Aca­demic cen­ters score win ...

… but there’s a big catch in their FICA victory

Modern Healthcare - - The Week In Healthcare - Gregg Blesch

Af­ter more than a decade of lit­i­ga­tion and de­lib­er­a­tion, the In­ter­nal Rev­enue Ser­vice re­lented to the po­si­tion of aca­demic med­i­cal cen­ters that their med­i­cal res­i­dents qual­i­fied for a stu­dent ex­emp­tion to the So­cial Se­cu­rity and Medi­care tax—but only un­til 2005.

The con­ces­sion could mean tens of mil­lions of dol­lars for large in­sti­tu­tions, but it only ap­plies to taxes paid be­fore re­vised reg­u­la­tions ef­fec­tive in April 2005 ex­pressly ex­cluded full-time work­ers from the stu­dent ex­emp­tion even if the work is part of an ed­u­ca­tional pro­gram, which aca­demic med­i­cal cen­ters con­tinue to fight.

The IRS last week an­nounced that uni­ver­si­ties, hos­pi­tals and res­i­dents who filed claims for re­funds within the three-year lim­i­ta­tion would be con­tacted within 90 days with more in­for­ma­tion about re­cov­er­ing money paid un­der the Fed­eral In­sur­ance Con­tri­bu­tions Act, or FICA.

“The IRS is ba­si­cally say­ing, ‘You win. Let’s put this be­hind us,’ ” said El­iz­a­beth Mills, se­nior coun­sel with the law firm Proskauer Rose, who works with teach­ing hos­pi­tals.

The door is closed on fil­ing re­fund claims. They must have been filed within three years of pay­ment dur­ing the qual­i­fied pe­riod, which ended when the new reg­u­la­tions be­came ef­fec­tive April 1, 2005. Be­cause the taxes are paid in part with dol­lars with­held from wages, for­mer res­i­dents them­selves qual­ify for re­funds if they or the or­ga­ni­za­tion that paid their stipend filed a claim on their be­half.

The IRS did not re­spond to a re­quest for the num­ber of or­ga­ni­za­tions with pend­ing re­fund claims and the sum that the IRS ex­pects to dis­burse to sat­isfy them. “One of the rea­sons the gov­ern­ment hes­i­tated on this is be­cause there is so much money in­volved,” said Richard Speiz­man, na­tional part­ner-in-charge of KPMG’s ex­empt or­gani- za­tions tax prac­tice, who has fol­lowed the is­sue closely since it started.

The dis­pute goes back to a 1998 opin­ion by the 8th U.S. Cir­cuit Court of Ap­peals. The court sided with the state of Min­nesota’s ar­gu­ment that it shouldn’t have to pay FICA taxes for the Uni­ver­sity of Min­nesota’s med­i­cal res­i­dents, in­spir­ing aca­demic med­i­cal cen­ters across the coun­try to ask for their money back.

The IRS gen­er­ally held the cases in abeyance but in a hand­ful of cases is­sued re­funds, Speiz­man said. The gov­ern­ment later sued those tax­pay­ers to re­claim the re­funds, even­tu­ally lead­ing to ap­pel­late de­ci­sions in sev­eral cir­cuits against the IRS.

Mean­while, the Mayo Clinic and the Uni­ver­sity of Min­nesota sued the IRS to chal­lenge the va­lid­ity of the 2005 reg­u­la­tions. The 8th U.S. Cir­cuit Court of Ap­peals sided with the IRS in an opin­ion de­liv­ered last June. The plain­tiffs have pe­ti­tioned the U.S. Supreme Court to re­view the case.

“Our mem­bers be­lieve what the IRS needs to do is re­turn to a facts-and-cir­cum­stances test to de­ter­mine this,” said Ivy Baer, di­rec­tor and reg­u­la­tory coun­sel for the As­so­ci­a­tion of Amer­i­can Med­i­cal Colleges, which filed a brief urg­ing the court to take the case. “The law doesn’t al­low a reg­u­la­tion that doesn’t al­low any res­i­dent to qual­ify as a stu­dent.”

Speiz­man: Gov­ern­ment hes­i­tated be­cause of all the money in­volved.

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