Appellate court rules against medical residents

Schools must pay social security taxes for residents
June 16, 2009

A U.S. Eighth Circuit Court of Appeals decision filed Friday sided with the federal government and ruled that medical residents training through University of Minnesota and Mayo Clinic hospitals must pay a yearly FICA Social Security tax on their stipends.
Hospitals will split FICA payments with employees, who will pay a 7.65 percent tax on each resident’s stipends, according to FICA tax laws.
A typical medical resident at the University receives a stipend of around $40,000 per year, which costs the University and medical residents more than $3,060 in FICA payments annually, University Deputy General Counsel Bill Donohue said.
A worker averaging a salary of around $40,000 per year will receive $1,440 per month when they are eligible for Social Security benefits, according to statistics provided by the Social Security Administration.
The decision ensures that the government will receive between $4 and $5 million dollars per year in taxes, he said.
If the courts would have ruled in the University’s favor, the government would have been forced to refund FICA payments the University has been making since a policy change in 2004.
In 2004, following a series of courtroom defeats, the Treasury Department specifically targeted medical residents by issuing new regulations declaring residents employees rather than students.
The Eighth Circuit Court used the 2004 tax regulations in their decision against the University. The University felt the court made the wrong decision, Donohue said.
“Most medical professionals would tell you that medical residents are still students learning their trade,” Donohue said. “Because of this, we believe they should be treated as students under federal law.”
The appellate court’s decision against the Board of Regents is the latest chapter in an arduous legal dispute between the federal government and the University stemming from the late 1980s.
The government has mounted unsuccessful appeals in five different federal appeals courts — including the Eighth Circuit — arguing a 1990 district court decision which ruled medical residents did not have to pay the FICA taxes.
In 1998 the federal government refunded $48 million to the University based on the decision, Donohue said.
The University is still deciding whether they will appeal Friday’s decision, Donohue said. If they do there are two routes the legal team could take.
The University could ask the Eighth Circuit Court to hear the case “en banc,” which would require all of the judges to make a decision on the case — Friday’s decision was based upon the decision of three judges. The University could also petition the case for discretionary review by the Supreme Court.
The University will discuss whether to appeal and which method to use with the next week, Donohue said.

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