The United States Supreme Court has agreed to consider in its next term whether teaching hospitals are required to withhold Social Security and Medicare (“FICA”) taxes from wages for services performed by medical residents. The two consolidated cases that the Court agreed to hear, Mayo Foundation for Medical Education and Research v. United States and University of Minnesota v. United States, are among several federal cases that have raised this issue over the last few years.

At issue is a Treasury Regulation, effective April 1, 2005, that holds that medical residents who work 40 hours or more per week are not entitled to the student exemption from FICA taxes. Under the exemption, a “student” is an individual “who is enrolled and regularly attending classes at such school, college, or university.”  IRC § 3121(b)(10)  provides that the exemption from FICA taxes applies to students for “service performed in the employ of a school, college, or university.” 

Both the Mayo Foundation and University of Minnesota paid the FICA taxes and sued for refunds, asserting that their medical residents qualified for the student exemption and that the Treasury Regulation was invalid. A federal district court in Minnesota sided with the  teaching hospitals, finding that the Treasury Department’s contention that medical residents were per se ineligible for the student exception if they worked “full time” was inconsistent with the Internal Revenue Code, and that eligibility determinations had to be made on a case-by-case basis. In June 2009 the Eighth Circuit Court of Appeals reversed, stating that it was required to defer to the Treasury Regulation, which it found to be a permissible interpretation of the Internal Revenue Code. The hospitals filed a certiorari petition with the U.S. Supreme Court, which the Court accepted on June 1, 2010. In opposing the certiorari petition, the Solicitor General estimated that the student exemption for medical residents cost the treasury over $700 million annually.

The Treasury Department acquiesced on this issue for periods prior to April 1, 2005, paying refunds of FICA taxes for medical residents. But for periods after April 1, 2005, when its Regulation became effective, it has continued to deny refund claims. If they have not done so already, teaching hospitals should consult with experienced employment tax counsel regarding whether to continue to file protective refund claims for their medical residents for periods after April 1, 2005, pending the Supreme Court’s decision.

This entry was written by William Weissman.