The IRS has thrown in the towel with respect to pre-April 1, 2005, medical resident FICA claims based on the so-called “student exception.” The agency announced on March 2, 2010, that certain medical residents who worked at hospitals, universities and other institutions were not subject to employment (FICA) tax on wages earned for services rendered in connection with their education. To qualify, the institutions that employed medical residents or the individual residents must have timely filed FICA refund claims for tax periods ending before April 1, 2005 (i.e., the effective date of new Treasury Regulations).
Prior to that date, Treasury Regulations provided that the status of employees was determined on the basis of their relationship with the organization for which services were provided. An employee had “student” status for services performed as an “incident to and for the purpose of pursuing a course of study” at the school, college or university. In the case of medical residents performing services at a teaching hospital, however, the IRS took the position that the student exception did not apply and residents were subject to FICA tax on the wages they earned. Despite the IRS position, many teaching hospitals filed FICA refund claims for the employer’s and the employee’s share of FICA tax. Those claims met with inconsistent results in courts around the country, with several appeals courts finding that medical residents qualified for the student exception.
Under new Treasury Regulations that became effective April 1, 2005, full-time employees are not eligible for the student exception because their services are not “incident to and for the purpose of pursing a course of study.” The IRS takes the position that medical residents are ineligible for the student exception because they are full-time employees under the current Treasury Regulations. In 2009, on challenge by the Mayo Foundation for Medical Education and Research and Mayo Clinic, the Eighth Circuit Court of Appeals agreed with the IRS application of the “full-time employee” standard to medical residents. As a result, medical residents who perform services for hospitals, universities and other institutions in connection with their course of study are – at least in the Eighth Circuit – subject to FICA tax.
The statute of limitations to file FICA refund claims for tax periods ending before April 1, 2005, has long expired, and neither employers nor medical residents may file new FICA refund claims at this time to take advantage of the IRS announcement. For those hospitals, universities and medical residents that did timely file refund claims, however, the IRS shortly will begin the process of contacting these filers with more information about the process for receiving their refunds