Medical College of Wisconsin Affiliated Hospitals, Inc.
FICA Refund Updates
FICA Refunds 1997- 2005 (UPDATED 3/8/2013)
3/8/13: We expect the majority of the employee FICA refund checks to be mailed to our former housestaff within the next two weeks. A small number of our former housestaff who have been specifically contacted about being potentially subject to statutory tax withholding, will have their checks processed with a slight delay. We expect most of those checks to be mailed by the end of March 2013. As of 3/8/2013, we have not received the FICA refund check from the IRS for the October - December 1997 period.
The MCWAH FICA Refund Claim was submitted to the IRS on December 21, 2010. We received consent forms from approximately 1,750 former housestaff who have been included in the refund claim. The claim covers these housestaff who were employed by MCWAH for the period January 1, 1997 to December 31, 2003 and for the first quarter of 2005.
As of this date, MCWAH has received most of the employee portion refunds and have placed them in a non-interest bearing account. We are still awaiting one refund check for approximately $800,000 from the IRS for the employee portion of our FICA refund claim. The outstanding check relates to the period October-December 1997. The IRS has not provided a satisfactory explanation for the delay and our attorney continues to pursue this matter.
In December 2012, the MCWAH Board gave approval to start the process for dispersing the refunds received as of January 2013. We have begun working with our accounting firm to aggregate the amounts due each former housestaff.
One check will be issued to each individual and will include the refunded FICA taxes as well as the statutory interest that the IRS is required to pay on refunds. The check will also include an IRS Form 1099-INT for the interest portion of the check and a W2-C form for each year you were involved in the refund claim. You should discuss these forms with your tax advisor when the check arrives.
We expect to have all of these checks to the former housestaff by the end of February 2013.
Those who were employed by MCWAH for the October-December 1997 period will receive a second FICA refund check for that period as soon as feasible once that refund is received from the IRS and processed.
The FICA refund matter is one that we have been pursuing for more than 15 years. We are very pleased that it is close to being resolved. If you have changed your mailing address since submitting your FICA refund consent form, please send your updated address to email@example.com.
On March 2, 2010, the IRS made an administrative determination to accept the position that housestaff are exempt from FICA taxes based on the student exception for tax periods ending before April 1, 2005. On April 1, 2005, new regulations regarding the student FICA exception became effective. These regulations state that an employee who works 40 hours or more for a school, college or university is not eligible for the student exception. These regulations specifically exclude medical residents from the student exception.
On January 11, 2011, the United States Supreme Court unanimously upheld a Treasury Department regulation that treats wages paid to medical residents as subject to FICA taxes. The decision in Mayo Foundation for Medical Education and Research v. United States, Sup. Ct. Dkt. No. 09-837, will likely mark the end of many years of litigation over the proper FICA tax treatment of medical residents. Unless a change in the law is enacted by Congress, housestaff will be subject to FICA taxes on their wages earned in a residency or fellowship program for tax periods ending on or after April 1, 2005.
The issue of housestaff exemption from social security tax was first successfully litigated in the late 1990’s.
Response Regarding Questions Concerning 2004
MCWAH did not successfully file a protective claim for 2004, and it is unlikely that anyone will be able to file an initial refund claim for 2004 at this time because it is beyond the statute of limitations.
The FICA refund issue is one that MCWAH has followed for more than a dozen years. Protective claims were filed for the years 1997 through 2003. After reviewing several articles (see example below), MCWAH decided not to pursue additional protective claims. This issue came back to life in September of 2008 when a key taxpayer victory was won by the University of Chicago.
In December 2008, MCWAH did file protective claims for the years 2004 through 2007, but the statute of limitations for the protective 2004 claim had ended on April 15, 2008.
IRS sues hospitals to get FICA refunds back
Medical residents are considered employees, not students.
By Myrle Croasdale, AMNews staff. Aug. 22/29, 2005.
The Internal Revenue Service appears to be going after teaching hospitals to reclaim social security tax refunds it made in recent years. If the courts find in favor of the IRS, the impact on the individual hospitals involved could be significant, legal experts said.
The University Hospital in Cincinnati is facing the possibility of having to repay, with interest, $5 million in Federal Insurance Contributions Act tax refunds it was awarded in 2003. With an annual budget of $450 million, that won't be easy, said Gail Myers, vice president of public relations and marketing for Health Alliance, which represents five hospitals, including University Hospital.
"Paying back the tax refund would have a significant impact," Myers said. "We're a not-for-profit, and money is put straight back into teaching and technology."
It's unclear how many schools or hospitals may be sued, but the IRS confirmed that it has filed complaints against three hospitals so far. The amounts it is seeking range from $2.5 million to $16 million.
The debate over whether medical residents are employees or students has gone on for at least 40 years. The Social Security Act was signed into law in 1935, and by 1939, students, medical interns and self-employed physicians were exempt from the tax. Residents were not. In 1964, when this distinction between interns and residents was challenged, Congress responded by expanding Social Security to include interns and self-employed physicians.
Then came Minnesota v. Apfel in 1998. Because employees of the state of Minnesota were exempt from paying Social Security taxes, the University of Minnesota had not been paying FICA for its medical residents. When the Social Security Administration decided that the University of Minnesota's medical residents should be taxed, the university sued and won in the 8th U.S. Circuit Court of Appeals.
"After Minnesota, accounting firms invited institutions to jump on the bandwagon," said Mark Levy, executive director of the Committee for Interns and Residents. "We got calls from all over."
In 2003, in United States v. Mayo Foundation, the foundation also won tax relief when the federal district court decided its residents qualified for the student exemption. According to court documents, what followed was a flood of 7,000 claims made to the IRS, seeking refunds of more than $1.135 billion in Social Security taxes.
The Dept. of Justice declined to comment on how many institutions received FICA refunds, but the consensus within the industry is that the number is probably in the hundreds, not thousands.
The IRS ended the debate when it issued a regulation in December 2004, clearly stating that residents are employees and do not qualify for the student exemption from FICA taxation.
While the regulation defined residents as employees from April 1, 2005 on, the debate over money rebated earlier could continue to play out.
In January, the IRS won a complaint against Mount Sinai Medical Center of Florida for $2.5 million in FICA taxes previously refunded.
Federal Court Judge Alan S. Gold, in his summary judgment, ruled that the IRS regulation was not retroactive but that Congress never intended to exempt residents from Social Security taxes. He said the Minnesota and Mayo decisions were wrong in giving residents the student exemption.
Arnie Jaffee, vice president and general counsel for Mount Sinai Medical Center, said forcing teaching hospitals to pay back these refunds will ultimately hurt patient care.
"Teaching hospitals don't put their assets where there's the largest return, but where there's the greatest community need," Jaffee said. "What it means is we'll lose money that we'd put into heart monitors, nursing ratios, things that truly save peoples' lives. It's not money that goes to shareholders. When a significant amount of money like this gets pulled out of a hospital, people die."
Jaffee said hospitals like Mount Sinai applied for the refund because they believed they were on firm ground based on settled law following the rulings in Minnesota and Mayo.
"Our summary judgment is out of line with the law," he said. "We believe the opinion is fatally flawed and should be overturned on appeal," which Mount Sinai plans to file.
Since the Florida decision in January, the IRS has filed at least two other complaints regarding FICA refunds. In April, the IRS filed against the Detroit Medical Center for nearly $16 million, and in June the IRS filed against University Hospital in Cincinnati seeking $5 million.