Social Security: Coverage for Medical Residents (Correspondence,
08/31/2000, GAO/HEHS/GGD-00-184R).

Pursuant to a congressional request, GAO reviewed a court ruling that
exempted certain medical residents from paying Federal Insurance
Contributions Act taxes and Social Security coverage, focusing on: (1)
how the Internal Revenue Service (IRS) and the Social Security
Administration are proceeding since the court decision; and (2) what
decisions IRS has made about refunding taxes for social security paid by
medical residents and their employers and the effect of those decisions
on the Social Security Trust Funds.

GAO noted that: (1) IRS completed assembling its guidelines in April
2000 for how its employees should respond to the refund applications
received since the court decision; (2) any determinations about refunds
had been placed on hold until these guidelines were in place and IRS had
trained its revenue agents to apply the guidelines, which was done in
July 2000; (3) under the IRS guidelines, which clarify existing agency
policy, refund decisions will continue to be made on a case-by-case
basis, by considering a variety of facts; (4) for example, determining
whether a medical resident qualifies for an exception as a student will
depend on such factors as whether the residency program includes
regularly scheduled lectures and classroom time, evaluation by faculty
members based on academic standards, and student benefits such as health
insurance, housing, and discount event tickets; (5) under these
guidelines, it is possible that decisions about exemptions will vary
even among residency programs at the same institution; (6) now that the
guidelines are in place and revenue agents are trained, IRS expects to
resume considering refund claims; (7) however, because each claim will
involve weighing a complex set of factors, IRS has no estimate of when
the first cases will be completed; and (8) in addition, it is impossible
to know at this point how many refunds IRS will make or what effect such
IRS decisions will have on the Social Security Trust Funds.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS/GGD-00-184R
     TITLE:  Social Security: Coverage for Medical Residents
      DATE:  08/31/2000
   SUBJECT:  Social security benefits
	     Tax refunds
	     Social security taxes
	     Students
	     Claims processing
	     Medical education
	     Tax exempt status
IDENTIFIER:  Social Security Trust Fund
	     Old Age Survivors and Disability Insurance Program
	     Medicare Program

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GAO/HEHS/GGD-00-184R

Social Security: Coverage for Medical Residents

United States General Accounting Office Washington, DC 20548

Health, Education, and Human Services Division

B- 284947 August 31, 2000 The Honorable E. Clay Shaw, Jr. Chairman,
Subcommittee on Social Security Committee on Ways and Means House of
Representatives

Subject: Social Security: Coverage for Medical Residents Dear Mr. Chairman:
In 1998 a federal court ruled that the University of Minnesota was not
liable for Social Security contributions for wages paid to certain medical
residents as part of their residency training. The court ruled, in part,
that these medical residents met certain criteria to be considered
“students” and therefore qualified for an exception to paying
Federal Insurance Contributions Act (FICA) taxes and Social Security
coverage. This ruling generated a number of applications for tax refunds to
the Internal Revenue Service (IRS) by medical residents and by medical
institutions that pay the employer's share of Social Security. As of April
7, 2000, medical residents and their employers had submitted 228 claims for
refunds totaling more than $162 million. The Social Security Administration
(SSA) estimates that if all the medical residents in the country were
exempt, the loss to the Social Security Trust Funds over the next decade
could be in the billions of dollars.

You asked us to provide information about (1) how IRS and SSA are proceeding
since the court decision and (2) what decisions IRS has made about refunding
taxes for Social Security paid by medical residents and their employers and
the effect of those decisions on the Social Security Trust Funds. We
interviewed IRS and SSA headquarters officials to obtain information on the
laws, regulations, and policies applicable to medical residents and how IRS
and SSA have been implementing them. Our review was conducted between
February and August 2000 in accordance with generally accepted government
auditing standards.

