I receive a number of calls from physicians in December who are looking to find the "magic" tax reduction plan to help them defer the $50,000+ that is sitting in the corporate bank account at the end of the year. That is money the physician does not want to take home and would like to have it go somewhere in a tax favorable manner and do so without a big expense for the employees.

Many advisors today are pitching defined benefit (DB) plans and 412i defined benefit plans. The problem with either plan is that the amount of money a physician has to pay for their staff (who must be included in the plan) usually runs between 20-40% of what the physician contributes to the plan (which is very expensive).

The ABC Plan is a very simple plan that allows physicians to defer $50,000-$300,000 plus a year where there is no contribution for the employees. The money can stay income tax deferred for up to 30 years where it will grow at market rates.

The beauty of the ABC Plan is that it can be setup on a monthly basis going forward and so for physicians that wished they had done something last year to reduce their taxes, they can start out the year with a new tax deferral plan so the same problems do not arise at year end.

What is the ABC Plan? It is a method of selling an amount of accounts receivables (A/R) in exchange for a deferred installment note. The selling of A/R is called "factoring".

How does the ABC Plan work?

1) A medical practice (hereinafter MP) sells a specific amount of A/R to a Factoring Company ($25,000-$100,000+).

2) The Factoring Company (hereinafter FC) takes a 5% factoring fee on the A/R factored and issues to the MP an installment note for payment of the remaining 95%. This installment note has repayment terms as dictated by the medical practice selling the A/R.

3) When the MP collects the A/R that was sold, that money is transferred to the FC.

4) The FC invests the money it receives (minus the 5% factoring fee). Typically, the money is invested in indexed annuities that have minimum guarantees and growth pegged to the S&P 500 index.

5) When the installment note comes due to pay the MP, the FC pays back to the MP the initial amount factored (minus the original factoring fee) plus any growth on the money (as it was pegged to the S&P 500 index).

6) The MP then can choose to use the money for any business purpose including the option of paying it to the owners/physician as a bonus.

Example

Assumptions: Assume the client Dr. Smith, age 40, works for XYZ Orthopedic Clinic, P.C., makes $600,000 a year and has an extra $100,000 he does not need to take home as income this year. Further assume that the medical practice at any given time has $700,000 of real A/R on the books and that Dr. Smith's patients represent $200,000 of that A/R.

Implementation:

1) XYZ Orthopedic Clinic contracts with FC to sell $100,000 of A/R in exchange for an installment note that will be payable starting in 21 years and will pay in a lump sum when Dr. Smith is 61 years old.

2) The FC takes a 5% factoring fee and invests $95,000 (typically the money is invested in indexed annuities with a minimum guarantee and growth pegged to the S&P 500 index).

3) If that $95,000 grew at 8% for 21 years there would be $371,000 at the end of the 21 year period. That $371,000 would come back to the medical practice via the installment note in lump sum at the end of the 21st year (when Dr. Smith is age 61).

4) The Clinic can use the money for any business purpose and can choose to disperse it out to Dr. Smith as income.

Continuous Contracting

One of the most advantageous aspects of the ABC Plan is that there is NO requirement to fund the plan each year. A physician can decided each year if he/she wants to implement the plan and for what dollar amount.

If I changed the above example to a ten year fund where Dr. Smith took money out starting from age 61-80, the money coming back from the installment note would equal $240,000 a year for 20 years.

ABC Plan vs. Post Tax Investing

In the lump sum example above, Dr. Smith would have done 38% better then taxing his $100,000 home an investing it in the stock market at 8% (net). In the ten year fund with a twenty year payout, Dr. Smith would have done 45% better than post tax investing.

Conclusion

If you are looking for a simple income tax deferral solution that your CPA will approve, has variable funding each year and does not require a contribution for the staff, then you should consider the ABC Plan.

This article was written by Roccy DeFrancesco, President of The Wealth Preservation Group, LLC and author of The Doctor's Wealth Preservation Guide©. For those that would like a FREE asset protection audio CD, please e-mail or call me at roccy@triarcadvisors.com or 269-469-0537.