[Federal Register Volume 69, Number 37 (Wednesday, February 25, 2004)]
[Proposed Rules]
[Pages 8604-8613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[REG-156421-03]
RIN 1545-BC81
Student FICA Exception
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations that provide
guidance regarding the meaning of ``school, college, or university''
and ``student'' for purposes of the student FICA exception under
sections 3121(b)(10) and 3306(c)(10)(B) of the Internal Revenue Code
(Code). In addition, this document contains proposed regulations that
provide guidance on the meaning of ``school, college, or university''
for purposes of the FICA exception under section 3121(b)(2) for
domestic service performed in a local college club, or local chapter of
a college fraternity or sorority by a student. This document also
provides a notice of public hearing on these proposed regulations.
DATES: Written and electronic comments must be received by May 25,
2004. Outlines of topics to be discussed at the public hearing
scheduled for June 16, 2004 must be received by May 25, 2004.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-156421-03), room
5703, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
156421-03), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically, via the IRS Internet site at: www.irs.gov/regs.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
John Richards of the Office of Associate Chief Counsel (Tax Exempt and
Government Entities), (202) 622-6040; concerning submissions of
comments, the hearing and/or to be placed on the building access list
to attend the hearing, Treena Garret, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR part 31 under
sections 3121(b)(10) and 3306(c)(10)(B) of the Internal Revenue Code.
These sections except from ``employment'' for Federal Insurance
Contributions Act (FICA) tax purposes and Federal Unemployment Tax Act
(FUTA) purposes, respectively, service performed in the employ of a
school, college, or university if such service is performed by a
student who is enrolled and regularly attending classes at such school,
college, or university. In addition, this document contains proposed
amendments to 26 CFR part 31 under section 3121(b)(2). This section
excepts from employment for FICA purposes domestic service performed in
a local college club, or local chapter of a college fraternity or
sorority, by a student who is enrolled and is regularly attending cases
at a school, college, or university.
Explanation of Provisions
A. Current Law
Section 3121(b)(10) of the Code (the student FICA exception)
excepts from the definition of employment for FICA purposes services
performed in the employ of a school, college, or university (SCU)
(whether or not that organization is exempt from income tax), or an
affiliated organization that satisfies section 509(a)(3) of the Code in
relation to the SCU (``related section 509(a)(3) organization''), if
the service is performed by a student who is enrolled and regularly
attending classes at that SCU. Section 3306(c)(10)(B) contains a
similar student exception. Thus, the student FICA exception applies to
services only if both the ``SCU status'' and ``student status''
requirements are met. This regulation deals with both the SCU status
and student status requirements.
To satisfy the SCU status requirement, the employer for whom the
employee performs services (the common law employer) must be either a
SCU or a related section 509(a)(3) organization. If a student is not
employed by a SCU or a related section 509(a)(3) organization, then the
student FICA exception is not available. See e.g., Rev. Rul. 69-519
[[Page 8605]]
(1969-2 C.B. 185) (holding that students attending an apprenticeship
school established pursuant to an agreement between a union and a
contractors' association were employees of the participating
contractors to whom the students were assigned.) Section
31.3121(b)(10)-2(d) of the Employment Tax Regulations provides that the
term ``SCU'' for purposes of the student FICA exception is to be
construed in its ``commonly or generally accepted sense.''
To satisfy the student status requirement, the employee must meet
three requirements. First, under section 3121(b)(10), the employee must
be a student enrolled and regularly attending classes at the SCU
employing the student. Second, the employee must be pursuing a course
of study at the SCU employing the student. Third, the employee must be
``[a]n employee who performs services in the employ of a [SCU] as an
incident to and for the purpose of pursuing a course of study at such
[SCU]. * * *'' Reg. Sec. 31.3121(b)(10)-2(c). The IRS's position has
been that whether services are incident to and for the purpose of
pursuing a course of study depends on two factors: the employee's
course workload and the nature of the employee's employment
relationship with the employer. See e.g., Rev. Proc. 98-16 (1998-1 C.B.
403); Rev. Rul. 78-17 (1978-1 C.B. 306).
