Wake Forest Baptist Medical Center's Memorandum Resident FICA Tax Witholding
We know there has been a lot of confusion for former medical residents and medical teaching institutions stemming from the decision by the Internal Revenue Service (IRS) in March of this year to permit the recovery of Federal Income Contributions Act (FICA) taxes withheld by the institutions prior to 2005. In 2005 the IRS changed its regulations to clarify the confusion about whether medical residents were "students" or "employees" for FICA tax filing purposes.
Prior to 2005, the IRS treated medical residents who worked at least forty hours as employees, which required North Carolina Baptist Hospital to withhold FICA (Social Security) taxes. This IRS treatment of residents as employees had long been controversial and had been the subject of much debate and some litigation. North Carolina Baptist Hospital followed the regulatory requirements of the IRS and withheld FICA taxes on residents prior to 2005. North Carolina Baptist Hospital did not file annual refund claims (Form 843s) of the withholding of those taxes because the requirement of the IRS had been long-standing and such requests for refund were consistently denied by the IRS.
The IRS modified the regulations in 2005 because of the on-going controversy and litigation. The amended regulations removed any doubt that the residents were employees and thus subject to FICA tax withholding. In March of 2010, the IRS changed course and stated that those hospitals and residents who filed for refunds of the withholding of FICA taxes prior to 2005 could now claim a refund of those taxes.
You should check your personal income tax returns and files for the time period you were a medial resident to see if you filed for a refund of the FICA taxes withheld during those years. If you did file for a refund (Form 843) as part of your tax returns for the years prior to 2005, you may be entitled to a refund from the IRS for those FICA taxes.
If a residency institution (hospital or medical center) filed for resident FICA withholding refunds during any pre-2005 tax year, it can now claim the refund of the FICA taxes paid during those tax years not only itself, but also for its former medical residents. North Carolina Baptist Hospital DID NOT file for refunds for FICA taxes withheld before 2005 because the IRS’s treatment of residents as "employees" and not as students had been long standing tax law. Consequently, NCBH is not eligible today to seek for itself or for its residents a refund of the FICA taxes it paid on its medical residents prior to 2005. However, those residents who personally filed for refunds of the FICA withholdings in the tax years prior to 2005 can claim the refund of those taxes irrespective of whether their residency hospital filed for refunds in any tax year.
In summary, North Carolina Baptist Hospital did not file for FICA refunds on its own behalf, or on behalf of its residents, in years prior to 2005. Again, the reason for this was that prior to 2005 the IRS required medical residents to be classified as "employees" and not as "students." Consequently, even though the IRS has changed its position about the treatment of residents as employees prior to 2005, Baptist Hospital will not receive a refund of FICA taxes that the institution paid on behalf of its former medical residents, and those former residents will not receive FICA refunds for the FICA taxes withheld from their pay - unless the residents individually filed for FICA refunds on their own behalf. You, as an individual tax payer, were entitled to file for a FICA tax refund during your years as a medical resident prior to 2005. If you failed to do so, it is our understanding that you will not be eligible for a FICA tax refund – but you should determine for yourself whether you have an individual claim.
However, things could still change. There is a challenge to the 2005 regulation change by the IRS before the US Supreme Court. The Mayo Foundation for Education and Research and the University of Minnesota separately challenged those regulations and were successful in the US District Court for Minnesota. The Eighth Circuit US Court of Appeals reversed these decisions, but Mayo and the University of Minnesota successfully petitioned the Supreme Court to review the Eight Circuit’s decision. We do not know what the outcome of this appeal will be and what effect it will have on the withholding of FICA taxes on medical residents.
We appreciate this issue is complicated for teaching institutions across the country and their medical residents. We hope this memorandum provides some additional clarity and background.
Effective - 9/9/2013
Remains effective 9/8/2014