Hospitals' battle with the Internal Revenue Service over FICA contributions for resident physicians may be near an end as the IRS issued a proposed regulation clarifying the act's student employment exemption and said that within 90 days it would outline a process for resolving outstanding FICA appeals. If adopted as proposed, the regulation would severely limit the number of residents eligible for the FICA student exemption. The Federal Insurance Contributions Act, or FICA, requires employers to pay 7.65% of employee wages or salaries and deduct an equal amount from the employee's paycheck to fund Social Security and Medicare. Starting in 1997, a number of teaching hospitals and academic medical centers sought to exempt resident physicians from FICA under the student employment clause and began seeking refunds of FICA taxes. As of 2000, some 228 organizations, mostly hospitals and healthcare organizations, had requested more than $162 million in FICA refunds, according to the General Accounting Office. Richard Speizman, a partner with KPMG in Washington, said he thinks the IRS settlement resolution program may allow some hospitals to obtain a partial refund for taxes paid.
Under the proposed regulation, the exemption would apply when education "predominates" over employment in the relationship between the resident and tax-exempt organization. But a resident would be considered an employee if he or she regularly works more than 40 hours per week, is a professional employee, is eligible to participate in retirement benefit programs and is required to be licensed to work in the field. Comments on the proposed regulation are due May 25 and will be aired during a June 25 public hearing. Read previous Modern Healthcare coverage of the issue. -- by Mark Taylor