IRS guidance on medical resident FICA refund claims.

• Author: Weinberger, Mark
• Position: Federal Insurance Contributions Act

In Chief Counsel Advice (CCA) 200029030, the IRS National Office provided guidance for determining whether the student FICA exception applies to medical residents. The three-step process involves determining the status of the resident's common-law employer, establishing that the resident is a student, and meeting procedural requirements for obtaining a refund of FICA taxes.

Medical residents have generally been treated by the licks (and the Social Security Administration) as employees subject to FICA tax on their wages. In contrast, services performed by student employees of institutions of higher learning are exempted from FICA, provided the students are enrolled and regularly attending classes. A recent Eighth Circuit decision, State of Minnesota v. Apfel, 151 F3d 742 (1998), seemed to provide an opportunity to claim that services performed by medical residents are performed "as an incident to and for the purpose of pursuing a course of study" at a school, college or university, and that therefore medical residents are able to qualify for the student exception from FICA.

Common-Law Employer

According to the CCA, the first step in determining whether a resident is subject to FICA is to determine the resident's common-law employer--the entity that has the right to direct and control the resident's work. Direction and control not only determine whether the worker is an employee, but also illustrate which party is the employer when the resident has a relationship with more than one entity (e.g., a hospital and a medical school).

The National Office cautioned that the entity that pays the resident may not be the common-law employer and could instead be a statutory employer under Sec. 3401(d)(1). On the other hand, the sponsoring institution (i.e., the medical school or hospital having overall authority and responsibility for the resident's graduate medical education) may be an agent for purposes of employment tax obligations under Sec. 3504, a common paymaster under Sec. 3121 (s), or may be acting merely as a common-law agent for payroll purposes. Regardless, the student FICA exclusion applies only to the common-law employer.

The issue is further complicated by the dual functions of graduate medical education (GME) programs. The primary purpose of GME programs is to train residents, but the programs also provide residents to hospitals for the performance of patient care services. Further, while the sponsoring institution will evaluate a...