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New Job with guaranteed salary as a forgivable loan

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  • jfoxcpacfp jfoxcpacfp 
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    Status: Financial Advisor, Accountant, Small Business Owner
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    Joined: 01/09/2016

    I don’t know, I’ve been mulling this over and it still seems problematic to me. Either they are loaning him money and actually forgiving the loan over 3 years or they are making a loan and requiring him to pay it back out of future income as they wean him off the “guaranteed salary”. The part I don’t quite understand is:

    (and the hospital will subtract off his gross cash receipts as income is earned, thereby decreasing the total forgivable loan amount.)

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    So – if he is truly on his feet in the 2nd year (because there is such a need), then he may be repaying the whole loan in yrs 2 and 3, leaving nothing to be forgiven? And he may be bringing home very little in years 2 and 3 b/c of the subtraction?

    There are so many different income packages offered to new physicians and it’s totally possible that I just haven’t run across this one yet, so don’t assume I’m any kind of authority – perhaps this setup is common in some places. I still get the feeling we’re not getting the whole story – not blaming you, just sounds like a complicated scenario.

    I’m sure others will chime in with alternative perspectives – looking forward to reading them.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #215091 Reply
    Avatar saildawg 
    Participant
    Status: Physician
    Posts: 335
    Joined: 01/24/2016

    Thanks for the replies. I should clarify:
    My husband will be joining a private group with the intent to become partner at a later time. The majority of his first year salary is in the form of a forgivable loan from a hospital that is supporting him by stating there is a community need. He is a surgeon moving to a new area so the hospital is providing a “guaranteed salary” for his first year to allow him to have income while first getting started while building up a patient/referral base. The idea is that he will transition into his own collections after the first year and no longer need assistance (and the hospital will subtract off his gross cash receipts as income is earned, thereby decreasing the total forgivable loan amount.) There is interest on this income and that will be forgiven as well. Then over the following three years (as long as we remain in the geographical area) the entire loan will be forgiven.

    I posted because I had never heard of this kind of set up, and didn’t know if it was common or if there were any red flags to look out for. Both local hospitals in the area are offering this forgivable loan option to recruit him.

    Also, I was trying to say that we have decided to move to the area because a lot family is there, so it would be extremely unlikely we would leave anytime soon. Ideally, we would retire in that area, so the likelihood of us moving out of the geographical area during the forgiveness period (which would trigger payback and lose forgiveness) is extremely slim.

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    Thanks for clarifying the title and the post.  I am not familiar with this set up, but I would look with a great deal of skepticism that your spouse will stay in their first job.  I think the stats are around 50% of physicians stay in their first job.  Take that into account, especially because there is “a need” in the area there is usually a reason for that (less desirable location, payer mix etc)

    #215100 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2382
    Joined: 03/01/2018

    This seems to me like a great benefit for the partners / shareholders in the private group with all the risk taken on by the new employee

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #215101 Reply
    lilsnappa lilsnappa 
    Participant
    Status: Other Professional, Spouse
    Posts: 43
    Joined: 02/24/2016

    My wife just entered into a similar deal, so let me take a stab at trying to explain how this works – bc it’s very confusing and took us some time to wrap our heads around it as well.

    Situation: Typically in an underserved/rural area where a small regional hospital is trying to use its scale/balance sheet to help local practices recruit physicians. The small private practices cannot offer competitive starting salaries from a cash flow perspective, so the hospital offers to help. The hospital grows its referral base and gets some goodwill from the practice.

    The Structure: Hospital enters into a 3-way agreement with A)Physicial & B)Practice. Hospital guarantees physician’s salary for 12 months – In our situation, they also cover all practice expenses incurred by the Physician, as well as a signing bonus, tuition reimbursement and moving expense. These costs are structured as a loan. Meaning, the hospital is fronting the cash but the Physician is required to pay back the hospital if the Physician does not meet the requirements of the agreement – In our situation, the Physician has agreed to practice in the geographical area for 36 months from the start of the contract. The Practice agrees to pay the hospital all gross collections for the 12 months. Which means, the Practice doesn’t get the reward of increasing revenue for the year, but also doesn’t take on the financial investment of growing their practice.

    The Catch: Here’s where it gets funky. For the initial 12 month period, the Hospital is paying out cash and receiving the collections from the new Physician. At the end of the 12 months everything is netted out. For example: The hospital paid out $500k (Salary + Incentives + plus expenses) & they received $350k in collections from the practice. At that point, the hospital has the option to “forgive” the difference of $150k. Meaning they gave the Physician a loan of $500k to get their practice started and it has a balance of $150k left. The catch is that if the Physician decides to leave the area over the next 24 months, the balance is to be paid if full (with interest). 

    Other things to be aware of: The Physician must treat the forgiven amount as income and it will be taxed accordingly. Thats why having a good CPA is mandatory to make sure you handle it appropriately.

    We toiled over whether to take this deal for a couple months before deciding to go with it. It does come with risk, and there are stories of the many ways the Physician can get screwed. If the Practice doesn’t hold its side of the bargain, such as timely submission of expenses and collections data to the hospital, the Physician can get screwed. If the Hospital decides after 12 months that you haven’t held to your side of the contract and requires that you pay the full loan back (with interest), the Physician can get screwed. If the Physician decides after a few months that he/she is not a good fit or one of the 100 other reasons that a job doesn’t work out, the Physician can get screwed. All things to be cognizant of when entered into one of these contracts.

    We ultimately made the decision bc 1) we were 100% ok with geographical area and plan to stay here long term 2) the Practice was willing to let us (specifically me – a business consultant) be the one responsible for tracking and collecting all data 3) we want to one day own the practice and this was a great opportunity to jump start my wife’s practice without putting the burden on the existing single Physician practice.

    #215105 Reply
    Liked by saildawg
    Avatar mjohnson 
    Participant
    Status: Physician
    Posts: 57
    Joined: 05/05/2019

    This type of arrangement seems very sketchy at best and I would never enter into this type of arrangement.  A hospital and/practice that brings on a new physician will have some financial risk tied to the new physician, but on the flip side the new physician has risk moving to a new area, fitting in, making sure there are enough patients, etc.  There is cost on the front end on the practice/hospital, but if they did the homework showing the new physician is needed, then the new physician’s practice will build quickly and generate revenue.

    #215110 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2382
    Joined: 03/01/2018
    The small private practices cannot offer competitive starting salaries from a cash flow perspective

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    Red flags here, and I would replace “cannot” with “chooses not” – in a small group, owners are probably going to take a cut to bring someone new in. The hope is that there is gain in the long term. Seems shady to shift the financial risk to the recruit.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #215126 Reply
    Avatar saildawg 
    Participant
    Status: Physician
    Posts: 335
    Joined: 01/24/2016
    The small private practices cannot offer competitive starting salaries from a cash flow perspective 

    Click to expand…

    Red flags here, and I would replace “cannot” with “chooses not” – in a small group, owners are probably going to take a cut to bring someone new in. The hope is that there is gain in the long term. Seems shady to shift the financial risk to the recruit.

    Click to expand…

    I agree, seems like it is deferring risk indirectly to the new physician via the hospital

    #215127 Reply
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 1863
    Joined: 02/11/2019

    Yikes,  Tread carefully.  I have heard of setups like this and sometimes the volume is not there and you under produce expectations then you end up owing the hospital a lot of money.

    Not to mention if the job stinks and you want to leave but you cannot.

    Physicians are in demand.  Find someone who needs you and will take the risk and will pay you.

    “Never let your sense of morals prevent you from doing what is right.”

    #215156 Reply
    Liked by Hank

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