Ending nearly six years of uncertainty, on January 11, 2011, the U.S. Supreme Court upheld the validity of Treasury regulations that, for the purpose of the student FICA tax exception, exclude from the definition of “student” any employee whose normal work schedule is 40 or more hours per week. In Mayo Foundation for Medical Education and Research v. United States, Chief Justice Roberts presented the issue as whether medical residents were “workers who study or students who work.” The Court adopted the former interpretation, holding that the Treasury regulations drew a reasonable line.
The case is the culmination of a series of rulings and appeals that began in 2003, when the U.S. District Court for the District of Minnesota held that stipends paid by the Mayo Clinic to medical residents from 1994-96 qualified for the statutory “student exception” to FICA taxes which exempts “service performed in the employ of … a school, college, or university … if such service is performed by a student who is enrolled and regularly attending classes at such school, college, or university.” In 2004, however, the IRS released Treasury regulations, effective April 1, 2005, providing that medical residents who worked at least 40 hours a week would not qualify as “students” for the purpose of the statutory exclusion. In 2007 and 2008 the U.S. District Court for the District of Minnesota, in two separate rulings, held the Treasury regulations invalid and again affirmed that medical residents qualified for the student FICA exception. These two cases were consolidated on appeal in the Mayo Foundation case and in 2009 the Eighth Circuit reversed both decisions and upheld the Treasury regulations. The case was then appealed to the Supreme Court.
The decision will most likely eliminate the possibility of obtaining FICA tax refunds for full-time medical residents for periods ending after March 31, 2005. On March 2, 2010, however, the IRS announced that it will honor claims, if timely made, for FICA tax refunds with respect to medical residents for tax periods ending before April 1, 2005 (when the current regulations were adopted). The IRS is contacting hospitals, universities, and medical residents who filed for refunds during these periods with more information.