WINTER 2014

Also in this issue

CareCredit agrees to refund card users

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In order to help pay for Obamacare, Congress added Section 1411, creating a new 3.8% Medicare payroll tax on high income (above $250,000 if married; $200,000 if single) doctors’ unearned income, including interest, dividends, capital gains, and certain rental income. The new law specifically provides that any income from passive activities is subject to the new tax. Most types of rental profits are considered as passive activities, and therefore are subject to the tax.

However, Treasury Regulation Section 1.469-2T(f)(6) provides that if a doctor generates profits from renting his office building to his practice (self-charged rent), that income is not passive, but rather, active. The purpose of this rule is to prevent doctors who have passive losses from other real estate ventures from offsetting these losses with passive income generated by hiking their office building rent.

In its Section 1411 proposed regulations, the IRS indicated that simply because the doctor’s office building rental profit was considered active, rather than passive, for purposes of those rules, did not mean that the 3.8% Medicare tax didn’t apply. Rather, those rental profits were subject to the new tax, unless the rental activity was considered to be a trade or business.

As we discussed in our April 2013 article “Does The 3.8% Medicare Payroll Tax Apply To Your Office Building Rental Profits?”, the tax law does not define what constitutes a “trade or business.” However, several court decisions have held that renting a single piece of real estate to a related party does not constitute a trade or business. Therefore it appeared that doctors’ office building rental profits would be subject to the new 3.8% Medicare payroll tax.

Fortunately, there’s good news! The IRS changed its position when it recently issued final regulations, providing special rules for this type of self-charged rental income. The final regulations state that where the doctor generates rental profits from renting his office building to his practice (self-

No 3.8% Medicare Payroll Tax Due On Doctors’ Office Building Rental Profits

charged rent), that rental income is assumed to be derived in the ordinary course of a trade or business, and therefore, the 3.8% Medicare payroll tax will NOT apply. The regulations also provide that any gain from the sale of the doctor’s office building will also NOT be subject to the 3.8% Medicare payroll tax.

Doctors can continue to charge the highest reasonable rent to their practice as an effective means to withdraw funds from their practice without payroll taxes. Make sure to provide your CPA with a copy of this article and alert him to the IRS’ changed position, so that your office building rental profits will not be inadvertently slapped with this new tax when your 2013 returns are filed.

For your free consultation or for more information, please call LGT at

214.871.7500

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Doctors saw huge variations in their investment returns in 2013. While bonds generated flat or even slightly negative returns, the stock market (as measured by the S&P 500 Index) delivered a whopping, unexpected total return of over 30%. While most doctors were excited about the unexpected stock market gain which pushed their investment accounts to new highs, they have big questions about the future. Can the stock market continue to rise for its sixth straight year in 2014?

Jeff Harrell, Director of Portfolio Management at McGill Advisors, Inc. (formerly Select Consulting, Inc.), believes there are several compelling reasons for the stock market rally to continue. First, the conditions that have generated stock market gains since it hit bottom in March of 2009 remain largely in place. The economy is growing at a slow pace with little inflation. Rising real estate values and stock market gains have increased household wealth, which should increase consumer spending. Also, companies have learned how to be profitable in the slow growth economy and hold record amounts of cash awaiting to be invested.

Harrell says that stock market valuations, earnings growth, and low interest rates also justify further gains. First, Harrell says that the most common valuation metric is the P/E (price to earnings) ratio. Currently, the forward P/E on the S&P 500 is 15, which is right in line with the historical 15-year average. Moreover, earnings growth is forecasted at 10% in 2014, providing a solid base for stocks to move higher. Also, interest rates remain near generational lows. While they’re expected to rise slowly, their meager returns do not offer an attractive investment alternative to stocks.

Bond investors suffered lousy returns in 2013, with most types of bonds showing slightly negative returns for the first time in many years. The one exception was corporate junk bonds, whose total return topped 7% in 2013. Harrell expects another disappointing year for bonds, including corporate and government bonds, with low single-digit returns likely again. As the Federal Reserve tapers down its government bond buying program, interest rates will likely continue to rise, making it more important for doctors to protect themselves from losses by keeping maturities short (7 years or less).

