Supreme Court Upholds Rule Medical Residents Subject to FICA Tax

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A unanimous U.S. Supreme Court ruled Jan. 11 that medical residents who spend most of their time working with patients are reasonably classified by the Internal Revenue Service as employees rather than students and therefore are subject to Federal Insurance Contributions Act taxes (Mayo Found. for Med. Educ. & Research v. United States, U.S., No. 09-837, 1/11/11).

In the 8-0 opinion written by Chief Justice John Roberts, the justices deferred to an Internal Revenue Service regulation interpreting the student exemption to FICA, in which the IRS said employees normally scheduled to work 40 or more hours per week cannot claim a student exemption.

Denying an appeal by the Mayo Foundation for Medical Education and Research and the University of Minnesota, both of which offer medical residency programs and sought refunds of their FICA contributions, the court said the IRS reasonably interpreted FICA's student exemption not to apply to medical residents who typically work 50 to 80 hours a week caring for patients.

Justice Elena Kagan, who was solicitor general before joining the court last year, did not take part in the decision.

Applying Chevron U.S.A. Inc. v. Natural Resources Defense Council ( 467 U.S. 837 (1984)), the court said that given the ambiguity of whether medical residents who take an academic course load in addition to working should be deemed “students,” it would defer to the IRS's expertise in interpreting FICA. The court rejected the petitioners' arguments that the FICA student exemption unambiguously covers any resident who is enrolled and attending classes or that the IRS's 40-hour rule for determining which students are exempt is arbitrary.

“Regulation, like legislation, often requires drawing lines,” Chief Justice Roberts wrote. “Mayo does not dispute that the Treasury Department reasonably sought a way to distinguish between workers who study and students who work. Focusing on the hours an individual works and the hours he spends in studies is a perfectly sensible way of accomplishing that goal.”

Ruling Could Affect Most Hospitals.

The case was considered by some to be the highest profile health care matter before the court this term, affecting most hospitals and involving an estimated $700 million in employment taxes annually.

Health care tax attorneys contacted by BNA, who generally declined to speak on the record, said the opinion marks the end of a long and litigious journey that saw wins and losses for both sides and that brought refunds to at least some teaching hospitals that were savvy enough to preserve their claims for refunds of FICA taxes paid before the challenged regulation took effect in April 2005.

American Hospital Association Assistant General Counsel Lawrence Hughes Jan. 11 said the group “is disappointed that the Supreme Court upheld the IRS rule that categorically excludes medical residents from being treated as students exempt from federal payroll taxes solely because they may engage in direct patient care for 40 hours or more per week.”

“We believe that the predominance of the educational aspects of a resident's service in a hospital, and not the mere arbitrary and immaterial fact of number of hours worked, should determine whether the student exemption applies,” Hughes said.

Sean P. Scally, counsel with Vanderbilt University and Medical Center in Nashville, called the high court's decision “a grand slam” for the IRS. “The nails are in the coffin. We are moving on,” he said.

“The good news for teaching hospitals is that the opinion's language makes it clear that the IRS will not change its stance with respect to claims arising before April 2005,” he added.

Text of the court's decision can be accessed at

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