B. Need for Regulations
Treasury and IRS have determined that it is necessary to provide
additional clarification of the terms ``SCU'' and ``student who is
enrolled and regularly attending classes'' as they are used in section
3121(b)(10). In recent years the question has arisen whether the
performance of certain services that are in the nature of on the job
training are excepted from employment under the student FICA exception.
This issue was presented with respect to medical residents and interns
in State of Minnesota v. Apfel, 151 F.3d 742 (8th Cir. 1998), which
concluded that services performed by medical residents and interns are
not employment for social security purposes. The question also applies
to services performed by employees in other fields, particularly
regulated fields, where on the job training is often required to gain
licensure. Guidance is needed to address situations where the
performance of services and pursuit of the course of study are not
separate and distinct activities, but instead are to some extent
intermingled.
Section 3121(a) defines ``wages'' as ``all remuneration for
employment. * * *'' Under section 3121(b), ``employment'' means ``any
service * * * performed * * * by an employee for the person employing
him.'' The Social Security Act provides nearly identical definitions of
``wages'' and ``employment.'' 42 U.S.C. sections 409(a)(1)(I); 410(a).
``The very words `any service * * * performed * * * for his employer,'
with the purpose of the Social Security Act in mind, import a breadth
of coverage.'' Social Security Board v. Nierotko, 327 U.S. 358, 365
(1946). The courts have generally found that the terms ``wages'' and
``employment'' as used in both the social security benefits and FICA
tax provisions are to be interpreted broadly. State of New Mexico v.
Weinberger, 517 F.2d 989, 993 (10th Cir. 1995); Mayberry v. United
States, 151 F.3d 855, 860 (8th Cir. 1998); Moorhead v. United States,
774 F.2d 936, 941 (9th Cir. 1985); Abrahamsen v. United States, 228
F.3d 1360, 1364 (Fed. Cir. 2000). The broad interpretation of these
terms results from the underlying purpose of the Social Security Act,
namely, ``to provide funds through contributions by employer and
employee for the decent support of elderly workmen who have ceased to
labor.'' Nierotko, 327 U.S. at 364. See also St. Luke's Hospital v.
United States, 333 F.2d 157, 164 (6th Cir. 1964) (``[I]n dealing with
the beneficent purposes of the Social Security Act, this court
generally favors that interpretation of statutory provisions which
calls for coverage rather than exclusion.'').
Wage and employment questions affect both social security benefits
entitlement and FICA taxes which fund the social security trust fund.
Except in unusual circumstances, the Social Security Act, and the
Internal Revenue FICA provisions, are to be read in pari materia.
United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 213
(2001). Thus, whether certain service is employment affects not just
FICA taxation, but also social security benefits eligibility and level
of benefits. Moreover, the integrity of the social security system
requires symmetry between service that is considered employment for
social security benefits purposes and employment for FICA taxation
purposes.
Resolution of this issue has significant social security benefits
and FICA tax implications. The case of medical residents illustrates
the possible effect on individuals and the social security system as a
whole of excepting service in the nature of on the job training from
employment for social security benefits and FICA tax purposes. The
Social Security Administration (SSA) reported to the General Accounting
Office (GAO) that ``[b]ecause many residents are married and have
children and work as residents for up to 8 years, an exemption from
Social Security coverage could have a very significant effect on their
potential disability benefits or their family's survivor benefits.''
Moreover, SSA reported that if medical residents were determined to be
students for purposes of the student FICA exception, 270,000 medical
residents would lose some coverage over the next ten years (2001
through 2010).\1\
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\1\ GAO Report B-284947, Health, Education, and Human Services
Division, Social Security: Coverage For Medical Residents (August
31, 2000).
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This regulation addresses two issues: (1) Whether an organization
carrying on educational activities in connection with the performance
of services is a SCU within the meaning of section 3121(b)(10), and (2)
whether certain employees performing services in the nature of on the
job training have the status of a student who is enrolled and regularly
attending classes for purposes of section 3121(b)(10).