These dismal bond returns resulted in a record $72 billion being pulled from bond mutual funds in 2013. Virtually all amounts removed from bond investments were plowed into the stock market, helping to support the unexpectedly huge returns. Harrell believes this “great rotation,” out of bonds and alternative investments and into stocks, will continue in 2014 leading to further stock market gains.

2014 investment strategies for doctors will depend on their stage of life. For doctors who are retired, or nearing retirement, Harrell recommends reducing risk by selling some stocks that have appreciated significantly to lock in gains. While Harrell remains bullish on stocks for 2014, nevertheless these doctors should rebalance their accounts to help guard against an unexpected (but inevitable) stock market correction, which was devastating to many retired/near retired doctors in 2008-2009.

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Harrell says these doctors should also invest in lower risk segments of the stock market, such as high dividend paying stocks, and non-cyclical industries, to generate significant returns with lower risk. While Harrell recommends that these doctors still have a sizable portion of their portfolio invested in bonds, the type of bonds invested in is increasingly important. He is a huge fan of corporate-only bond funds, which invest primarily in investment grade corporate debt, but also some junk bonds that may be inappropriately rated by the rating agencies. These funds can increase the yield of a retiree’s portfolio by 2-3%, while only modestly increasing risk. Pairing slightly more aggressive bond investments with more conservative stocks is an ideal strategy for retired/near retired doctors in 2014.

For doctors still practicing, the optimal 2014 strategies will depend on their current asset allocation and risk tolerance. Harrell still sees many doctors with excessive amounts of cash in checking, savings, and money market accounts earning negative returns after taxes and inflation are factored in. This represents a huge “drag” on a doctor’s investment return, and prevents them from reaching their retirement goals. Harrell recommends these doctors use a dollar-cost averaging strategy to get their cash fully invested to their desired stock/bond allocation over a 3-month period.

For doctors who are already fully invested, Harrell recommends a quick check-up through rebalancing as they roll into 2014. Although many investment advisors typically rebalance at the beginning of the New Year, Harrell uses a different strategy outlined in our July 2011 article, “Use This Disciplined Investment Strategy To Add Millions To Your Retirement Nest Egg.” McGill Advisors rebalances their accounts after a 25% increase or 10% decline in the S&P 500 Index. Currently, that puts their rebalance target at 1,923, or 75% above the 2011 low.

Harrell is making only minor adjustments to his investment strategy for McGill Advisors accounts. On the equity side, he is favoring financial and technology stocks. Financial stocks were among the best performers in 2013, and he expects their success to continue. These companies will likely benefit from an expected rise in interest rates, since a steep yield curve is highly profitable for most lending institutions.

On the other hand, technology stocks lagged the market in 2013, and Harrell feels that this will change. Technology companies are better insulated from rising interest rates, since most of them have very low debt and above average growth rates.

For more aggressive doctors, emerging market stocks offer attractive discounts. They are one of the few segments of the stock market that declined in 2013, and now trade at a 25% discount to developed countries. Value-oriented doctors will be looking to this segment as one of the most attractive areas to invest in 2014.

Despite Harrell’s optimism, he points out that his 2014 outlook could change if corporate earnings disappoint or interest rates rise sharply. Earnings for the S&P 500 companies are forecasted to grow 10% in 2014, down from 14% just six months ago. While this reduction in estimates is a common practice on Wall Street, if stock gains continue to exceed earnings growth, lower guidance will likely trigger a stock market decline.

Doctors also need to monitor the Federal Reserve to determine how their actions will affect interest rates in 2014. While most commentators are focused on how quickly the Fed will further “taper” their government bond buying program designed to suppress interest rates, Harrell is focused on how the 10-year Treasury reacts to the news. Harrell notes that the only stock market hiccup in 2013 was in May-September when the 10-year Treasury yield rose from 1.6% to nearly 3.0%. A steep increase in the interest rate on the 10-year note could stop the stock market’s ascent dead in its tracks.

For your free consultation or for more information,

please call LGT at 214.871.7500

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BY PATRICK CRAIG, JD*

Given the important role that referral relationships play in dentistry, practitioners need a basic understanding of the applicable state and federal laws that govern health care referrals.

Below is a brief explanation of how the two most important of these laws work, namely the Stark Law

and the Anti-Kickback Statute, and how to ensure that your practice avoids any potential liability.

