Excluding Medical Residents from 403(b) Participation?

[Christine Roberts]

Is anyone aware of an IRS ruling or other pronouncement on whether or not a hospital's 403(B) plan may exclude medical residents from participation, as a class of employees?

The residents are W-2 employees, work well in excess of 20 hours per week, and earn well under the HCE threshhold.

[IRC401]

A number of hospitals (at the urging of Final Four accounting firms) are taking the position that medical residents are not employees in order to get FICA refunds. There is a Minnesota decision favoring the taxpayers, and apparently, some sleep at the switch IRS people have been granting refunds. If the residents are not employees they wouldn't be eligible to participate in a 403(B) plan because they would have no includible compensation.

[mbozek]

401: There are two separate issues here: 1. For salary reduction purposes all employees who work more than 20 hrs a week must be given the opportunity to make sal. reduction contributions unless they are students exempt from FICA tax or are eligible to participate in another sal reduction program. The IRS has issued rulings treating residents as employees not students becasue they perform the functions of staff doctors. I dont understand who the taxpayers are in your post- Is it the employer or the residents? There is no reason for employer to exclude residents from a sal reduction plan if the FICA tax is payable by the employer whether or not the employee elects to contribute to the plan. What is the cite to the Minn case? I also disagree that residents would have no includible compensation- at most they would have taxable income under IRC 61 but not wages for fica purposes.

2. Employer contributions must be made to a non discriminatory group under the rules of 401(a)(4) which may exclude residents.

3. I also recollect that an employer cannot get a refund of FICA tax of its contribution unless the employee also requests a refund of FICA tax.

4. Regarding refunds of FICA tax: IRS has granted refunds to us employers claiming that IRC 861 excludes wages paid by domestic employers to us citizens from income even though IRS Officials have stated that such refunds are not permitted.

[Guest Johnny]

The cite to the Minnesota case is Minnesota v. Apfel, 151 F.3d 742 (8Cir. 1998). The Court of Appeals affirmed that medical residents were not students under the Social Security Act.

There were some special circumstances here like a 218 agreeement and the IRS has recently issued guidance in the form of a Chief Counsel Advisory suggesting that it interprets the Minnesota case very narrowly. -- Johnny

Originally posted by mbozek

401: There are two separate issues here: 1. For salary reduction purposes all employees who work more than 20 hrs a week must be given the opportunity to make sal. reduction contributions unless they are students exempt from FICA tax or are eligible to participate in another sal reduction program. The IRS has issued rulings treating residents as employees not students becasue they perform the functions of staff doctors.  I dont understand who the taxpayers are in your post- Is it the employer or the residents? There is no reason for employer to exclude residents from a sal reduction plan if the FICA tax is payable by the employer whether or not the employee elects to contribute to the plan. What is the cite to the Minn case? I also disagree that residents would have no includible compensation- at most they would have taxable income under IRC 61 but not wages for fica purposes.

2. Employer contributions must be made to a non discriminatory group under the rules of 401(a)(4) which may exclude residents.  

3. I also recollect that an employer cannot get a refund of FICA tax of its contribution unless the employee also requests a refund of FICA tax.  

4. Regarding refunds of FICA tax: IRS has granted refunds to us employers claiming that IRC 861 excludes wages paid by  domestic employers to us citizens from income even though IRS Officials have stated that such refunds are not permitted.

[Guest Johnny]

The prior message should say that the court of Appeals affirmed that the medical residents were students under the social security act. Sorry about any confusion. -- Johnny