To ensure funding for the Social Security and Medicare programs, the Federal Insurance Contributions Act (FICA) imposes "“ on both employers and employees "“ a payroll tax on "wages" from "employment."  FICA contains several exemptions from the definition of "employment" (and, thus, the requirement to pay payroll taxes), including one for "service performed in the employ of a school, college, or university" by a "student who is enrolled and regularly attending classes at such school, college, or university."

After Congress enacted the "student exemption" in 1939, the Treasury Department adopted regulations which provided that "student" status would be determined "on the basis of the relationship of such employee with the organization for which the services are performed"; moreover, an employee who performs services "as an incident to and for the purpose of pursuing a course of study" would be a "student" within the meaning of the "student exemption." The regulations remained substantially unchanged for the next several decades but eventually became the focus of litigation regarding whether medical residents "“ who are normally employed by hospitals on a full-time basis but whose employment necessarily involves on-the-job training "“ qualify for the exemption.  On Monday, in Mayo Foundation for Medical Education and Research v. United States, the Court will consider the validity of a Treasury Department regulation providing that full-time employees are not "students" for purposes of the student exemption.

In 1998, in Minnesota v. Apfel, the Eighth Circuit determined, using a "case-by-case" review, that medical residents at the University of Minnesota were "students" for purposes of the "student exemption" and therefore not subject to FICA taxes. That decision triggered an "avalanche" of litigation, with sponsors of residency programs seeking refunds of FICA taxes they had paid on residents' wages.  Thus, the Treasury Department amended its regulation to provide "“ among other things "“ that full-time employees do not qualify for the student exemption, even if their employment has an educational component. Moreover, the regulation specifically mentions medical residents as ineligible for the student exemption.

Petitioners "“ the Mayo Foundation for Medical Education and Research, the Mayo Clinic and the Regents of the University of Minnesota "“ all sponsor programs for medical residents.  They filed this lawsuit challenging the validity of the new regulation and seeking refunds of FICA taxes paid.  The district court agreed with petitioners that the "full-time employee" rule in the Treasury regulation was invalid, reasoning that the rule was not "a permissible and reasonable interpretation" of the statute because it is inconsistent with the unambiguous meaning of the word "student."  In the court's view, "[t]he word "student' is well defined and commonly understood outside the context of the Student Exclusion," and "[a] natural reading of the full text in which the term "student' appears demonstrates that an employee is a "student' so long as the educational aspect of his service predominates over the service aspect of the relationship with his employer."

On appeal, the Eighth Circuit reversed. The court acknowledged that several other courts of appeals had recently held that the student exception was unambiguous and did "not limit the types of services that qualify for the exemption."  But it emphasized that those decisions considered "an entirely different issue" because they did not address the validity of the amended regulations. It then upheld the amended regulation on the ground that the statutory term "student" is ambiguous and that the regulation is a reasonable interpretation of the student exemption.

The Mayo Foundation, Mayo Clinic and University of Minnesota filed a petition for certiorari that was granted certiorari on June 1, 2010.

In their opening brief on the merits, the petitioners focus on the plain meaning of the term "student," which in their view unambiguously encompasses medical residents enrolled and attending classes at petitioners' institutions.  They explain that six different factors "“ including the fact that residents are "effectively ineligible to obtain hospital privileges to practice medicine without completing a residency program" and the requirement that medical residents "engage in patient care solely for educational purposes" "“ support the conclusion that the term "student" encompasses medical residents.  And even if the statute is ambiguous "“ which, petitioners contend, it is not "“ it nonetheless is invalid because the full-time employee regulation "would still be an arbitrary and unreasonable interpretation of the statutory exemption" insofar as it draws the line between full-time employees and those who do not work full-time at forty hours a week. It is more important, petitioners emphasize, to focus on what the person does and why "“ not how long the person does it. Indeed, the fact that someone spends more time engaged in learning through (for example) hands-on training makes it more appropriate to deem that person a student.

In petitioners' view, the regulation is unreasonable for the further reason that it disregards the history of the exemption and conflicts with the underlying purposes of FICA.  Petitioners explain that Congress intended the student exemption to apply beyond part-time work for nominal wages to full-time work by students employed by their schools.

In its brief on the merits, the government first relies on the text of the student exemption, arguing "“ for example "“ that the statute's requirement that a student "regularly" attend classes suggests a limit that the individual may devote to other activities, such as work.  Moreover, the government contends, the statute's use of the term "student" was intended to refer to "someone engaged in formal, academic instruction," which "does not naturally encompass a full-time employee serving an apprenticeship or receiving on-the-job-training." And construing the student exemption narrowly, to exclude full-time employees, is also more consistent with Supreme Court precedent recognizing both that coverage under FICA and the Social Security Act should be construed expansively and, by contrast, exemptions from taxation should be construed narrowly.

Finally, the government argues that the expansive definition of "student" ignores the history of the statute.  Specifically, the government points to Congress's decision to enact and then repeal an exemption from FICA for medical interns. Congress could have extended this exemption to medical residents but declined to do so, reflecting its intent to categorically exclude medical residents from those eligible for the student exemption. The government emphasizes that medical residents spend most of their time "“ from fifty to eighty hours a week "“ treating patients; in exchange, the government observes, they receive "a substantial salary and employee benefits" and "frequently perform complex and sometimes life-saving medical procedures with minimal supervision." The Treasury regulation, it concludes, is merely "a refinement of the Treasury's longstanding view that the student exemption encompasses only those who are predominantly students" "“ which medical residents are not.

Posted in Mayo Foundation v. U.S., Merits Cases

Recommended Citation: Maka Hutson, Argument preview: can FICA impose a social security tax on medical residents?, SCOTUSblog (Nov. 6, 2010, 12:11 PM), http://www.scotusblog.com/2010/11/argument-preview-can-fica-impose-a-social-security-tax-on-medical-residents/