The Stark Law

The Stark Law, named after Congressman Pete Stark, is the federal law regulating physician self-referrals of Medicare and Medicaid patients. The first phase of the Stark Law (Stark I) went into effect January 1, 1992 and barred self-referrals for clinical laboratory services under the Medicare program. Since that time, the Stark Law has been expanded and clarified through statutory amendments and federal regulations promulgated by the Centers for Medicare and Medicaid Services (CMS).

Today, the Stark Law generally provides that a physician may not make a “referral” of a Medicaid or Medicare patient for a “designated health service” to an entity in which the physician (or an immediate family member of the physician) has a “financial relationship.”

Each of those key terms is defined broadly by the statute, with an extensive system of exceptions to protect permissible referrals from the ban. For example, the term “financial relationship” is generally defined to mean any ownership or investment interest as well as any arrangement involving remuneration of any kind. Obviously, this general definition

is quite inclusive. However, there are a number of exceptions to the definition, including ownership of publicly-traded securities, bona fide employment relationships, as well as certain real estate and equipment leases and personal service agreements, provided that those arrangements are in writing and meet certain other criteria.

Also excluded from the definition of “financial relationship” is certain de minimis non-monetary compensation (e.g., meals, gifts, etc.). To fall within this de minimis exception, the aggregate yearly value of the compensation must not exceed a certain statutory limit, which is adjusted for inflation each year ($385 for calendar year 2014). Further, the compensation must not (i) be determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician; (ii) be solicited by the referring physician or his or her staff; or (iii) violate the Anti-Kickback Statute (discussed below) or other federal or state law.

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The Stark Law imposes stiff penalties for violating the ban on restricted referrals, including denial/refund of payment to an entity that knowingly accepts a prohibited referral, imposition of a $15,000 per service civil penalty, and imposition of a $100,000 civil penalty for each arrangement considered to be a scheme intended to circumvent the Stark ban.

In addition to the federal Stark Law, many states have enacted similar bans on certain physician referrals. These laws, sometimes referred to as “mini-Stark laws,” vary widely from state to state in both content and enforcement. For example, some states have adopted statutes that contain language very similar to the federal Stark Law, banning physician referrals for designated health services to an entity in which the physician has a financial interest. Others have adopted a notice approach, requiring a referring physician to disclose to the patient in writing any financial interest that he or she may have in the referred entity. Still others have declined to adopt any state counterpart to the federal Stark Law.

Due to the wide-ranging scope and content of state mini-Stark laws, it is possible that a referral which is permissible under federal Stark Law may be prohibited under state law (for example, some mini-Stark laws reach beyond the

federal scheme to encompass private insurance, as well as Medicare and Medicaid, include a broader scope of services as designated health services, and/or contain fewer explicit exceptions than the federal scheme). It is therefore important for practitioners to be familiar with at least the basic parameters of their state’s self-referral laws.

Anti-Kickback StatutesThe federal Anti-Kickback Statute also plays a role in regulating certain referral relationships. Like the Stark Law, the Anti-Kickback Statute is broad on its face with a number of exceptions. Generally speaking, the statute prohibits giving anything of value in order to induce either (i) referrals for; or (ii) the purchase, ordering, or recommendation of any item or service covered by Medicaid, Medicare, or any other federally funded health care program.

Some exceptions to the Anti-Kickback Statute (called “safe harbors”) include certain employment arrangements, personal service and management contracts, real estate and equipment leases, practice sales, and investments in a group practice, provided that the arrangement meets certain requirements.

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RECOMMENDATIONS

1. Know the Basics 3. Put it in Writing

2. Get State Specific 4. Consult Legal Counsel

We recommend that dental professionals take the following actions to better protect themselves from potential violations of the federal Stark Law and Anti-Kickback Statute as well as their state law counterparts:

As discussed above, the state law equivalents to the federal Stark Law and Anti-Kickback Statute vary significantly from state to state. Get familiar with your state’s statutory scheme. Is it more inclusive than its federal counterpart? Less? Knowing can help to ensure that you are in compliance with both state and federal law.

If you have a question about a referral relationship, it is better to consult legal counsel at the outset than to potentially expose yourself to significant penalties (and potential jail time) down the road.