C. Whether an Organization Carrying on Educational Activities Is a SCU
Organizations providing on the job training typically carry on both
noneducational and educational activities. The issue is whether
organizations carrying on both noneducational and educational
activities are SCUs within the meaning of section 3121(b)(10). For
example, organizations such as hospitals typically carry on both
educational and noneducational activities. In United States v. Mayo
Foundation, 282 F. Supp. 2d 997 (D. Minn. 2003), the United States
argued, consistent with the position it has maintained
administratively, that the primary purpose of an organization
determines whether the organization is a SCU for purposes of the
student FICA exception. The court rejected this argument, finding it
inconsistent with the common sense standard. The court stated, ``If the
[IRS] had intended the term `SCU' in Sec. 3121(b)(10) to have the same
scope and meaning as `educational institution' (found in Sec.
170(b)(1)(A)(ii) * * * ), it could have clearly and explicitly given
the phrase such scope and meaning by cross-referencing those Code
provisions and their implementing regulations.'' Although Treasury and
IRS disagree with the interpretation of the district court, the
Secretary understands and is responding to the court's view by more
clearly incorporating the primary purpose standard in regulations.
[[Page 8606]]
This regulation provides that the character of an organization as a
SCU or not as a SCU is determined by its primary function. The primary
function standard is consistent with the language of section
3121(b)(10) and the existing regulations thereunder, and is consistent
with the intended scope of the student FICA exception as reflected in
the legislative history accompanying the Social Security Amendments of
1939 and 1950.
Section 170(b)(1)(A) of the Code defines various classes of
organizations for charitable deduction purposes. All of the
organizations have some combination of charitable, educational,
religious and/or cultural purposes. The definitions distinguish them
into categories based on various criteria. One such class defined in
section 170(b)(1)(A)(ii) is for any ``educational organization which
normally maintains a regular faculty and curriculum and normally has a
regularly enrolled body of pupils or students in attendance at the
place where its educational activities are regularly carried on.''
Section 1.170A-9(b)(1) of the Income Tax Regulations provides:
An educational organization is described in section
170(b)(1)(A)(ii) if its primary function is the presentation of
formal instruction and it normally maintains a regular faculty and
curriculum and normally has a regularly enrolled body of pupils or
students in attendance at the place where its educational activities
are regularly carried on. The term includes institutions such as
primary, secondary, preparatory, or high schools, and colleges and
universities. It includes Federal, State, and other public-supported
schools which otherwise come within the definition. It does not
include organizations engaged in both educational and noneducational
activities unless the latter are merely incidental to the
educational activities. A recognized university which incidentally
operates a museum or sponsors concerts is an educational
organization within the meaning of section 170(b)(1)(A)(ii).
However, the operation of a school by a museum does not necessarily
qualify the museum as an educational organization within the meaning
of this subparagraph.
Thus, in order to qualify as an educational organization under
section 170(b)(1)(A)(ii), it is not enough that the organization
carries on educational activities; instead, the organization's primary
function must be to carry on educational activities.
The section 170(b)(1)(A)(ii) standard applies to the organization
as a whole, an approach that is consistent with Sec. 31.3121(b)(10)-
2(b) of the regulations, which provides that one of ``[t]he statutory
tests [is] the character of the organization in the employ of which the
services are performed as a [SCU] * * *. '' Thus, the character of the
organization determines whether it is a SCU, not merely whether the
organization carries on some educational activities. Further, section
3121(b) provides that ``the term `employment' means any service * * *
performed * * * by an employee for the person employing him,'' and
Sec. 31.3121(d)-2 of the regulations provides that ``every person is
an employer if he employs one or more employees.'' Under section
7701(a)(1), the term ``person'' means any individual, trust, estate,
association, or corporation. Thus, the character of the person
employing the employee--the legal entity recognized for federal tax
purposes--determines whether the SCU status requirement is met, not
merely the character of a division or function of the employer.