In brief, IRS, the agency responsible for collecting taxes for Social
Security, completed assembling its guidelines in April 2000 for how its
employees should respond to the refund applications received since the court
decision. Any determinations about refunds had been placed on hold until
these guidelines were in place and IRS had trained its revenue agents to
apply the guidelines, which was done in July 2000. Under the IRS guidelines,
which clarify existing agency policy, refund decisions will continue to be

B- 284947 GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage for Medical
Residents 2 made on a case- by- case basis, by considering a variety of
facts. For example,

determining whether a medical resident qualifies for an exception as a
student will depend on such factors as whether the residency program
includes regularly scheduled lectures and classroom time, evaluation by
faculty members based on academic standards, and student benefits such as
health insurance, housing, and discount event tickets. Under these
guidelines, it is possible that decisions about exemptions will vary even
among residency programs at the same institution. Now that the guidelines
are in place and revenue agents are trained, IRS expects to resume
considering refund claims. However, because each claim will involve weighing
a complex set of factors, IRS has no estimate of when the first cases will
be completed. In addition, it is impossible to know at this point how many
refunds IRS will make or what effect such IRS decisions will have on the
Social Security Trust Funds.

BACKGROUND To become a physician in the United States, an individual must
graduate from an accredited medical school, pass a licensing examination,
and complete 1 to 7 years of graduate medical education in an accredited
medical residency program, usually at a teaching hospital. As a part of
their graduate medical education, these medical residents are involved in
direct patient care, which ranges from taking medical histories and
performing examinations to assisting in surgery. Medical residents are paid
a salary for these services and may receive other benefits such as
vacations, sick leave, and malpractice insurance coverage. In calendar year
1999 the average annual salary paid to medical residents was about $39,000.
During the 1998- 99 academic year, there were about 97,000 medical residents
in the United States. 1 These medical residents participated in
approximately 7,900 residency programs at about 1,500 teaching hospitals,
most of which are not parts of schools. 2

Authorized by title II of the Social Security Act, the Old Age, Survivors,
and Disability Insurance (OASDI) programs, commonly referred to as
“Social Security,” provide financial protection for covered
employees and their families against the loss of earnings due to retirement,
death, or disability. About 96 percent of the U. S. workforce pay Federal
Insurance Contributions Act (FICA) taxes on their wages to fund these Social
Security programs and Medicare. In 2000, the Social Security portion of FICA
taxes is 12.4 percent of a worker's annual wages up to $76,200 and are split
evenly between employee and employer or paid in full by the self- employed.
3 Two federal agencies have key roles related to Social Security and FICA.
SSA maintains individual records on each

1 This included about 67, 000 graduates of U. S. medical schools, about 26,
000 graduates of Canadian and foreign medical schools, and about 3, 600
graduates of osteopathic medical schools. 2 Throughout the report, we focus
specifically on medical residents, except when we use estimates from SSA's
Office of the Actuary. These estimates include dental residents as well. 3
The total FICA tax is 15.3 percent- 12.4 percent is used to fund Social
Security programs, and 2.9 percent funds the hospital insurance portion of
Medicare.

B- 284947 GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage for Medical
Residents 3 worker's reported wages subject to the FICA tax and disburses
benefits based on these

reported wages. IRS collects FICA taxes and issues refunds. No federal law
provides that medical residents are uniformly subject to, or exempt from,
paying the FICA tax. However, federal law contains provisions under which
medical residents could potentially be exempt. For example, school, college,
and university students employed at the school at which they are enrolled
and regularly attending classes can be exempt. Thus medical residents could
be exempt if they are employed by the school, college, or university at
which they are students, enrolled, and regularly attending classes. However,
SSA points to a 1965 change in the Social Security Act that established a
requirement that medical interns pay FICA taxes as an example of a
congressional decision to ensure that interns receive social security
coverage.

Before 1987, SSA had responsibility for collecting payments from state and
local employers, made in lieu of FICA taxes, to the Social Security Trust
Funds to obtain Social Security coverage. These payments were made under
what are known as “section 218” agreements between state and
local governments and SSA. 4 (Refer to encl. 1 for more information on these
agreements.) SSA, in enforcing its section 218 agreements, had consistently
held that medical residents were not students; students were excluded from
Social Security coverage in many of the section 218 agreements. Accordingly,
prior to 1987, even if students were excluded from coverage in a section 218
agreement, medical residents who worked for state and local governments,
including public medical schools, and their employers were required to make
Social Security payments in lieu of FICA taxes. After 1987, state and local
employees covered under section 218 agreements paid FICA taxes to the IRS.

