Supreme Court Holds Medical Resident Stipends Are Subject to FICA Tax

The U.S. Supreme Court has upheld a Treasury Department rule that considers medical residents as full-time employees subject to Federal Insurance Contributions Act (FICA) payroll taxes. In Mayo Foundation v. U.S. (09-837), (pdf) the Court was asked to consider whether the stipends provided to medical residents that perform medical and patient care services for 40 or more hours per week as part of an accredited graduate medical education program are subject to FICA, commonly referred to as “Social Security” taxes, which are imposed on both employers and employees based upon wages paid. Among the many statutory exceptions to this tax requirement is the “student” exception, which exempts “service performed in the employment of. . . a school, college, or university . . . if such service is performed by a student who is enrolled and regularly attending classes at such school, college, or university.” A Treasury Department amended regulation interpreting this student exemption was issued in 2004. The amended regulation clarified, among other things, that:

The services of a full-time employee are not incident to and for the purpose of pursuing a course of study. . . . [R]egardless of the employer's classification of the employee, an employee whose normal work schedule is 40 hours or more per week is considered a full-time employee. . . . The determination of an employee's normal work schedule is not affected by the fact that the services performed by the employee may have an educational, instructional, or training aspect.

In essence, the Treasury Department categorically excluded all medical residents and other full-time workers from the definition of “student” in the regulations (26 U.S.C. § 3121(b)(10). Mayo filed suit contesting that this amended regulation was invalid, a position with which a Minnesota district court agreed. On appeal, however, the U.S. Court of Appeals for the Eighth Circuit reversed, (pdf) finding that the Treasury regulations permissibly interpreted the statutory student exemption. Therefore, the appellate court reasoned, the compensation paid to medical residents that work full-time hours providing health care and patient services was subject to FICA taxes. The court explained that “[g]iven the explicit legislative history that these FICA exceptions were directed to part-time workers, we conclude that the full-time employee limitation in the amended regulation is consistent with the origin and purpose of the student exception.”

In upholding the 8th Circuit’s decision and giving deference to the agency’s rule, the Supreme Court explained that the Treasury Department “reasonably sought a way to distinguish between workers who study and students who work. . . Focusing on the hours an individual works and the hours he spends in studies is a perfectly sensible way of accomplishing that goal.” The Court further noted that the Department “certainly did not act irrationally in concluding that these doctors—who work long hours, serve as highly skilled professionals, and typically share some or all of the terms of employment of career employees—are the kind of workers that Congress intended to both contribute to and benefit from the Social Security system.”

Chief Justice Roberts delivered the opinion of the Court, in which all other members joined, with the exception of Justice Elena Kagan who took no part in the decision. 

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