Final Rules on Student FICA Published
December 22, 2004
Student FICA final regulations that are significantly less stringent than the proposed rules were published in the December 21 Federal Register. The student FICA exception has a broader application to student employees, particularly graduate students. However, as expected, the final regulations retain provisions excluding medical residents from eligibility.
For a student employee to be eligible for the FICA exemption, the employer must be a school, college, university, or affiliated organization whose primary function is conducting educational activities. The overarching principle of the new rules is that to be eligible for the exception, a student’s employment must be “incident to and for the purpose of pursuing a course of study.” The educational aspect of a student worker’s relationship with the institution will be evaluated in terms of the student’s course workload and in consideration of the facts and circumstances related to the work being performed.
The proposed rules had required a student be “enrolled and regularly attending classes,” with a class defined as an “instructional activity led by a knowledgeable faculty member for identified students following an established curriculum.” NACUBO and others commented that classes led by adjunct faculty members or graduate teaching assistants should be included in the definition. The final regulations clarify that the instructional activity may be led by a faculty member “or other qualified individual.”
The regulations establish new categories of student workers that will not be eligible for the FICA exception. Medical residents are ineligible, according to an example in the rules. Example 4 (Treas. Reg. 31.3121(b)(10)-2(e)) describes an employee of a teaching hospital of an institution (the hospital being an unincorporated division) participating in a residency program accredited by the Accreditation Council for Graduate Medical Education. The employee’s work schedule includes educational, training, or instructional aspects, but the employee also provides patient care services 40 or more hours per week. The educational or training aspect "does not affect the conclusion...[that the employee’s] services are not incident to and for the purpose of pursuing a course of study." Therefore, the employee is ineligible for the FICA exception.
Student employees who regularly work 40 or more hours per week will be deemed career employees and automatically subject to FICA withholding. The proposed regulations disallowed the exception if the individual is deemed a career employee where the service aspect of the individual’s relationship with the employer is predominant and not “incident to and for the purpose of pursuing a course of study.”
Certain individuals are automatically considered career employees if any one of the following applies to their campus employment:
• They regularly perform services 40 or more hours per week;
• They are “professional” employees (those “requiring knowledge of an advanced type in a field of science or learning, the consistent exercise of discretion and judgment and one that is predominately intellectual and varied in character”);
• They receive employment benefits (eligibility for retirement plans, vacation, and/or sick leave, etc.); or
• They must be licensed to work in the field in which they perform services.
In a major modification of the proposed rules, the final regulations use a facts and circumstances test to evaluate whether the relationship between employer and student results in career employee status. The abovementioned criteria are to be used as relevant factor rather than dispositive criteria in determining whether the educational versus the service aspect of the relationship is predominant.
The final rules are applicable for services performed on or after April 1, 2005. Supplemental guidance issued by IRS in Revenue Procedure 2005-11 contains new safe harbor rules, which include the half-time requirement and the other provisions related to drop-add periods, partial months of employment, and employment during school breaks of more than 5 weeks. These provisions appear to reflect the requirements contained in Rev. Proc. 98-16.
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