In 1990, in accordance with its policy that medical residents were not
students, SSA attempted to collect unpaid Social Security contributions for
1985 and 1986 for medical residents enrolled in the University of Minnesota,
a state university. The resulting 1998 court decision held that SSA's own
regulations required a case- by- case determination of whether medical
residents at the University of Minnesota were students. The decision, made
by the U. S. Circuit Court of Appeals for the 8th Circuit, affirmed a
district court ruling that the state of Minnesota was not liable for
employer payments in lieu of FICA taxes on amounts paid to medical residents
attending the University of Minnesota in 1985 and 1986 (State of Minnesota
v. Apfel, 151 F. 3d 742 (8th Cir. 1998)). The court found these medical
residents were students within the meaning of the Social Security Act. (See
encl. 2 for an expanded discussion of this case.)

4 When the Social Security Act was enacted in 1935, state and local
governments were exempted from participation. Section 218 of the Social
Security Act, enacted in 1950, allows a state to reach an agreement with SSA
allowing some or all state and local government employees to receive Social
Security coverage. Until 1987, these employees and their employers made
payments in lieu of FICA taxes to SSA. In 1987, these employees became
subject to FICA taxes, which are collected by the IRS. However, states
continue to have section 218 agreements with SSA to specify which state and
local employees participate in Social Security.

B- 284947 GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage for Medical
Residents 4 Following the 1998 court ruling, a number of tax consultants
advised their clients that

medical residents in general might qualify for the FICA student exception
and not have to pay taxes for Social Security. These tax consultants worked
with a number of colleges and universities that filed FICA tax refund claims
with the IRS.

IRS HAS DEVELOPED DETAILED GUIDANCE FOR CASE- BY- CASE DETERMINATIONS OF
CLAIMS

IRS has the primary responsibility for determining FICA liability and
collecting FICA taxes for all medical residents. 5 The agency has
regulations and guidance to be used to determine whether employees qualify
for the student exception, and this guidance indicates that medical
residents do not automatically qualify as students- instead, their status
must be considered on the basis of the particular facts and circumstances of
each case. 6 IRS has not developed data concerning the number or portion of
medical residents that are currently paying FICA taxes. However, because the
court decision generated a number of requests for FICA refunds, IRS recently
developed 31 pages of legal guidance and trained some of its revenue agents
to provide a consistent approach for examining refund claims. The legal
memorandum, dated April 19, 2000, expands on the existing IRS regulations
and provides a roadmap for determining whether the student FICA exception is
applicable for any specific medical residency program. Because the
determination process involves making judgments about a number of detailed
factors, residency programs and individual medical residents will continue
to need case- by- case evaluation.

The process involves several different tests that must be applied to each
program. As figure 1 shows, these tests focus on determining (1) whether the
resident's employer meets certain requirements and (2) whether the resident
meets the requirements to be considered a student under the exception.

5 SSA's responsibility for determining and collecting Social Security
contributions in lieu of FICA ended in 1986 and had applied only to those
individuals employed by state and local governments. 6 See 26 C. F. R.
section 31.3121( b)( 10)- 2 and Revenue Procedure 98- 16, issued January 16,
1998.

B- 284947 GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage for Medical
Residents 5 Figure 1: Overview of the Process for Making Refund Decisions

Source: Based on an IRS legal memorandum of April 19, 2000. Determining the
Common- Law Employer and Applying the Section 218 Test

As figure 1 shows, the first step in the process (see the diamond- shaped
box in the upperleft- hand corner of the figure) involves identifying the
“common- law” employer. Although it is not necessarily the
entity that pays the resident, the common- law employer is the party that
has the right to direct and control the resident. Determining who has
control can itself be very complicated. For example, as the IRS memorandum
notes,

“While the primary purpose of [graduate medical education] programs is
to train medical doctors in a medical specialty, they also provide residents
who perform patient care services.... The fact that the sponsoring
institution evaluates the resident's training progress does not necessarily
mean that it has the right to direct and control the resident's patient care
services.”