The statutory schemes discussed above are complicated and the accompanying regulations can be overwhelming. While it likely isn’t practical for you to learn the intricacies of each one, knowing the general purpose of each law and their basic elements can help you to spot a potential issue and seek further legal counsel.

A number of exceptions to the Stark Law and safe harbors to the Anti-Kickback Statute (e.g. lease agreements, personal service agreements, etc.) require that an agreement be in writing to qualify as an exception. For that reason (along with a number of others) it is a good idea to set out all business arrangements in writing.

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* Patrick Craig is an associate attorney at McGill and Hassan, P.A., a law firm that specializes in providing legal services to dental professionals. For more information call 877.306.9780.

CareCredit Agrees To Refund Card Users

CareCredit, a division of GE Capital, is the largest issuer of medical and dental credit cards in the U.S., with about 4 million cardholders and 175,000 participating medical and dental offices. Recently, the company announced that it had agreed to refund up to $34.1 million in a settlement with the Consumer Financial Protection Bureau (CFPB), to resolve allegations that it misled patients about the terms of credit cards used to pay for medical and dental procedures.

CFPB officials said they received numerous complaints about these risky cards, which often come with initial “teaser” interest rates of 0% that later jump to as high as 26.99% if the amount owed is not paid off before the typical 6-24 month promotional period ends. CFPB objected to the inadequate disclosures CareCredit made when marketing these medical/dental cards, claiming that these cards often result in higher interest rates than traditional credit cards. Under the settlement, CareCredit must notify more than 1.2 million patients that they can file a reimbursement claim for excessive interest charges and fees.

Unlike the Stark Law, the federal Anti-Kickback Statute does not contain an explicit safe harbor for de minimis gifts. However, subsequent guidance has suggested that gifts of

nominal value will not be a violation of the Anti-Kickback Statute, since such nominal gifts are unlikely to induce an impermissible referral.

Further, even if an arrangement that would otherwise fall within the general prohibition does not fit within a defined “safe harbor”, it does not necessarily mean that the Anti-Kickback Statute has been violated. Unlike the Stark Law, the Anti-Kickback Statute is a criminal statute and requires that a practitioner act with a specific intent to violate the law. Accordingly, the Anti-Kickback Statute will not be violated by a practitioner who is acting in good faith without any intent to violate the law or illegally generate referrals, even if the practitioner’s actions do not fall within a “safe harbor” under the statute.

Because the Anti-Kickback Statute is a criminal statute, violations can result in criminal sanctions, including a fine of up to $25,000 and imprisonment of up to five years for

each violation. In addition, a violator may be excluded from participation in the applicable government health care program, and face civil monetary penalties.

A number of states have also enacted their own versions of the Anti-Kickback Statute. Like the mini-Stark laws, these laws can vary significantly from state-to-state. Practitioners should therefore familiarize themselves with the general scope of their state’s Anti-Kickback Statute.

These laws, sometimes referred to as “mini-Stark laws,” vary widely from state to state in both content and enforcement.

For your free consultation or for more information, please call LGT at 214.871.7500

For your free consultation or for more information, please call LGT at 214.871.7500

Dallas, TX 75204 l Main No. 214.871.7500 l Fax 214.871.0011 l www.lgt-cpa.com

Kevin Warneke214.461.1423kwarneke@lgt-cpa.comAICPA & TSCPA - Member

Robert Lane, CPA, PFS214.461.1450rlane@lgt-cpa.comAICPA & TSCPA - Member

Lisa Hopkins214.461.1501lhopkins@lgt-cpa.com

Denise Yealy214.461.1508dyealy@lgt-cpa.comAICPA & TSCPA - Member

David Ovesen, CPA, PFS214.461.1443dovesen@lgt-cpa.comAICPA & TSCPA - Member

LGT Dental Group Team Members

LGT Dental Practice Includes:

For a complimentary review, please call LGT at 214.461.1467

▪ Bookkeeping and accounting

▪ Compilation, review and audit services

▪ Comprehensive financial planning and asset management

▪ Employee retirement plan consultation, compliance services and tax return preparation

▪ Exit and retirement planning

▪ Practice management consulting

▪ QuickBooks training

▪ State, local and federal tax return preparation

▪ Member of United Dental Alliance (UDA)