Supreme Court Upholds Regulations That Apply FICA Tax to Medical Residents

A unanimous Supreme Court ruled that the FICA tax regulations adopted by the Treasury Department in 2004 are valid as a permissible interpretation of the FICA statute. The decision seems to close the final chapter in the long-running legal saga on the FICA taxation of medical residents.

Regulatory Development of the "Student Exception" Is Challenged

In the case at hand, the Supreme Court addressed the validity of Treasury Regulations that were issued in 2004 regarding the student exception under the Federal Insurance Contributions Act (FICA). The FICA statute provides an exception for services that are performed in the employ of a school by students who are "enrolled and regularly attending classes" at the school. Prior Treasury Regulations construed the student exception to apply only to students who work for their school "as an incident to and for the purpose of pursuing a course of study." The 2004 regulations further developed the exception to categorically exclude a student who performs services as a full-time employee for the school. The 2004 regulations were adopted by the Treasury Department after a court decided adversely to the Department on the issue of whether medical residents were subject to FICA tax. Leaving no doubt as to the application of the new rule, the 2004 regulations include a specific example of a medical resident whose normal schedule requires him to perform services for 40 or more hours per week, and conclude that the resident is not a student for purposes of the FICA student exception.

High Court Applies Deferential Standard of Review

The Supreme Court applied the analysis from another case, which provided that, in determining whether a regulation is a permissible interpretation of a statute, the initial question is whether Congress directly addressed the precise issue at hand. If not, the analysis calls for the agency's rule to stand unless it is arbitrary or capricious or manifestly contrary to the statute. Since the FICA statute does not address the issue at hand – i.e., whether the student exception applies to medical residents who work full time – the Court looked to whether the regulations are a reasonable interpretation of the statute. Noting that a focus on the number of a person's working hours was a "perfectly sensible way" of determining whether an individual was a student, and that the "full-time employee" rule would improve the ease of administering the student exception, the Court held that the regulations were valid as a permissible interpretation of the FICA statute. The petitioner, in this latest ruling, argued that a more critical, less deferential standard of review should apply to the review of the regulations because they were inconsistent with the Department's prior position, were issued years after the statute was enacted, and were promulgated after an adverse judicial decision. The Court rejected those arguments, stating that none of the reasons justified a departure from the previous analysis.

A Clear Break from the Prior Period

As the Internal Revenue Service announced last year, for tax periods ending before April 1, 2005 – the date the 2004 regulations became effective – the IRS agreed to accept the position that medical residents were exempt from FICA tax because of the student exception and began processing timely-filed FICA refund claims for that period.

This page last updated 1/24/11 02:26 PM