Residents must pay Social Security taxes, top court rules

The U.S. Supreme Court has upheld an Internal Revenue Service requirement that medical residents pay Social Security taxes, resolving an issue that's been debated in the courts for decades.

The Jan. 11 decision maintains that residents are considered employees under the tax code rather than students, as argued by opponents to the IRS rule.

The court opinion is in response to a suit against the federal government by the Mayo Foundation for Medical Education and Research and the University of Minnesota.

The outcome wasn't what many in medical education were hoping for, but it puts to rest a long-standing question, said Perry A. Pugno, MD, MPH, director of medical education for the American Academy of Family Physicians.

"Everyone who has been involved in this is going to be relieved that this more than 30-year question is resolved and resolved pretty definitively," he said.

Students or employees?

Opponents of the federal rule are disappointed with the ruling, which excludes residents from a student exemption of the Federal Insurance Contributions Act, said Ted Olson of the law firm Gibson, Dunn & Crutcher, who represented Mayo and the University of Minnesota.

Those opponents argued that the IRS did not take into account that residency is an essential part of training for any physician and that doctors cannot begin their professional careers without such training. The money paid in federal taxes would be better used to support physician training programs, they said.

"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," Olson said in a statement. "The Treasury Dept.'s regulation overlooks the important educational pursuits in which residents are engaged."

The Supreme Court, however, sided with the Treasury Dept.'s conclusion that residents are employees as doctors "who work long hours, serve as highly skilled professionals and typically share some or all of the terms of employment of career employees."

The Treasury Dept. changed its regulations in 2004, barring residents who work at least 40 hours a week from the student exemption to clarify confusion stemming from conflicting court decisions.

At this article's deadline, the IRS and the Treasury Dept. had not responded to interview requests.

The Supreme Court decision isn't expected to affect residency programs greatly, because most residents and institutions already were paying the taxes, said Ivy S. Baer, director and regulatory counsel of health care affairs for the Assn. of American Medical Colleges.

Most people would be hesitant not to pay taxes on the chance that the court would rule in their favor, Dr. Pugno said. "I don't think that many people were aware of the option, and I think a smaller proportion took the risk," he said.

The AAMC said it believes strongly that residents should be considered students under the tax code but that it's no surprise the court sided with the Treasury Dept., because the question hadn't been addressed specifically by Congress, Baer said. The court generally gives deference to federal agencies as the experts, she added.

"We do not doubt that Mayo's residents are engaged in a valuable educational pursuit or that they are students of their craft," the high court said. "The question whether they are students for purposes of [tax code], however, is a different matter."

Given the economic climate, Baer said she doesn't see the issue going back before Congress anytime soon.