IRS Addresses Student FICA Exception for Medical Residents

Date: March 25, 2009

Refer Reply To: CC:TEGE:EOEG:ET2 - CONEX-111532-09

The Honorable Mr. David Obey

U.S. House of Representatives

Washington, DC 20515

Dear Mr. Obey: 

I am responding to your January 28, 2009, letter on behalf of your constituent, * * *, whose wife is a * * * graduate of the University of Minnesota medical residency program. * * * asked why the IRS continues to pursue the issue of whether stipends received by medical residents for their services are subject to taxes under the Federal Insurance Contributions Act (FICA).

Services students perform are excepted from FICA taxes [section 3121(b)(10) of the Internal Revenue Code]. The Code defines a student as an individual employed by a school, college, or university at which he or she is enrolled and regularly attends classes. The student FICA exception applies only to services performed in the employ of an organization that has the status of a school, college, or university (SCU); and only if the student who performs the services is enrolled and regularly attends classes at that school, college or university.

 

Our longstanding position is that medical residents are not students within the meaning of section 3121(b)(10); they are full-time employees. Therefore, they are ineligible for the student FICA exception. However, in State of Minnesota v. Apfel, 151 F. 3d 742 (8^th Cir. 1998) the Eighth Circuit held that medical residents the University of Minnesota employed in its residency programs were students as defined by the Social Security Act. Therefore, they did not need to pay FICA taxes on their wages.

 

In 2004, the IRS issued regulations to clarify the student FICA exception. The regulations provide more detailed standards for determining what is a SCU and who is a student within the meaning of section 3121(b)(10) of the Code. These regulations make it clear that a medical resident by virtue of being a full-time employee is ineligible for the student FICA exception. This regulation applies to services performed on or after April 1, 2005.

 

These regulations provide that any stipends * * * wife received for services provided as a medical resident on or after April 1, 2005 are subject to FICA tax. However, in Regents of the University of Minnesota v. United States, 2008 WL 906799 (D.Minn.2008), the district court for Minnesota held that the part of the regulation stating that a full-time employee is ineligible for the student FICA exception is invalid. The United States appealed this decision because the IRS and the Department of Justice believe the regulations are valid, and accordingly stipends the University of Minnesota pays to its medical residents for services performed on or after April 1, 2005 are subject to FICA tax. The Court system has not yet resolved this issue; therefore issuing any refunds of tax is premature.

 

I hope this information is helpful. If you have any questions, please contact me at * * * or * * * at * * *.

Sincerely,

Nancy J. Marks

Division Counsel/Associate Chief
Counsel

(Tax Exempt & Government Entities)

10 lessons you need to know before investing in EMR

1.    Think of EMR as a power tool – it should help to improve patient care and practice efficiency.

2.    Selection & implementation requires a substantial amount of time, planning, and support.

3.    Don’t try to implement if current system is in a state of chaos.

4.    Train, train, train, train, and train again.

5.    Change is hard – very hard.

6.    Any implementation plan should be group based, not vendor based.

7.    Pay close attention to data conversion.

8.    Plan and allow enough time.

9.    Get buy-in from key players.

10. Don’t confuse wants and needs. You don’t know what you don’t know.

IRS COBRA Q and A

The IRS has added 19 new questions and answers explaining the COBRA continuation premium subsidy by employers for severed employees. The questions cover eligibility, form preparation, reporting and documentation, and taxability.

http://www.irs.gov/newsroom/article/0,,id=205364,00.html

 

Turning up the heat on Medicare fraud

According to a statement by Secretary of HHS Catherine Sebelius in a June 24 HHS Press Release, "the Obama Administration is committed to turning up the heat on Medicare fraud..."  As evidence of this commitment, the Press Release announced the indictment of 53 individuals, including physicians and health care executives, accused of various Medicare fraud offenses ranging from conspiracy to defraud the Medicare program, false claims anti-kickback statute violations.  Among other things, the indictments allege that the individuals conspired to submit claims for medically unnecessary services and services not rendered as well as to pay kickbacks to beneficiaries to attest that they received the services.  The Press Release can be viewed here.

