FICA May Apply to Certain Student Employees Under New Rules
March 10, 2004
Institutions need to closely examine the recently published proposed regulations governing the student FICA exception. It appears that the rules are chiefly aimed at subjecting medical residents to FICA withholding. However, the rules could affect other student employees -- primarily graduate assistants -- if they meet the definitions of "career" or "professional" employee.
Concurrent with the publication of the proposed rules, the IRS issued Notice 2004-12, which suspends the previous student FICA exception safe harbor rules set forth in Rev. Proc. 98-16. The notice proposes a new safe harbor standard that reflects the provisions of the proposed regulations.
Background. The proposed regulations could narrow the student employee tax exception found in Internal Revenue Code section 3121(b)(10). That provision states that service performed in the employ of a school, college, or university by a student who is enrolled and regularly attending classes at the institution does not constitute employment for FICA tax purposes. Therefore, students who work at the institution are exempt from paying FICA tax.
In 1998, the IRS published Rev. Proc. 98-16 which set forth that student employees would be eligible for the FICA exception provided they were:
- enrolled as at least a half-time student; and
- not a "career employee" as defined in the revenue procedure.
There were no work hour restrictions imposed on student employees in Rev. Proc. 98-16. The revenue procedure did not apply to medical residents.
In two recent court cases in the Eighth Circuit and the district court of Minnesota, the IRS has not prevailed in asserting its position that medical residents should be subject to FICA.
Categories of student employees subject to FICA. The IRS is now addressing the medical resident issue by way of the proposed regulations. The notice includes two examples that illustrate how medical residents do not qualify for the FICA exception. In addition to residents, other categories of students may be adversely impacted by the proposed rules, particularly graduate students.
Review student employment. NACUBO urges institutions to review all employment arrangements with students to determine whether FICA wihholding is required under the proposed rules. The IRS has proposed that the rules take effect as of February 25, 2004 (the date of the notice).
According to the proposed regulations, any one of the following factors will subject a student employee to FICA.
The student employee:
- works 40 hours or more a week;
- is eligible for a Section 401 qualified retirement plan, a Section 403(b) plan, or a Section 457 plan;
- is eligible for tuition reduction benefits and other education assistance (except for graduate teaching and research assistants);
- is eligible for vacation, sick leave, paid holiday benefits, dependent care, or adoption assistance;
- is a "professional employee" by virtue of the knowledge required by the position, the degree of judgment exercised, and the intellectual work; and
- must be licensed under state or local law.
NACUBO advocacy. The Association of Amercan Medical Colleges is joining NACUBO in presenting a webcast on March 23, featuring IRS officials Catherine E. Livingston and John Richards, who will discuss the proposed regulations and respond to audience questions.
The NACUBO Tax Council will be formulating comments on the notice, which are due to the IRS no later than May 25. NACUBO will also request to testify at the public hearing scheduled for June 16 in Washington, DC.
Questions or concerns related to this topic should be directed to Mary M. Bachinger, senior policy analyst and staff liaison to the Tax Council, at 202.861.2581.
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