I just got this e-mail today from our Asst. Dtrector of Graduate Medical Education.....
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Q & A: University of Minnesota Medical Residents/Fellows and FICA
Q. Medical residents will have FICA taxes withheld from their paychecks
starting July 1, 2004. Why the change?
A. The IRS issued new, proposed regulations on Feb. 25, 2004, that if
adopted would change the tax status of University of Minnesota medical
residents from students who are exempt from FICA taxes. FICA taxes are
commonly known as Social Security taxes; they are a shared cost for
employees and employers.
Q. What will withholding FICA do to residents' paychecks?
A. Medical residents will see the 7.65 percent tax withheld from their
paychecks starting July 21. We recognize that for individual residents,
this is hard news. Whether medical residents from foreign countries have
FICA withheld will depend on visa status and arrival date in the United
States. For more information on taxation of nonresident aliens, see the
employee self-service Web site (hrss.umn.edu).
Q. Is the IRS telling the University to collect FICA taxes from
residents?
A. The IRS has not demanded that the University collect FICA. But if the
University of Minnesota does not collect FICA now, it could potentially
be liable for a very large FICA bill in the future. The overall annual
burden for University of Minnesota GME FICA taxes, for employees and
employers, is estimated to be $5.6 million.
Q. If residents will be paying FICA, why doesn't the University waive
tuition and fees?
A. As it pursues its goal of maintaining residents' student status, the
University must continue to collect student tuition. Their tuition and
fees cost is added to residents' paychecks, then withdrawn for the
Medical School and the University. Ultimately, these tuition and fees
are paid by hospitals where residents train. Even if the hospitals paid
residents' tuition directly to the U, however, those educational
benefits would be counted as income on residents' W-2 forms. Because our
affiliate hospitals recognize that University of Minnesota students pay
tuition and fees, they have been paying a higher stipend to them. Now,
University residents will be reduced to about the same income as
residents from other residency programs in the Midwest.
Q. What happens to my take-home pay if the University prevails and we
remain students?
A. Take-home pay would revert to the current situation, in which the
resident does not pay FICA, which adds about $3,000 to a typical
resident's annual income. In addition, if the University prevails,
students will be reimbursed for their FICA contributions. Affiliate
hospitals are being asked to pay FICA as well-the University is talking
with them about these unexpected expenses-and if the University is
successful, they also will be reimbursed for FICA.
Q. What happens if the IRS regulations are applied to Minnesota?
A. If the IRS prevails, residents will become University employees, FICA
will continue to be withheld and there will be no refund of FICA paid
during the challenge period. Any retroactive FICA charges, however, will
not be charged to residents. Residents and their families will become
eligible for Social Security benefits. Tuition and fees may no longer be
charged to the residents and the hospitals may not subsidize the
residents for their tuition and fees. The resident take-home income may
approximate the mean for other hospital residents in the Midwest.
Q. No other medical schools' residents have student status; why is
Minnesota different?
A. In the 1960s, when the Social Security system was instituted, the
University decided to treat residents as students-learners-rather than
employees. This was challenged once before by the Social Security
Administration in 1990. It went to court and in 1998, the U.S. Eighth
Circuit Court determined that the school could continue to treat our
residents as students-and under that court ruling, they have been exempt
from FICA.
Q. Is the University going to court again?
A. As of June 2004, the University has contacted the IRS to ascertain
whether the proposed regulations will be applied to its residents and
fellows, despite the earlier court decision. If the final IRS
regulations are issued in substantially the same form, the University
intends to take all legal steps to challenge the IRS's application of
FICA to these stipends. In the meantime, to avoid penalties for
noncompliance, the University is taking several steps, including
withholding FICA from residents' paychecks.
Q. Why is the University challenging the IRS for a clarification?
A. This challenge arises because the University wants to continue to
recognize our residents as the students that they are.
Q. If the IRS applies these new regulations to the U and the U responds
with a legal action, how long could this situation last?
A. It's unclear currently how long a legal action might take, if it
happened.
Q. Why has the University's leadership made this decision?
A. The General Counsel and other University leaders believe they can
protect medical residents' status as students and so maintain their
exemption from the FICA tax. This exemption benefits both residents and
hospital affiliates that train them.
Q. What can residents and fellows do?
A. Residents and fellows may consider contacting their representatives
in the U.S. House and Senate to ask them to support the University's
request for clarification whether the IRS ruling affects the University
of Minnesota. For contact information, see the University's Web site,
http://www1.umn.edu/urelate/fedrel/delegation.html