If IRS determines that the common- law employer is a state or local
government, and if the state or local government participates in Social
Security through a section 218 agreement that does not explicitly exclude
coverage for students, 7 the exception does

7 While a section 218 agreement permits state and local government employees
to participate in Social Security, the agreements may also exclude certain
groups of employees from coverage, such as students or employees of certain
entities.

B- 284947 GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage for Medical
Residents 6 not apply, and the medical resident is subject to FICA. As of
July 1, 2000, only three

states and Puerto Rico have section 218 agreements that require Social
Security coverage for either all university students (Florida, Vermont, and
Puerto Rico) or some university students (Alabama) employed at public
schools, according to SSA. However, several states elected to exclude
university students during the recent limited window of opportunity to
exclude students from coverage under section 218 agreements. Thus university
students may have been covered in these states during the years involved in
the refund claims. If the common- law employer is not a state or local
government, the process proceeds to the next step- determining whether the
employer meets qualifying criteria.

Determining Whether the Employer Meets Qualifying Criteria

The student exception to FICA is available only if the common- law employer
is a school, college, university, or an organization that is organized and
operated for the benefit of and controlled by the school, college or
university. 8 The IRS memorandum states that a university medical school
clearly qualifies, but a hospital that is a separate legal entity from the
university may not. Even if a hospital is part of a university, it might not
qualify. For example, if the hospital is separately incorporated under state
law, the hospital and university are separate legal entities for the
purposes of applying the employment tax provisions, including the exception.
An excerpt from the IRS guidance shows how claims determinations will
involve case- by- case analysis and how the outcomes might be different from
employer to employer:

“A simple starting point ... is whether the hospital and the
university have different EINs [employer identification numbers used for tax
purposes]. If they have different EINs, they generally should be separate
employers and assertions that they are not should be carefully examined....
Even if wages paid to university employees and medical residents are
reported under the same EIN, the university may be merely acting as a common
paymaster .... Thus, if wages are reported under the same EIN, it must
[also] be determined whether the university hospital is incorporated
separately under state law.”

Determining Whether the Medical Resident Qualifies as a Student Under the
Law

As with questions related to employer status, the questions related to
whether a medical resident qualifies as a student for Social Security
exception purposes are extensive and often complex. The IRS memorandum calls
for examining status on a program- byprogram, year- by- year basis. Table 1
shows examples of the kinds of facts and circumstances that would need to be
considered.

8 These related organizations are described under section 509( a)( 3) of the
Internal Revenue Code.

B- 284947 GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage for Medical
Residents 7 Table 1: Examples of Evidence to Be Gathered and Evaluated for
the Student Status Test

Type of consideration Questions to address

Teaching approach Are there regularly scheduled lectures and classroom time?
Do residents participate in formal “teaching rounds”? If so, is
there a record of the teaching rounds that have taken place?

Evaluation Are residents evaluated by faculty members of the school,
college, or university based on academic standards?

Distribution of time What percentage of time is spent in direct patient
contact versus classroom study or formal teaching rounds?

Eligibility for student benefits Can the resident receive benefits that
students are entitled to, such as student health

insurance, discount event tickets, housing, and library access? Degree or
certificate Will the training program lead to obtaining a degree or
certificate?

IRS Trained Staff Handling FICA Refund Claims

Having developed its memorandum, IRS, with input from SSA, has also trained
its staff on what the memorandum contains and how it should be applied. Over
a 3- day period in July 2000, IRS provided specific training for 55 revenue
agents responsible for handling FICA refund claims. This training also
covered other procedural steps that must be followed before granting a
refund. For example, before IRS will authorize a FICA tax refund, entities
filing the refund claim must submit a statement that the employer has
obtained the employee's consent to receive a refund of the employee portion
of FICA, which the employer is to forward to the employee when it is
received.

