The Jan. 11 Supreme Court decision requiring medical residents to pay Social Security taxes probably won't have much immediate impact since most universities and medical schools have been paying the tax while awaiting a decision. The ruling upheld the IRS rule that classified medical residents as full-time employees rather than students.
Beginning in the 1990s, many hospitals, medical schools and residents began filing for the Federal Insurance Contributions Act (FICA ) refunds, claiming that residents are students who are eligible for a student exemption from the tax. The IRS accepted that argument for tax periods before April 1, 2005, when new IRS regulations went into effect.
The new IRS regulations stipulate that any employee who works 40 hours or more per week for a school, college or university is not eligible for the student exemption.
In general, postdocs in other fields who receive a salary from a university must pay FICA taxes, but those who receive a fellowship or stipend may or may not depending on how they are funded, and on individual circumstances, according to Cathee Johnson Phillips, executive director of the National Postdoctoral Association.
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“At Johns Hopkins, we've been paying FICA taxes all along,” said Julia A. McMillan, MD, professor of pediatrics and director of the pediatric residency program at Johns Hopkins University School of Medicine. “I think everyone was hopeful that the Supreme Court would rule differently so those funds could be reimbursed, but it doesn't change what we've been doing up to now.”
James A.D. Otis, MD, director of the Neurology Pain Service, and residency director for neurology at Boston University Medical Center, also doesn't expect the Supreme Court ruling to have much of an impact. He conducted an informal poll of other residency program directors and found that all their residents have been paying payroll taxes.
Of greater concern, he said, are the new rules from the Accreditation Council for Graduate Medical Education (ACGME) regarding work hour restrictions, which will take effect July 1. The new rules, designed to reduce the effects of sleep loss, limit residents to working 80 hours per week, with no more than 24 hours of continuous duty, and with one day in seven free of responsibilities. [For more on the ACGME rules, see the Aug. 19, 2010 Neurology Today story, “ACGME Guidelines: New Rules for Supervising Trainees,” neurotodayonline.com.]
The impact of the work hour rules is going to be greater than this tax issue, especially in neurology where we frequently rely on residents who require closer supervision,T Dr. Otis said. “A lot of places are going to be struggling with how they will cover services, what the call supervision is going to be and so on, especially in smaller programs.”
That said, if the Supreme Court had ruled the other way, hospitals also would have benefited by no longer having to pay the employer's share of Social Security and Medicare taxes, which would have made more money available for resident training, according to Dr. Otis.
“As the infrastructure demands of residency training increase, hospitals are going to find themselves struggling to pay for it,” he said.
Mayo Clinic, which challenged the rule, issued a statement expressing disappointment in the Court's decision, but also acknowledging that because the Clinic and its residents have been paying FICA tax while this case was pending, “they will not see any changes based on this decision.”
However, Ted Olson of Gibson, Dunn & Crutcher, who represented Mayo and the University of Minnesota, released a statement criticizing the ruling. “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,” he said. “The Treasury Department's regulation overlooks the important educational pursuits in which residents are engaged.”
Rafael Llinas, MD, associate professor of neurology at Johns Hopkins Medicine, and associate director of the neurology residency program, agrees with that argument, and believes that residents are primarily students. “Residents can't practice medicine right out of medical school,” he said. “They can't apply for a medical license without an internship. The residency trains them in actual medical practice.”
He also pointed out that residents are given time to do research, which highlights their status as students. “At Johns Hopkins neurosurgery residents do two years of research, and during that time they do very little patient care,” Dr. Llinas said. “If they were employees hospitals wouldn't give time for electives. They would just have to do more work.”
While he expects the money paid to the government will pose some financial hardship for universities and medical schools, in the long term “the institutions will adjust and move on,” he said.
Stephen L. Galetta, MD, professor of neurology and ophthalmology at the University of Pennsylvania School of medicine, and residency director for the department of neurology, does not foresee any long-term impact for Penn from the Supreme Court ruling.
“I don't agree with the interpretation that residents are students,” he said. “They provide direct care to patients. And I think anyone who makes $50,000 a year should contribute. The Social Security system is not flush with cash, so I think contributing is the fairest thing for our society.”
The Association of American Medical Colleges (AAMC), which represents all 132 accredited U.S. medical schools, says that typical resident physician salaries, plus or minus $3,000-4,000, are $46,000 for the first year, $48,000 for the second, $50,000 for the third, $52,000 for the fourth, $54,000 for the fifth, and $56,000 for the sixth. However, given the extremely high debt incurred by medical students, loan payments can consume half of a first year resident's pay, according to the brief.
“So many hospitals and institutions have been refunding the FICA taxes they collected from residents during that period, and requesting refund from the government, which I believe they'll have no trouble collecting,” Dr. McMillan said.
If the Supreme Court ruling had gone the other way, that would not have meant that all residents suddenly would have been exempt from payroll taxes, according to AAMC spokesperson Ivy Baer.
“The IRS would have decided on a case-by-case basis which residents qualify as students and which do not,” she said. “For tax purposes, some residents would have been students and some not. Some institutions, because of how they're structured, thought they would never have benefitted from a positive ruling.”
As a result of this unknown, estimating how much in taxes residents and their institutions would have saved is impossible to calculate. “Some institutions thought they would benefit a lot, but it's very hard to know the exact numbers,” Baer said.