Laundry list of merger issues

As predicted, more and more physician practices are exploring the merger option. Many have found a merger is a very viable strategic option for moving a practice in to the future. However, to be successful, a merger must be done right. Here is another laundry list of merger issues to consider if you are ever involved in merger discussions:

·         How will call be distributed

·         Treatment of part time physicians

·         Equalization of benefits

·         Treatment of nonphysician providers

·         Compensation for administrative duties

·         Distribution of ancillary income

·         Treatment of overhead

·         Treatment of owners vs. employed physicians

·         Inclusion of non-productivity incentives

Medicare Scam Alert

CMS has become aware of a scam where perpetrators are sending faxes to physician offices posing as the Medicare carrier or Medicare Administrative Contractor (MAC). The fax instructs physician staff to respond to a questionnaire to provide an account information update within 48 hours in order to prevent a gap in Medicare payments. The fax may have the CMS logo and/or the contractor logo to enhance the appearance of authenticity.

 

Medicare fee-for-service providers, including physicians and non-physician practitioners, should be wary of this type of request. If you receive a request for information in the manner described above, please check with your contractor before submitting any information. Medicare providers should only send information to a Medicare contractor using the address found in the “Downloads” section of the CMS Web site at one of the following links:

 

http://www.cms.hhs.gov/MLNGenInfo/

 

http://www.cms.hhs.gov/MedicareProviderSupEnroll

Dependency Exemption in Divorce

In chief counsel advice, the IRS concludes that for divorce decrees or separation agreements executed before July 3, 2008, a noncustodial parent may claim a dependency exemption without using Form 8332, when (1) the appropriate pages from the divorce decree or separation agreement which unconditionally allows the exemption claim are attached to the return, and (2) when the attached pages constitute a statement substantially similar to requirements of Form 8332. For tax years beginning after July 2, 2008, a custodial parent must release a claim of dependency exemption on Form 8332 or on a separate release document that has as its only purpose the release of a claim to exemption.

Determining cost of service

Use this effective shortcut to determine cost of service:

1. First, using a spreadsheet program, for your most recent fiscal year, list all the procedure codes that you bill along with the associated relative value units (RVUs) from the Center for Medicare and Medicaid Services.
2. Then, multiply each RVU by the volume of each procedure code billed. You can obtain the RVU schedule online from www.cms.gov. This gives you total RVUs for each code. Total that number, and you have the total number of RVUs your practice produces during a fiscal year.
3. Finally, divide that number into your total operational expenses to derive an average cost per RVU.

Ad Frequency: The Key To A Healthy Return On Investment

Achieving the right balance between where and how often to advertise can pay big dividends for practice growth.

Frequency, or the number of times you run an ad, in print radio, or television or any other medium can be used to control expenses while getting patients to respond favorably to your practice.

For example:

• In print advertising smaller ads run with more frequency will give you more exposure for dollars spent, and generate higher reader recognition than larger ads run with less frequency for the same cost.
• If you are new at promoting practice growth through marketing then frequency adds another feature to your campaign. It establishes a “market presence” that helps patients remember your ads rather than the competition. This also gives you a better rate of return on marketing dollars spent.
• When using radio to promote your practice, frequency plays an even greater role than it does in print. In radio you only have about 54 seconds sandwiched between an introduction and an exit line to get your listener’s attention. In this short span of time your ads must work hard to tell your story, impress your listeners, and instruct them on how to contact your office. This makes frequency all the more necessary.

Some physicians cutting fees and offering payment plans during economic downturn

The Washington Post/Kaiser Health News (6/2, Boodman) reports that "doctors are encountering more patients struggling to pay for care," and as a result, some physicians are now "selectively cutting their fees or devising novel payment arrangements." These physicians "say they feel a responsibility to help strapped patients," and "some say assisting patients pays dividends in the form of loyalty, which will benefit them once the economy recovers." Meanwhile, "others have taken a harder line on billing and are sending more overdue accounts to bill collectors" as they face "rising overhead and static reimbursements." But, "whether the downturn will lower physicians' incomes this year remains to be seen." According to "a survey by Sullivan, Cotter, and Associates...doctors' incomes increased an average of four percent last year, despite the souring economy."