FICA for Medical Residents Splits Circuits

Medical residents in a teaching hospital might be eligible for a student exemption from FICA taxes, a circuit court ruled recently, adding to a split among circuits on the issue.

The Eleventh Circuit vacated and remanded the decision of a Florida district court in United States v. Mount Sinai Medical Center , which had held that payments to medical residents were not exempt from FICA (for the earlier decision, see “ Tax Matters,” JofA, May 05, page 106).

FICA, which supports the Social Security Trust Fund, imposes tax on the wages of employees and creates an equivalent liability for employers. Section 3121(b)(10), however, provides an exception for “service[s] 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.” This exemption prompted Mount Sinai Medical Center of Florida Inc. to obtain a refund of approximately $2.5 million in FICA taxes paid and withheld from medical residents participating in the hospital’s Graduate Medical Education Program (GMEP). The IRS then sued to recover the refund, claiming it was paid in error. Based on the legislative history of § 3121 and a factually similar case in the Sixth Circuit, the district court held that the student exemption did not apply to medical residents and held for the IRS.

On appeal, however, the Eleventh Circuit found that the district court’s reliance on Congress’ enactment and then repeal of an exception for medical interns was misplaced, as the current statute is unambiguous. It also refused to follow the Eighth Circuit, which has held that medical residents always fall within the student exemption. Rather, the Eleventh Circuit adopted the position of a federal district court in United States v. Mayo Foundation, which calls for a case-by-case analysis of whether the employer (1) qualifies as a “school, college or university” and (2) whether the employees qualify as students. If both tests are satisfied, the student exemption should apply, the Eleventh Circuit said.

U.S. v. Mount Sinai Medical Center , 99 AFTR2d 2007-2800

Prepared by Laura Lee Mannino, CPA, LL.M., assistant professor of accounting and taxation, St. John’s University, Jamaica, N.Y.