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Taxes

Current Massachusetts Law

Are interns, residents and clinical fellows (residents) at Beth Israel Deaconess Medical Center (BIDMC) required to pay Social Security and Medicare, (FICA) taxes?

• The short answer is Yes.
  
• Massachusetts law currently requires that payments made to residents are subject to income and FICA tax withholding at the time the payments are made. However, BIDMC has been aware of and involved with this issue for at least 10 years and we regularly monitor the on-going legal developments in this area.

Questions and Answers for Discussion

I have heard pieces of information or maybe read an article which indicated that residents might not be required to pay FICA. Now that I understand the current law as it applies to BIDMC, can you please explain to me what this means, how this came about?

What are FICA taxes?

• Pursuant to the Federal Insurance Contributions Act (FICA), the United States government imposes taxes which consist of two components commonly referred to as Social Security and Medicare (FICA) taxes.
  
• FICA taxes are also referred to as payroll taxes.
  
• FICA taxes provide for a federal system of old age, survivors, and disability insurance (OASDI) and hospital insurance (HI).
  
• FICA taxes are NOT the same as federal income taxes, although both are imposed by federal law.
  
• OASDI
  
  • The OASDI component is financed through the Social Security portion of FICA taxes and pays for federal programs that provide benefits for retirees, the disabled, and children of deceased workers. We generally refer to those taxes as Social Security taxes rather than OASDI.
    
  • Social Security taxes are assessed on Social Security wages at a rate of 6.2% paid by the employee and 6.2% matched by the employer and are subject to an annual "wage cap."
    
  • Employees who have FICA wages in excess of that annual cap do not pay Social Security taxes on the FICA wages above the cap
    
  • For 2009 FICA Tax and Social Security Limits are:
    
    • Social Security Wage Limit = $106,800
      
    • Maximum Employee Social Security Contribution = $6,621.60
      
  • For 2008 FICA Tax and Social Security Limits were:
    
    • Social Security Limit = $102,000
      
    • Maximum Social Security Contribution = $6,324.00
      
• HI
  
  • The HI component is financed through the Medicare portion of the FICA taxes and provides Medicare hospital insurance benefits. We generally refer to those taxes as Medicare taxes. The Medicare tax is assessed on Medicare wages at a rate of 1.45% paid by the employee and 1.45% matched by the employer.
    
  • There is NOT an annual "wage cap" on Medicare wages.
    
• FICA wages can and often do differ from federal or state income tax wages.

Do FICA Taxes Apply to Residents?

History - FICA and Residents

• During the 1950s, 1960s and 1970s, many individual residents filed petitions with their local courts requesting a refund of FICA taxes paid claiming they were not "employees" as defined for FICA purposes.
  
• All cases were decided in favor of the government and therefore, until the late 1990s, it was a fairly well settled matter of law, that payments to residents and related to their resident training were subject to FICA tax withholding.

Minnesota v. Apfel

• In 1998, the U.S. Court of Appeals for the Eighth Circuit determined that the state of Minnesota was not liable for FICA taxes on amounts paid to medical residents in the University of Minnesota's graduate medical program.
  
• This was a major departure from earlier decisions on this issue.
  
• That outcome only applies to hospitals located in the Eighth Circuit and those institutions with facts which mimic those of the Minnesota program.
  
• BIDMC is not in the Eighth Circuit.

After Apfel

• The Minnesota v. Apfel case generated significant interest, resulting in hundreds of hospitals filing claims for refunds or adjustments of FICA taxes deposited in connection with stipends paid to their medical residents.

OK, so now I know about the history. What is the underlying theory here?

• The underlying theory is basically that residents are furthering their training and as such should not be subject to FICA taxes on payments made to them relating to such training.
  
• Note: This theory applies to FICA taxes only. It does not impact federal or state income taxes.
  
• Note: This theory applies to payments related to training only. It does not apply to amounts paid for other work such as moonlighting.

What about BIDMC? Are we involved?

• The Apfel case was final in late November 1998. BIDMC was one of the first institutions in the country to file a petition on this issue and the BIDMC efforts date back to the calendar year 1995, the oldest year open under the Statute of Limitations at the time the Apfel decision was rendered.

Does that mean that BIDMC has filed claims related to all calendar years since 1995?

• BIDMC has filed claims related to FICA payments for the calendar years 1995 - 2007, with the exception of the 2006 calendar year. That one filing has been delaying for procedural reasons, but BIDMC intends to make a filing for that year as well.

Does that mean that residents who have trained at BIDMC over these periods should be expecting to receive money?

• We don't know.
  
• Over the past few years, the law related to whether or not those payments should be subject to FICA tax withholding has been challenged by several institutions throughout the country, and BIDMC supports those challenges.
  
• Several of the challenges with the IRS have resulted in the court cases.
  
• There are currently cases pending in several circuits around the country at various stages in the litigation process.
  
• Some of the cases to date appear to be favorable, but none of the court decisions thus far affect BIDMC's obligation under Massachusetts law as stated above.
  
• The majority of the IRS challenges, including those made by BIDMC, currently remain as claims in suspense at the IRS pending the outcome of court cases.

Does the IRS have to respond to our claims within a specific time period?

• No.

What should I tell a resident who asks me about this?

• BIDMC has been aware of and involved with this issue for at least 10 years and we regularly monitor the on-going legal developments in this area.
  
• BIDMC has previously filed FICA claims with the IRS. Again all of these claims currently remain unresolved.
  
• Unfortunately there is no way to know when this matter will be resolved or what the outcome of these legal challenges will be, which is why we regularly monitor the legal activity in this area.
  
• Depending on the outcome of currently pending and/or additional cases, residents may or may not be entitled to a refund of FICA taxes that were withheld from payments made to them.
  
• BIDMC will contact current and former residents when there is additional information.

Who can I have a resident contact if they have further questions?

• Please direct additional questions to:
  Karen L.P. Wolfson
  Director, Taxation
  kwolfson@bidmc.harvard.edu
  617-667-1885