Medical Residents Not Subject to FICA

Although circuits have split on the issue previously, two recent decisions concluded that medical residents are not subject to FICA, based on the student exception of IRC § 3121(b)(10). The provision states that the term “employment” “shall not include…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.”

In August 2008, the U.S. District Court of South Dakota examined the FICA issue for two residency programs: an internal medicine program sponsored by the University of South Dakota School of Medicine and the Sioux Falls Family Medicine Residency Program operated by the Center for Family Medicine (CFM), a nonprofit corporation. Then, on Sept. 23, 2008, the Seventh Circuit upheld an exception from FICA for medical residents at the University of Chicago Hospitals.

In both cases, the IRS said none of the three programs was a school, college or university. In the South Dakota case, the government argued that the programs did not identify themselves by those terms and did not grant degrees. The IRS also said medical residents are not students because they do not enroll or regularly attend class, their purpose is to earn a livelihood rather than an education, and the amount of medical services they provide precludes student status.

Both courts disagreed. The South Dakota court, whose decision is appealable to the Eighth Circuit, looked to the 1998 holding by that circuit in Minnesota v. Apfel (151 F.3d 742) and, more recently, in United States v. Mayo Foundation for Medical Education & Research (92 AFTR2d 2003-5774 (D. Minn.)) that student status is determined also by examining whether enrollment in the program is “incident to and for the purpose of pursuing a course of study”—and concluded it was. However, chief residents did not qualify for the exception because they elected to stay after completing their residency to help administer the residency programs.

In University of Chicago Hospitals, the Seventh Circuit agreed with the Eleventh Circuit in U.S. v. Mount Sinai Medical Center (99 AFTR2d 2007-2800) (see “Tax Matters: FICA for Medical Residents Splits Circuits,” JofA, Jan. 08, page 73) that section 3121(b)(10) does not limit the exemption by the type of services performed, and that student status is determined on a case-by-case basis by the criteria of Treas. Reg. § 31.3121(b)(10)-2. Meanwhile, the U.S. District Court of Massachusetts, noting the “recent eruption” of such cases, cited University of Chicago Hospitals in denying summary judgment to the IRS on similar facts in U.S. v. Partners Healthcare Systems Inc. (102 AFTR2d 2008-5503). While leaving open the question of whether medical residents qualify for the student exception, the court refuted Partners’ argument that the payments are not wages as defined in section 3121(a).

By Melanie J. Earles, CPA, DBA, professor of accounting, Tennessee Tech University, Cookeville, Tenn.