Physician employment agreements for both new physicians and experienced physicians should contain a physician sign-on bonus. If a physician sign-on bonus isn’t included in an employer’s initial offer, I always ask for one in my physician employment agreement review. A physician sign-on bonus can range from $10,000 to over $125,000.
In addition, most larger employers provide a physician relocation allowance. Although many physician employment agreements provide that only the amount paid to the moving company qualifies as “relocation expenses,” sometimes employers can be persuaded to include the costs of travel and meals incurred in house-hunting as part of the physician relocation allowance. Occasionally employers also offer a housing allowance to compensate physicians for losses sustained in selling their homes in a down real-estate market. Admittedly, senior physicians who own homes tend to find this perk more interesting than their younger counterparts.
Some physicians leaving training for their first position can pack all of their belongings into their car, so the physician relocation allowance is effectively wasted on them. In some cases, though, when negotiating a physician employment agreement I have been able to persuade an employer to revise the physician employment agreement by decreasing the physician relocation allowance and increasing the physician sign-on bonus. Although there used to be a tax advantage to characterizing money received as a relocation allowance, recent tax law changes have removed this advantage, so a physician sign-on bonus and a physician relocation allowance have the same tax effect.
It is common for the initial physician employment agreement offer to provide that the physician sign-on bonus and/or physician relocation allowance must be repaid if employment is terminated before the agreement’s initial term ends. Most of those provisions provide for what is called an “amortization” of the repayment obligation. In other words, the physician employment agreement may provide that the physician must repay a fraction of the physician sign-on bonus if the physician leaves before the end of the initial term; the repayment fraction is based on the fraction of the time that the physician didn’t work there. For example, if the initial term of the physician employment agreement is for three years (36 months) and the physician leaves after 12 months, the physician employment agreement could provide that the physician would keep 12/36 of the physician sign-on bonus, but must repay the balance (24/36).
Physician relocation allowances are generally a reimbursement of money that the physician actually paid. For that reason, in my physician employment agreement review I try to avoid any repayment obligation for the physician’s moving expenses that the employer reimbursed.
Additionally, the physician should be protected if the employer terminates the physician employment agreement without cause, if the physician terminates the physician employment agreement because the employer breached it, or if the physician employment agreement is terminated because of the physician’s death or disability. In such cases, the physician should not have to repay the physician sign-on bonus or the physician relocation allowance.
Finally, when negotiating a physician employment agreement, I have been able to obtain a shorter amortization period for some physicians. Let’s return to the above example. Say, in that case, that the employer agrees that the physician must only repay a portion of the physician sign-on bonus if employment is terminated before the first 12 months of the physician employment agreement. If the shorter amortization period is agreed to, the physician would not have to repay any part of the physician sign-on bonus or the physician relocation allowance if the physician sticks around for a year or more.
The Medical Group Management Association (“MGMA”) publishes benchmarks on both the physician sign-on bonus and the physician relocation allowance. Citing MGMA benchmarks can be helpful where the initial physician employment agreement presented provides either a physician sign-on bonus or a physician relocation allowance that is less than the median for the specialty in that particular region of the country.
Sometimes the physician sign-on bonus and/or the physician relocation allowance is structured as a loan, where the physician signs a promissory note and agrees to repay the amounts advanced if the physician doesn’t stay a given period of time. If that is the case, the physician should realize that he or she may recognize taxable income in the years the “loan” is forgiven. For example, assume a physician receives a $30,000 physician sign-on bonus that is structured as a loan on December 31, 2020. If the physician employment agreement provides that the loan will be forgiven over two years, the physician would have the following taxable income reported: 2020 - $0; 2021 – $15,000; 2022 - $15,000.
This is not a bad deal for the physician. If the physician sign-on bonus had not been treated as a loan, the physician would have paid the full tax on the bonus in 2020. The physician just has to be aware that his or her taxes will be going up in the next two years, even though the physician will not have received any cash in those years. Such physicians can avoid a nasty tax surprise in the years the loan is forgiven by increasing their tax withholding to account for this “phantom income.”The important aspects of the physician sign-on bonus and the physician relocation allowance go well beyond the amount of these benefits. Savvy physicians will also want to review how they are structured.