Ruling does not affect previous FICA refund claims
On Jan. 12, 2011, the U.S. Supreme Court unanimously ruled that medical residents are not entitled to the student exemption from paying Federal Insurance Contributions Act (FICA) taxes (Mayo Foundation for Medical Education and Research v. United States). This ruling means that medical residents and their employers are required to pay FICA taxes from April 1, 2005, onward when new regulations by the Internal Revenue Service (IRS) went into effect. However, previously filed FICA refund claims by several institutions and individuals for tax periods from the 1990s through March 31, 2005, will not be affected by the recent ruling.
As defined by the IRS, FICA taxes include both Social Security and Medicare taxes that are paid on wages earned for services performed. Because both employees and employers contribute, employers generally withhold the employee’s share and pay both shares together.
FICA taxes are 15.3 percent of wages, of which 12.4 percent goes to Social Security. For example, a medical resident who earns a $40,000 annual stipend pays $3,060 and the hospital/sponsoring institution pays $3,060 in total FICA taxes. The student FICA exemption (Section 3121[b] of the Internal Revenue Code [IRC]) exempts payments made to a student who is enrolled and regularly attending classes at the school, college, or university where he or she is employed from FICA taxes on the payments.
A court ruling in 1998 that medical residents could be considered as students prompted medical centers across the country to file refund claims, and the IRS received more than 7,000 claims. In some cases, medical residents filed individual claims for their share of the FICA tax.
Supreme Court case
The volume of FICA tax refund claims prompted the Treasury Department to adopt an amended rule on Dec. 21, 2004, that further defined the student FICA exemption that went into effect as an IRS regulation on April 1, 2005. Under the amended rule, an employee who works 40 hours or more (full-time employee) for a school, college, or university is not eligible for the student FICA exemption. This essentially eliminated medical resident eligibility.
The University of Minnesota and Mayo Clinic filed lawsuits challenging the Treasury Department in 2007, and received favorable decisions in U.S. District Court in 2008. The government appealed the rulings to the Eighth U.S. Circuit Court of Appeals, which reversed the decisions. Mayo then appealed this ruling, and the case was taken before the U.S. Supreme Court in November 2010.
On January 11, 2011, the Supreme Court upheld the Eighth Appeals Court ruling that medical residents are not entitled to the student FICA exemption. Chief Justice John Roberts Jr., writing for the Court, supported the Treasury Department’s determination that “employees who are working enough hours to be considered full-time employees have filled the conventional measure of available time with work, and not study.”
Since May 25, 2010, the IRS has been contacting employers and individual medical residents who had filed refund claims with new instructions on how to proceed. Institutions that had filed claims also began to contact previous medical residents to obtain consent to proceed on their behalf. Many institutions have since filed their “perfected” claims.
Physicians who were medical residents during the time period in question (1990–2005) who have not been notified by their programs should contact their former institutions to see if they are still eligible to participate in the refund claim through the program. Some programs obtained prior resident consent, and others have received extensions to file their claims.
FICA tax refunds that have been claimed for tax periods prior to the new IRS rule on April 1, 2005, may still proceed as planned. With more than 300 hospitals and medical schools pursuing refunds for more than 250,000 house staff, a lengthy claim process is likely.
Not all residents and hospitals are eligible, so physicians should check both the IRS and the institution’s Web sites for information. According to the IRS Web site, the refunded FICA taxes are not taxable; however, the interest portion that will be included in the refund is subject to taxation. Individuals should consult a tax professional or attorney for further advice.
Hassan R. Mir, MD, is a member of the AAOS Candidate, Resident, and Fellow Subcommittee and co-editor of the AAOS Residents’ Newsletter. He can be reached at firstname.lastname@example.org