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Business and Policy Areas
Business and Policy Areas

IRS Gives in on Refund Claims for Pre-April 1, 2005 Medical Resident FICA

March 10, 2010

The IRS has announced that it will accept the position that medical residents qualify for the IRC §3121(b)(10) student FICA tax exemption. However, this position is limited to refund claims filed for tax periods prior to April 1, 2005, when new regulations went into effect. The regulations treat medical residents as full-time employees and thus ineligible for the student FICA exemption. Therefore, for tax periods beginning April 1, 2005, the IRS will treat the stipends paid to medical residents as subject to FICA tax. 

Background. The FICA tax refund claims stem from a 1998 decision in the 8th Circuit holding that medical residents at the University of Minnesota were not subject to FICA tax because they qualified as "students" for the purposes of the student FICA exemption. Since that time, hundreds of refund claims were filed, estimated to possibly exceed $2 billion. After a series of litigation losses, arguing that medical residents were primarily employees rather than students and therefore ineligible for the FICA exemption, the IRS decided to address the issue by promulgating regulations summarily excluding medical residents from the exemption.

Supreme Court Review Pending. The University of Minnesota challenged the validity of the IRS regulations and won in district court. However, the 8th Circuit Court of Appeals reversed the district court's decision, holding that the regulations were a valid interpretation of the statute and that medical residents were ineligible for the student FICA exemption for April 1, 2005, and subsequent tax periods. Earlier this year, the University of Minnesota filed a petition with the Supreme Court asking it to overturn the 8th Circuit decision.  The Court has not yet announced whether it will hear the case.

What Institutions and Individuals with Pre-4/1/05 Claims Should Do. The IRS will begin contacting institutions, medical schools, hospitals, and individual medical residents who filed FICA refund claims for the eligible periods with information about how to proceed. There is no need to take any action at this time.     

IRS Q&A on Medical Resident FICA


Mary Bachinger
Director, Tax Policy