Potential benefit problems in connection with expense-sharing arrangements…
This article highlights some of the risks and potential problems for the retirement plans (and other employee benefits) of professionals who participate in invalid or improperly documented office expense-sharing arrangements.
In today's ever-tightening professional practice environment, a greater and greater premium is placed on ways to control overhead costs. One of the ways in which various service professionals (i.e., doctors, lawyers, and accountants) have attempted to control their staff and office overhead costs is through the use of an office expense-sharing arrangement with other professionals.
What is an office expense-sharing arrangement? In a nutshell, an office expense-sharing arrangement is an agreement between two or more professionals to share certain common office facilities, overhead expenses (i.e., rent and utilities), and support staff (i.e., a receptionist, billing personnel, office assistants). Most often, office expense-sharing arrangements take the form of a suite of offices which share a common reception area as well as, in some cases, common meeting, research, and laboratory facilities. In many cases, the identifying signage on the offices merely list the individual professionals (or the individuals' professional corporations) who are practicing at that location. However, there is a definite trend towards the use of a fictitious business name (e.g., Mountain Valley Dental Group) to simplify phone answering and for advertising purposes.
Ruining Your Day
What impact does an office expense-sharing arrangement have on the individual professional's retirement plans and welfare plans? If an office expense-sharing arrangement is properly structured and is not being used as a cover for a partnership or other profit-sharing arrangement among the professionals, then each professional (or his professional corporation) is treated as a separate employer for employee benefit plan purposes. This means that each employer can establish his own separate retirement plan without regard to the type or types of retirement plans maintained by the other professionals who are parties to the office expense-sharing arrangement. In general, certain shared employees must be taken into account to different extents for the purpose of each professional's retirement plans. Unfortunately, it is not absolutely clear what set of rules should be applied to properly allocate the compensation (and coverage) of the shared employees among the retirement plans of the participating professionals. These rules, and the confusion surrounding them, are described in greater detail later in this article.
Suffice it to say that there is enough uncertainty and ambiguity about the handling of shared employees (assuming that a valid office expense-sharing arrangement exists in the first place) that it is quite likely that many pension consultants and third party administrators are not properly accounting for the professional's shared employees under his/her separate retirement plan. The good news is that this type of improper allocation or crediting of service for eligibility purposes can generally be corrected without the professionals' plans losing their tax-favored status. However, if a particular office expense-sharing arrangement is not really an office expense-sharing arrangement at all, but rather a partnership, as described below, the consequence can be the loss of tax-favored status for all of the participating professionals' retirement plans and certain welfare plans (i.e., cafeteria plans and medical expense reimbursement plans) as well.
Waking Up To A Partnership
When is an office expense-sharing arrangement not an office expense-sharing arrangement? The answer is: when it is a partnership for tax purposes. In general, a partnership for tax purposes is found where the parties have "engaged in a common enterprise for the production of profit." This rather simple definition can describe many professionals' arrangements which have been set up as office expense-sharing arrangements. How can you tell the difference; and what does it matter? Taking the second question first, if an office expense-sharing arrangement is determined by the IRS to be a partnership for income tax purposes and not a true office expense-sharing arrangement, then the participating professionals (whether or not incorporated) will be "aggregated" or combined under the IRS's affiliated service group (ASG) rules and treated as a single employer for retirement plans (and welfare plans) purposes. As a practical matter, this means that all of the retirement plans of the professionals and their employees must be designed in a way which meet all of the retirement plan coverage, minimum participation and nondiscrimination rules as though all of the professionals were one employer and all of the so-called "shared" employees of the professionals were employed by that one employer. In most cases, this means that the professionals cannot maintain separate retirement plans and must instead coordinate their retirement plans with one another. More importantly, this means that plans sponsored by professionals who are parties to existing office expense-sharing arrangements that are not true office expense-sharing arrangements are most likely violating many of the retirement plan qualification rules at this very moment.
How do you know whether your arrangement is a true office expense-sharing arrangement or will be treated as a partnership for retirement plan purposes? Although you can certainly ask this question of your tax attorney, CPA, or pension consultant, none of these advisors can give you an absolutely definitive answer to this question. The only party that can really tell you whether your arrangement qualifies as an office expense-sharing arrangement for retirement plan purposes is the IRS itself. In making its determination, the IRS will consider the following factors:
- Whether there is a written agreement between the parties describing how profits are to be shared.
- How title to business real property is held.
- The person or entity described as lessee on leases.
- How services are billed to patients.
- Whether the parties use a group name in advertising as third parties.
- The bases for sharing expenses between the parties.
- How fees are determined.
- Whether the parties ever share patients.
- Whether professional liability insurance is being maintained on a group or an individual basis.
- Whether there is a joint banking account, and if so, who has signatory control.
- The number of common employees and their functions.
- Who has hiring/firing authority with respect to the employees.
- Who pays employment taxes and employee benefit costs for the employees.
Practicing Safe "Tax"
If under your office expense-sharing arrangement one of the professionals is the "designated" employer for withholding and payroll tax purposes, you may have inadvertently created an employee leasing arrangement. This can have different and potentially adverse ramifications for purposes of your retirement plans than an office expense-sharing arrangement.
If you are concerned about the status of your retirement plan (whether it is a new retirement plan or an ongoing retirement plan), you should seriously consider seeking a determination from the IRS that your professional practice as described in the submission materials is a valid office expense-sharing arrangement and therefore is not required to be aggregated with the other participants to the arrangement. Having a determination letter from the IRS is like obtaining an insurance policy regarding this important aspect of your retirement plan. However, like any other ruling from the IRS, a determination letter regarding your retirement plan is only as good as the quality of the information provided to the IRS in order to obtain that ruling. Therefore, if you do not provide the IRS with a complete and accurate picture of your office expense-sharing arrangement, a favorable IRS ruling may not be worth the paper it is written on.
Even if you and your advisors are absolutely convinced that you have a valid office expense-sharing arrangement, you should still check with your third party plan administrator or pension consultant to find out what rules they are applying for the purpose of determining eligibility and allocating compensation and retirement plan contributions among the shared employees. As mentioned earlier, there is a certain amount of ambiguity and uncertainty regarding how shared employees should be accounted for in the retirement plans of the various participating professionals. This confusion stems from the fact that the IRS had issued a series of revenue rulings regarding the treatment of so-called "shared employees" prior to 1974. However, in the late 1980s, the IRS issued proposed regulations under the Code which provided fairly specific, and definitely more liberal, guidance on the treatment of shared employees. Unfortunately, these proposed regulations were withdrawn by the IRS in 1993 and it is not clear whether employers are taking an unwarranted risk in relying on the now withdrawn regulations for the handling of their shared employees. A more conservative, and probably safer, approach would be to account for your shared employees in accordance with the principles contained in the pre-ERISA revenue rulings. However, these rules will generally require you to include more shared employees in your retirement plans and make somewhat larger contributions on behalf of these shared employees. Once again, if you are not sure whether your plan is accounting for shared employees in the proper fashion, it may be possible to obtain guidance from the IRS.
What To Do?
Because many professionals have a lot of money contributed and invested in their retirement plans and fully expect to obtain the full array of tax-favored benefits attributable to such plans, it makes little sense to play "fast and loose" with the rules. Therefore, if you are involved in an office expense-sharing arrangement which is either undocumented, poorly documented, or is questionable in terms of whether only true expenses are being shared, it would make sense for you to look into this matter further and obtain whatever assurances you feel are necessary to make sure that your retirement plan or plans are not in jeopardy.