Clarification sought on FICA exemption for residents

Teaching hospitals are seeking IRS refunds on the basis that housestaff members are students, not employees.

By Jay Greene, AMNews staff. Jan. 21, 2002.

More than 18 teaching hospitals have applied for FICA refunds from the Internal Revenue Service, claiming that their residents are students and should not pay Federal Insurance Contributions Act taxes.

The IRS had issued a memorandum Nov. 9, 2001, stating that residents are employees, not students, but also left the door open for special circumstances in which teaching hospitals can apply for FICA exemptions for their residents.

FICA tax exemptions for residents became an issue when the University of Minnesota, Minneapolis, won a federal lawsuit in 1998. The University of North Dakota in Grand Forks also appealed and was granted FICA tax refunds for its residents.

More than 18 other unspecified teaching hospitals applied to the IRS for exemptions, said a spokesman for the Assn. of American Medical Colleges. A decision is expected this year.

The IRS said the primary purpose of teaching hospitals is patient care and not education. But it also said teaching hospitals that are part of the same legal entity as a university may be exempt from FICA taxes, as was the case in Minnesota and North Dakota.

If a hospital is found to be the common-law employer of a medical resident, the residents who trained at that hospital would not qualify for a FICA refund, the AAMC spokesman said. "If a [pay] check was cut by a medical school or university, then it may qualify," the spokesman said. [...]