Teaching Hospitals Prep for FICA Rebates

Another deadline has passed in the long-drawn efforts of the nation's academic medical centers and teaching hospitals to recover more than $2 billion in social security taxes that the hospitals and their medical residents paid under protest to the federal government for more than a decade.

Teaching hospitals filing for a Federal Insurance Contributions Act (FICA) are required by The Internal Revenue Service requires refund to have submitted by July 9 a power of attorney Form 28-48, assigning representation for the refund process. The IRS will send back a notification letter that sets in motion a 120-day organizational period for hospitals to document their FICA rebate claims.

Teaching hospitals are trying to regain FICA taxes that they and residents paid from 1995 until April 1, 2005. For years, the IRS had treated medical residents as employees, requiring them and their teaching hospitals to pay FICA taxes on their earnings, even though no specific regulation was on the books addressing the special status of residents. The teaching hospitals claim that medical residents are students in a learning environment, and are therefore exempt from paying FICA taxes.

In April, 2005, after years of lawsuits and complaints, the IRS imposed specific FICA requirement for medical residents, but said that teaching hospitals and residents that had paid the FICA taxes under formal protest in a "pre-regulation" period between 1995 and the first quarter of 2005 would be eligible for a rebate, plus interest.

By some estimates, teaching hospitals and medical residents could each be due rebates of between $3,000 and $3,500 per resident, per year, for the 10-year period. Several estimates peg the total value of the rebates as more than $2 billion.

The legality of the April 1, 2005 FICA requirement for residents is being challenged in a separate suit that will be heard by the U.S. Supreme Court this fall.

Robin Greenhouse, a partner and tax specialist with the law firm of McDermott Will & Emery LLP, which has litigated on behalf of several teaching hospitals, said the FICA refund process will require extensive documentation, and that any teaching hospital that has not begun the process should do so now.

For example, teaching hospitals must show the IRS a consent form signed by every medical resident dating back to 1995, which Greenhouse said could prove to be particularly time consuming.

"It requires identifying last-known addresses, sending out consent forms, responding to inquiries, tabulating the information you get, that will all go to the IRS," Greenhouse says. "There is a lot of work the academic medical centers are doing either in-house or with outside consultants. These are residents who may no longer be affiliated with these academic medical centers. So identifying their last known addresses takes work." Greenhouse says teaching hospitals need to at least make a "reasonable effort" to contact former residents, using first-class mail, and giving residents 45 days to respond.

"That is an area where hospitals need to be careful. The IRS will look at the reasonableness of their efforts," Greenhouse says. "They don't have to be perfect but they have to have acted reasonably."

Teaching hospitals must also understand that moonlighting by medical residents is not exempt from FICA taxes that Greenhouse says needs to be "scrubbed out" of refund claims. "So, academic medical centers need to review their records and identify potential amounts for moonlighting. The IRS will be looking for that," she says. When the claim is approved, teaching hospitals will get a lump-sum check from the IRS that will include an aggregate amount for the medical students.

"The medical center is going to have to send out individual checks to the former residents and they are going to have to include the appropriate amount of interest," Greenhouse says, adding that the interest rate the IRS pays individuals on claims refunds is higher than the rate it pays corporations.

The teaching hospitals also must submit to the IRS a Form 1099, indicating that taxable interest was paid on the reimbursement, and a Form W-2c, which will be sent to the Social Security Administration to reflect that FICA taxes were not deducted on the medical residents' pay.