Leverage employer-sponsored benefit plans: Primer for employed physicians
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Key takeaways:
- For employed physicians, maximizing employer-sponsored benefit plans is essential to long-term financial success.
- Leveraging health, disability and life insurance benefits protects against unforeseen events.
Physicians employed under W-2 status are often presented with a variety of employer-sponsored benefit plans, which can provide significant tax and financial advantages.
These plans are vital for retirement planning, as they may be one of the few tax-saving opportunities available to employed physicians. Understanding and maximizing the value of these plans can make a meaningful difference in long-term financial security for employed physicians. As such, we wanted to provide an overview.
401(k) and 403(b) plans
The most common retirement benefit plans offered to employed physicians include 401(k) and 403(b) plans, both of which allow participants to defer a portion of their income and benefit from tax-deferred growth on contributions.
401(k) plans: In 2024, these plans allow employed physicians to contribute up to $23,000 annually (or $30,500 if they are 50 years or older). This contribution limit will increase to $23,500 in 2025, with a catch-up contribution of $7,500 allowed for those 50 years or older (for a total limit of $31,000). Contributions are made pre-tax, and the invested funds grow tax-deferred, meaning taxes are only paid upon withdrawal, typically in retirement.
403(b) plans: For physicians employed by nonprofit hospitals, academic medical centers or government entities, a 403(b) plan might be available. Similar to 401(k)s, these plans also allow pre-tax contributions and tax-deferred growth. In many cases, 403(b) plans are identical in structure and benefit to 401(k) plans, but they are exclusively available to employees of tax-exempt organizations.
457(b) plans
Physicians employed by state or local government health care organizations may have the option to participate in a 457(b) plan. These plans offer additional opportunities to contribute beyond what is allowed under 401(k) or 403(b) limits, as 457(b) contributions are separate and can effectively double retirement savings. However, it is essential to note that there are two types of 457(b) plans: governmental and non-governmental. Governmental 457(b) plans are generally safe, while non-governmental 457(b) plans are subject to the financial health of the sponsoring organization — meaning that if the employer becomes insolvent, the funds in the plan may be forfeited. Additionally, non-governmental 457(b) plans cannot be rolled over into an individual retirement account (IRA) or other retirement accounts, making them less flexible in terms of retirement planning.
After-tax IRAs
In addition to employer-sponsored plans, physicians can benefit from IRAs, which are a critical tool in long-term financial planning because they offer the opportunity to grow wealth on a tax-advantaged basis.
Traditional IRAs: Under the limits for 2024 and 2025, physicians can contribute up to $7,000 annually to a traditional IRA (or $8,000 if they are 50 years or older). Although not all contributions are deductible for high-income earners, these accounts can still grow tax-deferred, which can be advantageous when planning for retirement. Traditional IRAs are particularly beneficial for physicians whose employers may not offer robust retirement savings plans or those who want to diversify their retirement contributions beyond employer-sponsored plans.
Backdoor Roth IRAs: Physicians whose income exceeds the limit for direct Roth IRA contributions, which provides tax-free growth and tax-free withdrawals in retirement, can still take advantage of a strategy known as the “backdoor” Roth IRA. This involves making contributions to a traditional IRA and then converting those funds into a Roth IRA. This technique allows high-income earners, including many physicians, to benefit from the tax-free growth offered by Roth accounts, which can be especially valuable in managing taxable income in retirement.
Insurance benefits
Beyond retirement planning, employer-sponsored benefits often include health insurance and disability insurance, which are crucial for physicians to consider.
Health insurance: Many employers provide comprehensive health insurance packages, including coverage for medical, dental and vision care. These plans typically allow physicians to benefit from lower premiums than those available in individual markets and may include additional benefits such as health savings accounts (HSAs) or flexible spending accounts (FSAs). These accounts enable physicians to set aside pre-tax dollars for eligible health care expenses, providing additional tax savings.
Disability insurance: Disability insurance is particularly important for physicians, whose ability to practice medicine relies on maintaining their health and physical capabilities. Employer-sponsored short-term and long-term disability insurance plans provide income protection if a physician becomes temporarily or permanently unable to work due to injury or illness. In many cases, physicians can also purchase supplemental disability insurance through their employers at reduced rates to further safeguard their income.
Life insurance: In addition to health and disability benefits, many employers also offer life insurance policies as part of their benefits package. Basic group life insurance is often provided at no cost, but physicians may have the option to purchase additional coverage at a lower group rate.
Malpractice insurance: One of the most critical benefits for employed physicians is employer-sponsored malpractice insurance. Medical malpractice claims can be financially devastating, and employers often provide coverage that protects physicians from the potentially enormous costs of litigation. Physicians should carefully review their employer-provided malpractice coverage to ensure it is sufficient for their specific specialty and practice setting.
Entrepreneurial ventures While many physicians remain employed throughout their careers, there is a growing trend of physicians pursuing entrepreneurial ventures or “side hustles” to generate additional income and achieve greater financial flexibility. These activities can include moonlighting, locum tenens work, expert witness services, telemedicine, writing, public speaking, and even starting medical-related businesses or startups.
Beyond the income potential, these ventures offer unique tax advantages not available to employed physicians under a W-2 status. By establishing a business entity (such as an LLC or S-Corp), physician entrepreneurs can deduct a range of business-related expenses, including office costs, travel, marketing and even retirement contributions made through self-employed retirement plans like a solo 401(k) or SEP-IRA.
Conclusion
For employed physicians, understanding and maximizing employer-sponsored benefit plans is essential to long-term financial success. Retirement plans like 401(k), 403(b) and 457(b) options, in combination with personal strategies such as IRAs and Roth conversions, provide a powerful toolkit for tax-advantaged savings.
Furthermore, leveraging health, disability and life insurance benefits ensures that physicians are protected against unforeseen events. For those interested in entrepreneurship, the potential tax savings and flexibility of side ventures can further enhance financial stability.
For more information:
David Mandell, JD, MBA, is an attorney and co-founder of the wealth management firm OJM Group, www.ojmgroup.com, where Jason O’Dell, MS, CWM, is the managing partner and an insurance specialist. They can be reached at 877-656-4362 or mandell@ojmgroup.com.
Mandell and OJM Group partners are pleased to announce the 2024 publication of their newest book, Wealth Strategies for Today’s Physician: A Multi-Media Playbook. The playbook’s innovative format features more than 90 links to videos and podcast episodes to enhance important financial topics for physicians. To receive a free print copy or ebook download, text HEALIO to 844-418-1212, or visit www.ojmbookstore.com and enter code HEALIO at checkout.
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