Med residents are taxable employees, Supreme Court rules

Got this today from the Associated Press. University of Minnesota’s response follows. (Note: Residents won’t be paying any more than they already have. See last paragraph in U’s response.)

The Supreme Court ruled Tuesday that medical residents should be considered employees when it comes to collecting Social Security taxes.

The high court said that the IRS did not have to refund tax money collected by the Mayo Foundation of Rochester, Minn., and the University of Minnesota Medical residents, doctors still in training, routinely work in hospitals and pay income taxes. But Mayo officials argued that residents fall under a Social Security tax exemption for student employees whose work is part of their education.

The Treasury Department took away that exemption in 2004 for medical students who work more than 40 hours per week. The Obama administration said that Social Security taxes for medical residents can be as much as $700 million a year.

Mayo Clinic officials wanted the court to overturn a federal appeals court ruling and restore the student exemption for medical residents. It also wanted a refund of the money it had withheld and paid to the IRS on its residents’ stipends during the second quarter of 2005.

In arguments before the Supreme Court, Mayo’s lawyer, former solicitor general Theodore Olson, argued that the IRS’ decision that anyone who works over 40 hours a week at a hospital can no longer be classified as a student was arbitrary and capricious.

But the high court ruled unanimously that the Treasury Department had the right to take away the exemption.

“The department certainly did not act irrationally in concluding that these doctors – ‘who work long hours, serve as high 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 and benefit from the Social

Security system,” said Chief Justice John Roberts, who wrote the opinion for the court.

Justice Elena Kagan did not take part in the case because she signed the government’s brief defending the IRS’ position.

The U’s response:

The University of Minnesota’s general counsel, Mark Rotenberg, expressed disappointment in today’s U.S. Supreme Court decision regarding FICA taxation of medical residents (Mayo et al. vs. United States), an issue that has been litigated since the 1990’s. At issue is whether medical residents are considered students for purposes of paying FICA taxes.

“The university is disappointed in the outcome of this case, in which we sought to protect our medical residents’ stipends from FICA taxation,” said Rotenberg. “Although the Court recognized that medical residents are engaged in valuable educational pursuits, the Justices decided to defer to the Internal Revenue Service’s rigid rule that residents cannot possibly qualify as students under the FICA law if they work 40 hours or more per week in their residency program.”

Theodore B. Olson, counsel for the university and the Mayo Clinic, added, “We are disappointed that the Supreme Court decided to uphold the Treasury Department’s exclusion of medical residents from the scope of the Student Exemption enacted by Congress. As the Court itself acknowledged, medical residents are engaged in a formal and structured educational program that is an indispensable component of their medical training. The Treasury Department’s regulation overlooks the important educational pursuits in which residents are engaged.”

Because the university and its medical residents have been paying FICA taxes since 2005, medical residents will see no impact on their paychecks because of the decision. Had the university prevailed, however, university officials estimate that the institution and its medical residents could have received over $24 million in refunded FICA taxes since 2005.

  • Hmmm, does this mean they can unionize?

    • Anonymous

      Are any residents unionized in the U.S.? That would seem odd considering the profession, but faculty and journalists (both white-collar professions) are.

      • I do not know, but when I was a graduate student at UC Berkeley and part of a graduate student unionization effort, one of the issues was whether or not the NLRB recognized us as employees or as “apprentices.” We claimed that since we paid taxes we were employees, while the UC system tried to claim that our work was part of an apprenticeship. It took some years, but we won our case. I vaguely recall that this was an issue for medical students/residents at the time as well. This would have been in the mid-eighties.

        • Anonymous

          Looks like there is: the CIR (http://www.cirseiu.org). And interestingly enough, the NLRB decision allowing them to unionize was based on the same idea as the one in the yesterday’s Supreme Court ruling: that they’re employees — not students. (http://www.acpinternist.org/archives/2000/03/newruling.htm)

          • Yes, I poked around and found out about that decision in 2000 that recognized the right to collective bargaining. One of the issues then was that residents were working 120 hours/week. Now I think there is a cap of 80, at least in some places, in part due to pressure from collective bargaining. Let’s face it: without unions, we would not have things like weekends and minimum wage. The illusion of “collegiality” among professionals means that they/we are often unwilling to work together to negotiate better working conditions or a greater say in governance of the institutions that employ us.

  • Anonymous

    Rotenberg, as usual, is being less than candid with his statements:

    “The university is disappointed in the outcome of this case, in which we sought to protect our medical residents’ stipends from FICA taxation,”

    As a former resident put it: “Make no mistake about this…this decision is not about hurting the residents…Basically, the U of M and most academic medical centers have been screwing residents and fellows out of their retirement benefits in order to save money.”

    In rough terms, the FICA paid by residents is some figure like 7.5% and the university has to match it at about the same level. Eventually the residents – or their survivors – will get some or all of it back, INCLUDING the university’s contributions.

    Simply put this is about the university trying to save money by not contributing to the resident’s retirement fund. It would be nice if for ONCE Mr. Rotenberg could be honest about his motivation in this and not pretend that he is trying to save residents from FICA tax. Earlier he made an even more ridiculous claim:

    “It’s a lot of money every year out of our budget that we’d be able to either put into the pockets of the residents themselves or save,” Rotenberg said.

    Really Mark, talk about chutzpah! The present system already puts “your” money in the resident’s pocket. Actually, you want to take it out.

    How would you feel if you started a job and the boss told you: “Psstt, I”ve got a deal for you. We’ll forget all about FICA – that way you won’t have to pay and I won’t have to pay. I’m tryin to save youse money!”

    • Thanks for the background. When I was a grad student, we unionized because we were paid a stipend, supposedly as a “fellowship” but then we also had to pay taxes on it and every time fees went up we effectively got a pay cut. Also no health care benefits and our paychecks came late. The U of MN does much better by its grad student employees in that they receive a stipend plus health care benefits and tuition waiver, but that makes them much more expenseive to employ than non-tenure track instructors. Hence the move to shrink graduate programs and the huge increase in the ratio of tenure-track to non-t-t instruction. The situation for medical employees is different, but related.