DECISIONS ON APPLICATIONS FOR REFUND CLAIMS ARE STILL PENDING

In response to the increase in FICA refund claims after the 1998 court
decision, IRS decided to suspend consideration of these claims until after
it had developed detailed guidance. Now that the guidance is in place and
the revenue agents have received training, IRS expects to resume
consideration of the refund claims. Given the complexity and case- by- case
nature of these determinations, IRS has no estimate of when the first cases
will be completed or of how many of the refund claims will result in refunds
and what the dollar amount will be. Agency officials told us that they
expect to monitor the outcomes of the initial decisions to determine whether
any additional action or clarification is needed.

As Table 2 shows, through April 7, 2000, IRS had received 228 refund claims
for tax years 1995 through 1999. These claims had been submitted by 148
entities such as medical schools or teaching hospitals and by 11
individuals. The refund claims add up to an amount in excess of $162 million
plus accrued interest. However, the actual amount may be considerably more
because 71 of the claims are “protective claims”- claims filed
for a nominal amount before the 3- year statute of limitation expires that
enable the claimant to calculate the refund amount at a later date.

B- 284947 GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage for Medical
Residents 8 Table 2: Number of FICA Refund Claims Filed by Tax Year as of
April 7, 2000

Tax year Claim type Number of refund

claims filed for specific tax year

Number of refund claims filed not specifying tax year (probable tax year

inferred) a Total by year Dollars by year

(in thousands) c

All claims 107 15 122 $82, 593 1995 Protective claims 35 5 40 b All claims
51 4 55 34,205 1996 Protective claims 20 1 21 b All claims 26 2 28 29,545
1997 Protective claims 3 1 4 b All claims 20 1 21 16,236 1998 Protective
claims 4 1 5 b All claims 1 0 1 b 1999 Protective claims 1 0 1 b

All claims 206 22 228 $162,579 Total, all years Protective

claims 63 8 71 b

a For claims without a specified tax year, we assumed that the initial claim
was for tax year 1995 and that additional claims were for subsequent years.
Due to the 3- year statute of limitations, tax year 1995 is the earliest
year for which an entity could have filed a FICA refund claim in response to
the July 1998 State of Minnesota v. Apfel ruling. b Less than $1, 000.

c Totals may not add due to rounding. Source: IRS taxpayer data.

In June 2000, IRS asked its field offices 9 for updated data on the number
of claims received as of April 17, 2000, the last day that entities could
submit FICA refund requests for tax year 1996. While those data are not yet
available, the 122 claims submitted for 1995 exceeded the number of claims
for four following years, as Table 2 shows. Thus, when IRS receives the
updated data, there may be an increase in the number of claims for 1996.
Moreover, IRS may continue to receive claims for 1997 through 1999 until 3
years after the filing date of each tax year. The decisions that IRS makes
on these refund claims could have a significant effect on the Social
Security Trust Funds, because repayments for valid refund claims are
deducted from the amounts IRS pays to the Trust Funds.

IRS decisions on refunds can also have an effect on future collections for
the Social Security Trust Funds, because entities who have been granted
refunds usually will not pay FICA taxes in the future unless the facts and
circumstances have changed. SSA officials prepared an estimate of the effect
on the Social Security Trust Funds if all medical residents and their
employers were exempt from paying FICA taxes. They estimated this amount to
be as much as $5.6 billion from 2000 to 2009. These officials also prepared
a later estimate of the effect on the Trust Funds that reflects a smaller
but

9 IRS national office contacted each of its 33 district offices, 10 service
centers and 6 Tax Exempt/ Government Entities examination areas.

B- 284947 GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage for Medical
Residents 9 growing number of medical residents receiving exemptions from
coverage from IRS.

Under this scenario, the Trust Funds would lose approximately $3.9 billion
from 2001 to 2010. 10 This would, according to SSA, affect the long- range
(75- year) solvency of the Trust Funds by 0.01 percent of taxable payroll.

SSA officials told us that the agency believes its long- standing policy
that residents do not qualify as students leads to equal treatment under the
law for all individuals in residency programs while making decisions on a
case- by- case basis raises a question of fairness. For example, if medical
residents at some institutions not affiliated with a school, college or
university, could not meet the statutory test of being “enrolled and
regularly attending classes” at a “school, college, or
university” then they have no chance to qualify as students like
medical residents at other hospitals do. SSA stated that, consistent with
its policy on acquiescence rulings, it plans to take steps to restore
national uniformity. The agency is exploring whether to seek legislation
amending the Social Security Act to clarify that medical residents are
covered for Social Security purposes.

