Frequently Asked Questions About Medical Resident FICA Refund Claims
UW Hospital and Clinics Graduate Medical Education (GME) publishes the following FAQ concerning refund of social security and Medicare taxes paid on wages earned for services performed by medical residents from January 1, 2001 through December 31, 2004.
1. What are FICA taxes?
FICA stands for the Federal Insurance Contributions Act. FICA taxes consist of two separate taxes, social security and Medicare taxes that are paid on wages earned for services performed. Employers withhold and pay their employees' share of the FICA taxes and also pay the employer share.
2. Why are FICA refunds being paid to medical residents and their employers?
Under an untested position that medical residents are excepted from FICA tax as students under Internal Revenue Code section 3121(b)(10), some employers (typically hospitals and medical schools) and individual taxpayers (medical residents) began filing FICA refund claims in the 1990's. This exception is referred to as the student exception and may apply to a student at a school, college or university who is also an employee of that school, college or university.
As this position had not been applied to medical residents before and the IRS was not refunding such claims by asserting that medical residents were employees (and not students), there was considerable uncertainty as to whether the student exception would prevail. Lawsuits filed by institutions seeking to enforce FICA refund claims were vigorously fought by the Department of Justice, with mixed results. Some courts declined to treat residents as students and held they were employees subject to FICA, while others held that medical residents in other programs were more like students and not subject to FICA. Over time, more and more residency programs (often with the help of firms such as Deloitte Tax, LLP) began filing protective claims to preserve their ability to claim FICA refunds should this controversial issue be resolved in favor of treating medical residents as students, not employees, and thus triggering the right to refunds of FICA taxes paid.
For those years that an employer filed a protective refund claim, the claim includes two parts; the first part is the employer's FICA tax, and the second part is the employee's FICA tax (for consenting medical residents only). In some cases, individual medical residents filed their own claim for the employee share of the FICA tax. The IRS held the claims in suspense because there was a dispute as to whether the student FICA exception applied. The IRS now has made an administrative determination to accept the position that medical residents are excepted from FICA taxes for tax periods ending before April 1, 2005, when new IRS regulations went into effect.
3. Who is eligible to receive a refund?
Institutions that employed medical residents and individual medical residents are eligible to receive refunds if they timely filed FICA refund claims. Institutions can be covered under FICA refund claims they filed themselves. Individual medical residents can be covered under FICA refund claims they filed themselves or under claims filed by the institutions that employed them. These refund claims are subject to the same requirements that apply to all FICA refund claims including verification by the IRS of the amount of the claim and payment of interest.
4. Did UW Hospital and Clinics file FICA refund claims and, if so, for what years? (And if not, why not?)
In 2004, the University of Wisconsin Hospital and Clinics retained Deloitte Tax, LLP, to assist with the filing of protective claims relating to medical resident FICA. UW Hospital and Clinics filed protective claims starting with calendar year 2001 (earlier years at that time were closed to refund claims due to the expiration of the statute of limitations) and ending with calendar year 2004. These are the only years for which UW Hospital and Clinics will be seeking FICA refunds. You may have been involved in other residency programs - or you may know other individuals involved in other residency programs - which filed protective claims for more years, or which did not file protective claims for as many years or at all. Each program is different and should not be compared to other programs. There was no requirement to file protective claims at any time or to challenge the IRS's interpretation that residents were employees, not students, for purposes of FICA. The simple fact is that over time, an increasing number of programs and residents chose to challenge the IRS position, and those numbers increased as some challenges (but certainly not all) proved successful. The recent decision by the IRS to settle these claims for refunds with those who did file protective claims - rather than to continue with protracted and expensive litigation - came as a surprise both to programs which filed and those which didn't file protective claims.
5. How would this initiative impact my benefits from the Social Security Administration?
Whether an employee's social security benefits (either current or future) will be reduced on account of removing wages from his or her social security earnings record will depend on the employee's personal circumstances. A refund could have a detrimental effect upon disability, survivors, or retirement benefits that you, or your family, are receiving or may seek to receive in the future. If you want information about the effect on your social security benefits, you should contact SSA directly at 1-800-772-1213 (toll free). If you call or visit a Social Security office, please have this letter with you. It will help SSA answer your questions. You might want to review your social security record before and after your refund has been processed. You can use your current Social Security Statement or you can request a copy of your Social Security Statement at the SSA Web site: http://www.ssa.gov/mystatement
6. If I do not consent, will my FICA wages be affected?
At this time, the IRS is indicating that residents who consent and obtain a refund are to receive a W-2c reporting reduced FICA wages. Recent IRS materials have not addressed whether residents who do not consent (and thus receive no refund) are to be similarly treated but imply that such social security earnings may not be impacted for non-consenting residents. Future IRS and/or SSA materials may clarify this issue.
7. Who is Deloitte Tax LLP?
Deloitte Tax LLP is a professional service provider that is assisting UW Hospital and Clinics with the medical resident FICA refund claim process. Much of the official correspondence from UW Hospital and Clinics to you, and from you to UW Hospital and Clinics related to this claim will be handled by and through Deloitte Tax LLP.
8. What must I do in order to be included in UW Hospital and Clinics FICA refund claim for training that I received prior to April 1, 2005?
The consent letter provides detailed instructions on how to participate in UW Hospital and Clinics's refund claim. If you wish to participate please read the materials thoroughly, complete and sign the Consent Form, and return the signed Consent Form as indicated on its face.
9. If I consent, when will I get my money?
Residents who consent to participate in the refund claim should not expect to receive their refund check from UW Hospital and Clinics until several months (or even more than a year) after consenting. This is because there are multiple procedural steps that must be undertaken by UW Hospital and Clinics and the government after the consents are received and before UW Hospital and Clinics is able to remit the refunds to the residents (i.e., filing final refund claims, review and processing by the government, and allocation of interest to individual residents).
10. What is the process that UW Hospital and Clinics must follow in order for me to obtain my refund?
The IRS has instituted a process for all institutions that have pending refund claims to follow. Each claim must proceed through the following steps. It will take several months to complete this process and will be largely dependent upon how long the IRS takes to review the UW Hospital and Clinics refund claims for all such years. Once the IRS approves the MR claim(s), it is expected to take at least four (4) weeks for the IRS to issue such refund checks to UW Hospital and Clinics. Post claim administration work (i.e. allocating interest to the medical residents, issuing individual checks, and preparing Form W-2c) must then commence. Again, the entire process will take several months but we are optimistic that the process can be completed within the next 12 months.
11. Will I receive interest on my refund?
Yes. The IRS will pay statutory interest when refunding these taxes and you will receive your proportional share. Interest in excess of $600 will generally be reported on Form 1099-INT as required by the IRS.
12. Whom should I contact if I have questions regarding this initiative or to update my contact information?
Because each resident's personal tax situation is different, we encourage you to discuss questions about your particular situation with your tax preparer or other personal financial advisor.
For all other questions, please contact Deloitte Tax LLP by e-mail at firstname.lastname@example.org. You may also leave a voice mail message for Deloitte Tax, LLP, at (312) 486-9206. E-mails and voicemails will be answered within five business days.