U.S. Supreme Court Rules Against Residents Claiming FICA Exemption

Resident physicians are employees, not students, and so they must pay Social Security and Medicare payroll taxes in accordance with the Federal Insurance Contributions Act, or FICA. That's according to a U.S. Supreme Court ruling handed down Jan. 11.

According to the unanimous decision (18-page PDF; About PDFs), the high court agreed with an appeals court ruling that resident physicians can rightfully be considered "full-time employees," as defined by the U.S. Treasury Department, and, therefore, are not exempt from paying FICA taxes.

FICA taxes equal 15.3 percent of wages, of which 12.4 percent goes to Social Security. Generally, of that total amount, half is paid by the employer and half by the employee. Thus, a medical resident who earns a $40,000 annual stipend pays $3,060 and the hospital/sponsoring institution pays $3,060 in total FICA taxes.

The Supreme Court's decision came in a case initially filed in the U.S. District Court for the District of Minnesota by the Mayo Foundation for Medical Education and Research, known as the Mayo Clinic, in Rochester, Minn., and the University of Minnesota. Mayo had sought a refund of money it had withheld and paid on its residents' stipends during the second quarter of 2005.

In its case, the Mayo Clinic asserted that regulations promulgated by the Treasury Department in 2004 that categorically defined a full-time employee as one who works 40 hours a week or more are invalid.

Previously, the department had accepted the view of residencies' sponsoring institutions that residents fall under the FICA statute enacted in 1939 that specifically exempts individuals who work for their school, college or university from paying FICA taxes so long as they are enrolled and regularly attending classes at that institution.

Social Security officials questioned that view, however, and in 1990 attempted -- unsuccessfully -- to collect back payroll taxes from the University of Minnesota on behalf of its residents. That attempt was stymied by a ruling by the U.S. Court of Appeals for the Eighth Circuit, which held that residents' stipends were exempt under the student provision.

In its 2004 rule, the Treasury Department sought to close that student loophole, offering as an example a medical resident whose schedule requires him or her to perform patient care services 40 or more hours a week. According to rule, the services provided by such a full-time employee could not be considered "incident to and for the purpose of pursuing a course of study," a prerequisite for the student FICA exemption. The department explicitly discounted the fact that such services "may have an educational, instructional or training aspect."

Mayo argued that the rule failed to take into account the fact that residents are, in fact, trained primarily through hands-on experience, saying that the department arbitrarily distinguished between hands-on training and classroom instruction.

Whereas the district court agreed with the Mayo Clinic that the Treasury Department's full-time rule was inconsistent with language describing "employment" contained in the original FICA legislation, the same Eighth Circuit Court of Appeals that ruled in favor of residencies' position in 1990 this time reversed the lower court, saying that the department's regulation was a "permissible interpretation of an ambiguous statute."

The Supreme Court opinion, written by Chief Justice John Roberts Jr., pointed out that although Mayo accepted the Treasury Department's determination that an individual may not be exempted unless the educational aspect of the relationship with his or her employer predominates over the service aspect, it objected to the department's conclusion that residents working 40 hours a week can't satisfy that requirement, arguing that the hours a resident spends working make him "more of a student, not less of one."

The high court disagreed, supporting the Treasury Department's determination that "employees who are working enough hours to be considered full-time employees have filled the conventional measure of available time with work, and not study."

Moreover, the court said in its opinion, the Treasury Department did not act irrationally in concluding that resident physicians "who work long hours, serve as highly skilled professionals and typically share some or all of the terms of employment of career employees are the kind of workers that the U.S. Congress intended to both contribute to, and benefit from, the Social Security system."

Perry Pugno, M.D., M.P.H., director of the AAFP Division of Medical Education, told AAFP News Now that he sees the court's decision as having little impact on family medicine residency programs because, "with some geographic variation, few failed to pay FICA in the first place."

"The impact on teaching hospitals and community health centers will also be very modest, since I believe most took the conservative approach to the unsettled question and paid the FICA anyway," Pugno added.