SSA officials cautioned us that treating medical residents as students could
have other potential consequences for the medical residents, such as not
earning credits toward retirement, survivor, and disability benefits. SSA
estimates that 270,000 residents would lose Social Security coverage over 10
years if this were to occur. SSA officials also said that because many
residents are married and have children and they work as residents for many
years, their loss of coverage could have a very significant effect on their
potential disability benefits or their family's survivor benefits. Thus, a
resident who became disabled might not be eligible for Social Security
disability benefits, and the family of a deceased resident might not be
eligible for survivor benefits, unless previous work history was sufficient
to qualify the resident or the resident's family for such benefits. It is
unlikely, however, that treating medical residents as students would have a
significant effect on their retirement benefits. Even if they do not begin
paying into Social Security until later in life, after their formal
schooling and residency end, their relatively high salaries and the method
used to calculate retirement benefits would likely result in their receiving
only marginally lower Social Security benefits than they would receive if
they had begun paying earlier.

AGENCY COMMENTS IRS and SSA both provided comments on the draft report. (See
enclosures 3 and 4.) IRS agreed with the report's discussion of the
applicable law and the agency's actions to administer it. SSA, in its
comments, reiterated its concern that treating medical residents as students
would (1) adversely affect medical residents because they would lose Social
Security earnings credits and the benefits derived from them, and (2) result
in a loss of

10 Under this estimate, SSA assumes the percentage of medical and dental
residents not covered by FICA will grow from about 19 percent in 1998 to
about 71 percent in 2010 because more and more medical programs will be
designed to meet the guidelines set forth by the ruling of the United States
Court of Appeals for the Eighth Circuit.

B- 284947 GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage for Medical
Residents 10 revenues to the Social Security Trust Funds. SSA stated that
the loss of revenues would

have a small effect on the long- range solvency of the OASDI program. SSA
also made technical comments on the report, which we incorporated where
appropriate.

---- We will make copies of this letter available to those who are
interested on request. If you or your staff have any questions, please call
me or Kay Brown, Assistant Director, at (202) 512- 7215. Other staff who
contributed to this letter include Ralph Block, George Bogart, Robert McKay,
Chuck Novak, Chuck Shervey, and Elwood White.

Sincerely yours, Barbara D. Bovbjerg Associate Director, Education,

Workforce, and Income Security Issues Enclosures

ENCLOSURE I ENCLOSURE I GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage
for Medical Residents 11 SECTION 218 AGREEMENTS

When the Social Security Act was enacted in 1935, service performed in the
employ of a state or local government was excluded from the definition of
“employment” for purposes of assessing the employee and employer
taxes. However, the act has been amended over time to permit Social Security
coverage for these public employees. 11

In 1950, section 218 of the Social Security Act was enacted, allowing a
state to enter into an agreement with SSA to extend Social Security coverage
to its state and local government employees. The law required such
agreements (referred to as “section 218 agreements”) to provide
that states pay to the Treasury amounts equivalent to the sum of the
employee and employer taxes that would be imposed if the services covered by
the agreement constituted employment as defined in FICA. Through such
agreements, certain state and local government employees made contributions
to Social Security even though they were not actually subject to FICA taxes.

This situation changed in 1987 when the Omnibus Budget Reconciliation Act of
1986 amended the FICA definition of “employment” to include
service performed under the employ of a state or political subdivision
pursuant to a section 218 agreement. Consequently, state and local
government employees participating in Social Security through section 218
agreements are subject to FICA taxes. Accordingly, responsibility for FICA
collection based on section 218 agreements was transferred from SSA to IRS.
12

Section 218 agreements may also have special provisions related to state or
local government employees who are students. A state may include within a
section 218 agreement a provision excluding students who are employed at
state or local public schools from Social Security coverage. However, in
order to be exempt from FICA when a section 218 agreement includes such an
exclusion, individuals, including medical residents, would have to meet the
criteria for the FICA student exception described previously, just as
students in private schools must do. Without such an express exclusion in
the section 218 agreements, these student employees in a state with a
section 218 agreement will participate in Social Security and be subject to
FICA taxes even when their counterparts who are working for private
employers and qualify for the student exception cited above are not.

