Employment/Tax-Supreme Court Upholds A Treasury Department Rule Under Which A Medical Resident’s Pay Is Not Exempt From FICA Tax

In Mayo Foundation For Medical Education and Research v. United States, 09-837 (2011), the Supreme Court faced the issue of whether a Treasury Department rule (discussed below) is valid. This rule was being applied to determine whether a medical resident is a student whose pay is exempt from FICA tax under section 3121(b)(10) of the Internal Revenue Code (the “Code”). The Eighth Circuit Court of Appeals had determined that the rule is valid.

According to the Court, most doctors who graduate from medical school pursue additional education in a specialty to become board certified to practice in that field. The Court explained that the plaintiff (referred to as “Mayo” for convenience) offers medical residency programs which provide this education. Mayo’s residency programs, which usually last three to five years, train doctors primarily through hands-on experience. Residents often spend between 50 and 80 hours a week caring for patients, typically examining and diagnosing them, prescribing medication, recommending plans of care, and performing certain procedures. Residents are generally supervised in this work by more senior residents and by faculty members known as attending physicians. Mayo residents also take part in a formal and structured educational program. Residents are assigned textbooks and journal articles to read and are expected to attend weekly lectures and other conferences. Residents also take written exams and are evaluated by the attending physicians. However, the bulk of residents’ time is spent caring for patients.

Section 3121(b)(10) exempts from FICA taxation “service performed in the employ 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.” The Court noted that, since 1951, the Treasury Department (the “Department”) has applied this exemption to students who work for their schools “as an incident to and for the purpose of pursuing a course of study” there. On December 21, 2004, the Department adopted a rule under which an employee’s service is “incident” to his studies only when the educational aspect of the relationship between the employer and the employee, as compared to the service aspect of the relationship, is predominant. The rule categorically provides that the services of a full-time employee–as defined by the employer’s policies, but in any event including any employee normally scheduled to work 40 hours or more per week–are not incident to and for the purpose of pursuing a course of study. The rule clarifies that the Department’s analysis is not affected by the fact that the services performed may have an educational, instructional, or training aspect. Treas. Reg. Sec. 31.3121(b)(10)-2(d)(3)(i) and (iii). Also, see Example (4) of Sec. 31.3121(b)(10)-2(e). This rule is referred to as the “full-time employee rule”. But is this rule valid?

The Court stated that the statute does not address the precise question at issue. The Court then held that the Department’s full-time employee rule is valid, affirming the Eighth Circuit’s decision.

The Court did not actually determine whether the full-time employee rule would prevent the Mayo medical residents’ pay from being exempt from FICA taxes under section 3121(b)(10). However, applying that rule to the facts here, it appears that the educational aspect of the relationship between Mayo and its medical residents did not predominate the relationship. Also, the medical residents had a 50 to 80 hour work week. Thus, it seems that the full-time employee rule would prevent the exemption of section 3121(b)(10) from applying, so that the Mayo medical residents’ pay is subject to FICA taxes.