Defined Benefit Plan for Physicians: An Owner's Decision Framework

A medical group considering a defined benefit plan needs to answer two questions before requesting an owner contribution figure: which employers belong in the review, and which workers belong in the census? A practice payroll showing only physicians is insufficient when another entity employs the people supporting their work. Build a documented employer and staffing file, then have qualified advisers apply the rules to the proposed design.

Physicians with hospital wages and separate locum work can use our mixed-income source-of-pay worksheet. This framework addresses the broader medical-group decision: related businesses, complete staffing records, employee coverage, and the sponsoring practice's funding capacity.

1. Map the employers before selecting the sponsor

Create one row for each practice, professional entity, imaging business, management company, and hospital employer involved. Record legal names, ownership interests, ownership changes, payroll sources, existing retirement plans, and services performed between entities. Include family and indirect ownership information for professional review. Keep compensation by employer separate until the adviser confirms the actual plan's compensation definition.

Ask the plan adviser to document the controlled-group, common-control, and affiliated-service-group analysis. The current IRS Employee Plans manual, section 7.11.7.1.1, identifies these related-employer categories under sections 414(b), 414(c), and 414(m), and explains that employers related under them are treated as a single employer. Separate entity names or payroll accounts do not resolve that analysis.

Service arrangements also deserve review. The IRS aggregation FAQ, question 11, describes affiliated service groups involving services and ownership, and management arrangements that require no common ownership. That FAQ addresses a different tax provision; use its section 414(m) explanation to identify questions, rather than importing its other aggregation thresholds into a retirement-plan decision.

2. Reconcile a complete census to actual staffing

Start with every entity's payroll register, then reconcile it to the practice staffing roster and staffing-agency invoices. Include owners and spouses on payroll, employed physicians, nurses, technicians, billing staff, administrative workers, part-time workers, and workers supplied through another organization. A job title or payment label does not decide employee status or eligibility.

For each person, collect a consistent identifier, employing or supplying entity, birth date, hire and termination dates, service and hours records, compensation by employer, ownership information, and existing plan participation. Attach staffing and management agreements where relevant. Mark missing data and discrepancies explicitly; do not silently remove someone because their record is incomplete.

Have the adviser review common-law employee status and any leased-employee rules before accepting exclusions. IRS Publication 560, Definitions You Need To Know and Qualified Plans, explains that qualifying leased employees can be treated as employees for certain plan qualification rules, subject to conditions and exceptions. An agency invoice alone establishes neither inclusion nor exclusion.

3. Separate eligibility from the required plan tests

Ask the administrator to return a written census showing who is included in the testing population, who enters the proposed plan, and the reason for each exclusion. Request separate conclusions for eligibility and entry dates, section 410(b) coverage, section 401(a)(4) nondiscrimination, and the defined benefit plan minimum-participation requirement under section 401(a)(26).

The IRS qualified-plan requirements guide treats these as distinct requirements. Coverage addresses the employee group benefiting; nondiscrimination addresses contributions or benefits favoring highly compensated employees. Meeting a participation count does not establish that every other requirement passes. Require the actuary to model employee benefits and existing-plan coordination alongside the owner benefit.

A hypothetical medical-group staffing mismatch

Assume a clinical practice's payroll contains three physician owners and one employed physician. A separate management company pays two nurses, two billing employees, and an office manager who support that practice. A staffing agency also supplies a technician. The initial proposal uses only the four physicians because that is the payroll file submitted.

The corrected decision packet identifies all ten people across the three records, supplies ownership and service agreements, and flags the technician's service history for review. This does not conclude that all ten must participate, that the entities form a related group, or that any proposed design passes. It exposes the mismatch between the submitted payroll and the workforce serving the practice. The adviser must resolve the employer analysis, worker treatment, eligibility, and each applicable test before the illustration can support a decision.

4. Price the reviewed design and assign ongoing duties

Compare the actuary's funding proposal with the sponsoring practice's cash forecast after payroll, malpractice costs, rent, debt, taxes, and reserves. Include a delayed-collections scenario. Use the business-owner plan checklist for the broader funding and administration review. The IRS defined benefit plan overview explains formula-based benefits and the enrolled actuary's funding role; a physician's desired deduction is not a funding calculation.

Assign responsibility for census updates, ownership and service-agreement changes, valuation, applicable filings, and provider oversight. The Department of Labor sponsor guidance explains fiduciary duties for plans subject to ERISA. The older IRS affiliated-service-group training material provides background, not a current case determination. TaxBowl's tax and accounting team can help reconcile the entity, payroll, and financial packet before qualified plan professionals evaluate the design.

For a practice with insured clinical and self-pay cosmetic services, the dermatology plan-review worksheet separates unpaid clinical claims, prepaid treatment obligations and compensation records before requesting an illustration.