In 1998 the Congress passed a law to allow states that had not originally
excluded students employed at state or local public schools from Social
Security coverage in their section 218 agreements to do so. 13 States had to
act to exclude these students during the January 1 to March 31, 1999,
period, with the exclusion effective July 1, 2000. According to SSA
officials, all states that had extended coverage to these students took full

11 Some states have chosen to maintain their own retirement systems and not
have their employees participate in Social Security. 12 However, in the
absence of an applicable section 218 agreement, if employees of state and
local

governments are not members of a retirement system, they are provided Social
Security coverage. 13 This change was included in the Omnibus Consolidated
and Emergency Supplemental Appropriations Act of

1999.

ENCLOSURE I ENCLOSURE I GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage
for Medical Residents 12 advantage of this opportunity and excluded
university students except Alabama, Florida,

and Vermont, and also Puerto Rico. As a result, since July 1, 2000, only
university students employed at state or local public schools in Florida,
Vermont, and Puerto Rico and some of the university students so employed in
Alabama have been required to pay FICA taxes as a result of a section 218
agreement.

ENCLOSURE II ENCLOSURE II GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage
for Medical Residents 13 STATE OF MINNESOTA V. APFEL

In State of Minnesota v. Apfel 14 , the U. S. Circuit Court of Appeals for
the 8th Circuit considered the state's liability for unpaid Social Security
contributions for medical residents enrolled in the state university's
graduate medical education program. Because the years of employment at issue
were 1985 and 1986, preceding the transfer of collection responsibility and
the responsibility for determining coverage liability for employees covered
by section 218 agreements to IRS, this case involved SSA's administration of
the program. The court considered whether medical residents working for the
university were “employees” under Minnesota's section 218
agreement in effect at that time and, if so, whether they were exempted by
the student exclusion included in that agreement.

The court concluded that the residents did not meet the definition of
employees under the section 218 agreement and thus should not have to pay
FICA taxes; however, the court also went on to consider whether they met the
criteria for the student exclusion. The court applied SSA regulations to
determine the student exclusion, focusing on the facts of the case:
particularly, the relationship between the residents and the university.
That is, if the residents' “main purpose is pursuing a course of study
rather than earning a livelihood,” then they are considered students
not subject to Social Security contributions. The court found persuasive the
facts that the residents were enrolled in the university, paid tuition, and
were registered for approximately 15 credit hours per semester. The court
concluded that the primary purpose for their participation in the program
was to pursue a course of study rather than to earn a livelihood. Therefore,
the medical residents qualified for the student exception, and Social
Security contributions were not required on their behalf.

As a result of the court decision, SSA issued an acquiescence ruling 15 on
October 30, 1998, that applies to medical residents and their employers in
the court's jurisdiction. 16 In the ruling, SSA agrees to apply section 218
agreement student exclusions to medical residents within the 8thCircuit
Court's jurisdiction by making a case- by- case examination of the
relationship between medical residents and their employer school, college,
or university.

14 151 F. 3d 742 (8 th Cir. 1998) 15 Acquiescence rulings explain how SSA
will apply a holding by a U. S. Court of Appeals that is at

variance with SSA's national policies for adjudicating claims. As the court
required, SSA will evaluate other claims in the jurisdiction of the 8th
Circuit Court on a case- by- case basis. 16 The 8th Circuit includes
Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South

Dakota.

ENCLOSURE III ENCLOSURE III GAO/ HEHS/ GGD- 00- 184R Social Security:
Coverage for Medical Residents 14

ENCLOSURE IV ENCLOSURE IV GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage
for Medical Residents 15

ENCLOSURE IV ENCLOSURE IV GAO/ HEHS/ GGD- 00- 184R Social Security: Coverage
for Medical Residents 16 (207091)
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