Service to update guidance on student FICA exception.

• Author: O'Driscoll, David
• Position: Federal Insurance Contributions Act

The Service recently issued a notice suspending and updating earlier guidance on the student FICA exception (Sec. 3121(b)(10)). The notice contains a proposed revenue procedure to update the guidance and safe harbor in Rev. Proc. 98-16, and to align it with recent proposed amended regulations (Prop. Regs. Sec. 31.3121(b)(10) 2(c)-(f)).

First, the proposed revenue procedure adds a primary function requirement to the definition of an institution of higher education. Sec. 3121(b)(10) applies only to services performed in the employ of a school, college or university, or an affiliated Sec. 509(a)(3) organization. Under the proposed regulations and the new safe harbor, an organization can be a school, college or university only if its primary function is to conduct educational activities. Thus, to take advantage of the safe harbor, an institution must satisfy not only the Department of Education's regulations at 34 CFR Section 600.4 mad the accreditation requirements of 34 CFR Section 600.2, as was required in Rev. Proc. 98-16, but it also must have education and instruction as its primary function. The primary function requirement may make the student FICA exception unavailable to certain institutions of higher education embedded within a larger organization (like a hospital or museum).

Second, the proposed procedure does not permit an institution to apply the student FICA exception to services performed by an employee who regularly works 40 or more hours per week. Under the existing regulations, services fall within the exception only if they are performed incident to and for the purpose of pursuing a course of study. The proposed regulations clarify that an individual who regularly works 40 or more hours per week has the status of a career employee, and, accordingly, is not performing services incident to and for the purpose of pursuing a course of study. However, the student FICA exception and the safe harbor provided by the updated proposed revenue procedure are still available for services performed by an employee who occasionally works 40 or more hours per week.

Third, the proposed procedure provides that an individual has career employee...