The U.S. Court of Appeals for the Seventh Circuit decided September 23, 2008 that medical residents are not categorically excluded from claiming the student exception under the Federal Insurance Contributions Act (“FICA”).
The decision came after of the University of Chicago Hospitals (“UCH”) filed a refund action for FICA contributions it had paid for its medical residents during 1995 and 1996. UCH claimed that its medical residents qualified for the student exception from the FICA tax. The government argued that medical residents were per se ineligible for the student exception. The student exception exempts from FICA tax liability employment which meets the description of a service performed in the employ of:
- a school, college, or university, or
- an organization described in section 509 (a)(3) if the organization is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of a school, college, or university and is operated, supervised, or controlled by or in connection with such school, college, or university.
The government argued that medical residents could not be considered students within the meaning of the exception because residency programs were commenced post medical school, after the residents had already obtained their medical degrees. The government added that a hospital did not fall within the common meaning of a “school, college, or university.”
The court looked to the applicable Treasury Regulation for guidance in interpreting the student exception. The statutory requirement for determining eligibility for the student exception include investigation of:
- the character of the organization in the employ of which the services are performed as a school, college, or university; and
- the status of the employee as a student enrolled and regularly attending classes at the school, college, or university.
The status of the employee as a student performing the services is determined on the basis of the relationship of such employee with the organization. An employee who performs services in the employ of a school, college, or university, as an incident to and for the purpose of pursuing a course of study at such school, college, or university has the status of a student in the performance of such services.