Using Retirement Benefits to Solve the Challenge of Hospital Sector Employment

One of my colleagues sent me an interesting article last night. It reminded me that hospitals, perhaps more than any other classification of employer in the US have particularly interesting challenges when it comes to attracting and retaining their employees, mostly professionals. And, as hospital organizations have become a primary employer of physicians, the difficulties only increase.

Let's consider the employee population of a hospital or hospital system. We can start with physicians. From a retirement compliance standpoint, they are probably all highly compensated employees (HCEs) meaning that their compensation, roughly speaking, exceeds $120,000 per year. But, not all physicians are paid the same. The general practitioners and internists, for the most part, are among the lowest paid of the group. At the other end, surgeons, cardiologists, anesthesiologists, and a group often referred to as critical care physicians are among the higher paid. Despite their pay, supply of these specialists may be less than demand. In order for a particular hospital system to meet their own demand, they need something that appeals to those physicians.

Let's turn our focus to nurses. They're often thought of as the life-blood of the hospital. They are skilled professionals, not all that highly paid, and they have a high turnover rate due to burnout. Informal survey data shows that retention of nurses is often due to one of several factors including a great work environment and great benefits.

Then there are the technicians. To someone just collecting data, they may look a lot like nurses. But digging deeper shows that they are not. They have different skill sets and different mindsets. Their pay may be similar to that of nurses, but their jobs would appear to have different stress levels. As a result, their turnover rates due to burnout seem to be lower.

And, there are the true blue collar staff in the hospitals. While they may have learned specific skills and duties that make them more valuable to hospitals than they are in other industries, in many cases, they can find other employment outside of the hospital industry. These people are generally among the lower paid in the systems and probably value straight pay and their health benefits as much as anything.

Finally, we'd be remiss in not mentioning all the other staff from the people who run the hospital systems -- the top executives -- to the administrative staff. All have usually developed specific skill sets that make them particularly valuable in a hospital system where they might not be in other industries. They tend to want to stay with a good organization, but they expect a lot before they would call that organization good.

Moreso than many other industries, what we've pointed out here is that this is a really diverse population. As a group, they are intelligent and well-educated. As a group, they have high-stress jobs. That combination leads to a need for retirement benefits.

But, how do we provide them? The top executives want to be treated as top executives. The physicians have large tax burdens and providing for their heirs that they worry about. The nurses may have relatively shorter careers and, according to data, do not always make saving for retirement a top priority early in their careers.

The current method of choice is to use a deferral sort of arrangement perhaps with a match. So, that would be a 401(k) plan or a 403(b) for some tax-exempt hospitals. There are problems galore there. The physicians complain because they just can't defer that much (maybe even less if nondiscrimination testing is a problem). The nurses who don't focus on retirement suddenly see that between their high-stress, high-turnover jobs and their neglect of their retirement plans early in their careers that retirement may never be an option. Behaviors will likely vary among the other staff.

We need other methods. Those other methods are there.

Suppose we tell the doctors that they can defer more -- a lot more. Suppose we tell the nurses and the technicians that they will still have an opportunity to defer, but that we are going to give them something akin to their matching contribution even if they forget to pay attention to retirement. Suppose we tell the executives that all that nonqualified money that's not secure and not tax-effective can be.

We might have people dying [yes, a very bad pun] to work for our system. When you become the employer of choice, work shortages are less of an issue for you, unwanted turnover is less of an issue for you, and yes, patient satisfaction and therefore profitability will improve.

You need a solution that meets all of these criteria:

• Costs are stable
• Ability for very high-paid people to defer significantly is there
• Nondiscrimination testing is easy to pass
• Benefits are portable
• Both lump sums and wholesale priced annuities (annuities from the plan as compared to from a mutual fund provider or insurer) are available

The solution lies in designs like these. Costs can be controlled through proper design. Physicians wanting larger deferrals will happily pay for their own enhancements. Because these plans test so well, nonqualified money can often be qualified. Benefits will be portable for everyone and annuities will be available without lining the pockets of insurers for any participants who want them.

it really should be the best of all worlds for hospital systems.

Ultra-High Earners, How Much Can You Really Defer?

A lot of what we might describe as ultra-high earners (say $500,000 US per year or more) would love to have more tax-favored savings. Physicians, attorneys, and others who are owners of their businesses struggle with this.

In a fairly common design scenario, here is what they can defer into a qualified retirement plan (tax-favored, secure from creditors):

• $16,500 ($22,000 if they reach age 50 or older during the year) to a 401(k) plan
• $22,050 in a profit sharing plan. This is 9% of $245,000 (pay cap). We use 9% because by contributing 3% of pay on behalf of nonhighly compensated employees (NHCEs), the owners are usually able to contribute 9% (3 times 3) to their own accounts
• Perhaps a matching contribution (not more than about $11,000) in the 401(k) plan, but only if they make similar percentage of deferral matches for NHCEs, and the NHCEs participate in the plan to a great enough extent.

Suppose someone told you that by putting aside a little bit more for your NHCEs (generally tax deductible, but you should seek appropriate legal or tax counsel before proceeding), you could quintuple your own deferrals if you are at least age 62 (the numbers are smaller for younger ages, but can triple as early as your 40s). Go through the math, or trust me. Because of the tax deductibility of all these contributions (if you can afford to make them), your income plus deferrals less taxes will often increase ... and you get the benefit of tax-deferred buildup, secure from creditors.

The mechanics aren't that simple, but that's why there are experts. From your standpoint, you just need the willingness to do this, good advisors, and proper counsel.