matters to include tax compliance, planning, and tax avoidance strategies.  He has experience in the country club, professional association, and construction industries.  He joined the Firm in 2007 as a Principal and was formerly a shareholder with a local firm specializing in health care clinics.


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