College student exclusion being challengeed by IRS auditor due to summer employment

[Eve Sav]

IRS auditor is telling our client, a large college, that the students who work in the summer and continue to be excluded from 403(b) Plan while wages are not exempt form FICA must be offered participation in the Plan for elective deferrals, and is requiring make up missed 403(b) deferrals. This impacts more than the year under audit (2014). All students were enrolled full time in spring and fall semesters, and majority have wages that will result in make-up contributions of <$75. Fear if we agree to correction, they will go back to 2009. They will correct practice prospectively (in summer 2017).

Has anyone else had this issue raised? We have had DOL and IRS audits of other colleges where this issue was never mentioned.

[Belgarath]

Nope. But you might take a look at Revenue Procedure 2005-11, which provides a "safe harbor" which, if the requirements are met, will deem the student-employees to be exempt from FICA without moving on to the "facts and circumstances" in the regulations. While the auditor may be absolutely correct in this case, they frequently don't know their own guidance.

Good luck!

Caveat - I haven't done any research to see if 2005-11 has recently been invalidated or superceded, so take the above with a large dose of caution.

[Eve Sav]

I have read 2005-11, but the issue is summer break, which is more than 5 weeks. IRS is taking position that if they are not taking classes while working over the summer they are not exempt from FICA withholding, and therefore no longer meet the definition of student for purposes of universal availability. The Colleges in question (both being audited by same IRS person) ARE withholding FICA tax pursuant to 2005-11, but are not offering the students the option to make 403(b) deferrals. The amount of summer earnings are small, and the students working during the summer are most unlikely to make elective 403(b) deferrals even if offered.

[Belgarath]

I sympathize, but if the college has already determined that these employees are subject to FICA, then I'm dubious they are going to get relief on the 403(b) issue.