FICA Taxes For Medical Residents

Payments to students for services they provide to a school, college or university are exempt from FICA taxes under IRC section 3121(b)(10) if the students are enrolled and regularly attend classes.

Mount Sinai Medical Center of Florida Inc., Miami Beach, is a teaching hospital. Between 1996 and 1999 the hospital staff included about 100 medical residents receiving training in various specialties, on whose wages the hospital paid approximately $2.4 million in FICA taxes. The hospital applied for and received refunds of those taxes on the basis that they were payments for services under the student exception of section 3121(b)(10). The IRS filed a court action with the U.S. District Court of Southern Florida seeking repayment of the refunded taxes, arguing the refund had been paid erroneously.

Result. For the IRS. Mount Sinai argued that wages paid to residents were exempt from FICA taxes under the student exception since the hospital was a school and the residents were students. The district court disagreed, saying that, for any question concerning whether employees were covered by the Social Security system, courts should “err on the side of including employees in the system.” The court agreed with the government’s position that wages paid to medical residents had never been exempt from the FICA tax, although medical interns at one time had been exempt.

The court noted that the differing treatment of interns and residents at the time had created some confusion and said Congress had responded by specifically eliminating the medical intern exception, intending that all medical residents and interns be covered by the Social Security system. Congress at that time referred to both groups as “young doctors,” not students, in its committee reports.

Mount Sinai argued that the decision in United States v. Mayo Foundation for Medical Education and Research, 282 FSupp2d 997, made it possible to apply the student exception to medical students. In Mayo, a Minnesota district court held that the student exception could be applied to medical residents in individual cases based on the relationship of the residents to their school. It said under regulations section 3121(b)(10)-1(c) medical residents could be considered students if they provided services to the school incidental to and for the purpose of pursuing a course of study at that school. Since the services to patients rendered by the Mayo medical residents “were incidental to and for the purpose of pursing a course of study in postgraduate medical education,” the district court concluded the residents were students and their wages were exempt from FICA taxes.

The Florida district court, however, rejected this argument, stating that the case-by-case approach advocated by the Minnesota decision was wrong and not practical. Following it would mean individually litigating each of the 7,000 claims for refunds of FICA taxes paid by residents and hospitals—totaling over $1 billion—filed with the IRS since 1998. The court concluded Congress never had intended such an application of the law and payments to medical residents always would be subject to FICA taxes.

The two district courts reflect very different views on whether medical residents are covered by Social Security. It appears this issue is destined for frequent litigation unless Congress intervenes with legislation.

United States v. Mount Sinai Medical Center of Florida, Inc., 2005 US Dist., Lexis 909.

Prepared by Charles J. Reichert, CPA, professor of accounting, University of Wisconsin, Superior.