In addition, the primary function standard reaches a result
consistent with the ``commonly or generally accepted sense'' standard
of the existing regulation (Sec. 31.3121(b)(10)-2(d)). In common
parlance, the term ``hospital'' is used to describe an organization
with the primary function of caring for patients. The term ``museum''
is used to describe an organization with the primary function of
maintaining a collection and displaying it to the public in a way that
will educate them about the collection and related concepts. A hospital
or a museum may conduct educational activities, even classes or
possibly even certificate or degree programs, but the activities which
define them in the public mind are patient care and maintenance and
display of a collection. An organization bears the label ``school''
when its primary function is the conduct of classes for an identified
set of students leading to the awarding of a credential demonstrating
mastery of some subject matter.
Finally, defining the term ``SCU'' to include institutions whose
primary function is other than to carry on educational activities could
lead to expansion of the student FICA exception beyond what Congress
intended. When Congress enacted the student FICA exception in 1939, and
amended it in 1950, it contemplated that the exception would be limited
in scope. The House Report to the Social Security Amendments of 1939
states the following in describing the purpose of the student FICA and
other exceptions:
In order to eliminate the nuisance of inconsequential tax
payments the bill excludes certain services performed for fraternal
benefit societies and other nonprofit institutions exempt from
income tax, and certain other groups. While the earnings of a
substantial number of persons are excluded by this recommendation,
the total amount of earnings involved is undoubtedly very small * *
*. The intent of this amendment is to exclude those persons and
those organizations in which the employment is part-time or
intermittent and the total amount of earnings is only nominal, and
the payment of tax is inconsequential and a nuisance. The benefit
rights built up are also inconsequential. Many of those affected,
such as students and the secretaries of lodges, will have other
employment which will enable them to develop insurance benefits.
This amendment, therefore, should simplify the administration for
the worker, the employer, and the Government.
H.R. Rep. No. 728, 76th Cong. 1st Sess. (1939), 1939-2 C.B. 538, 543.
The Senate Report uses similar language. S. Rep. No. 734, 76th Cong.
1st Sess. 19 (1939), 1939-2 C.B. 565, 570.
The House Report to the Social Security Amendments of 1950
continued to describe the exception as a matter of administrative
convenience not meaningfully affecting social security benefits:
The bill would continue to exclude service performed for nominal
amounts in the employ of tax-exempt nonprofit organizations,\2\
service performed by student nurses and internes [sic],\3\ and
service performed by students in the employ of colleges and
universities. These exclusions simplify administration without
depriving any significant number of people of needed protection.
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\2\ The general exception from employment for services performed
for non-profit organizations was repealed in 1983 by Public Law 98-
21, section 102(b).
\3\ The Social Security Amendments of 1965 repealed the student
intern exception under Sec. 3121(b)(13). See discussion infra.
H.R. Rep. No. 1300, 81st Cong. 1st Sess. 12 (1949). The Senate Report
contains similar language. S. Rep. No. 1669, 81st Cong. 2d Sess. 15
(1950). Defining ``SCU'' to include organizations whose primary purpose
is not to carry on educational activities would create a broad
exception contrary to what Congress intended. Accordingly, the term
``SCU'' should not be interpreted so broadly as to include
organizations whose primary function is other than to carry on
educational activities.
D. Whether Certain Employees Are Students
This regulation clarifies who is a student enrolled and regularly
attending classes for purposes of section 3121(b)(10). The existing
regulations at Sec. 31.3121(b)(10)-2(c) provide that an employee will
have the status of student only if the services are performed ``as an
incident to and for the purpose of pursuing a course of study'' at the
SCU.
[[Page 8607]]
Thus, to qualify for the exception, the individual's predominant
relationship with the SCU must be as a student, and only secondarily or
incidentally as an employee.
Where an individual's employment and educational activities are
separate and distinct, the extent and nature of the respective
activities determine whether the employment or student aspect of the
relationship with the SCU is predominant. See Rev. Proc. 98-16. In the
vast majority of cases the service and the course of study are separate
and distinct activities; for example, the biology major's service in
the cafeteria is unrelated to his course of study. By contrast, some
employees' services are arguably part of a course of study; for
example, the services of a medical resident are necessary to receive a
certificate in a medical specialty. The standards in Rev. Proc. 98-16--
whether the employee has at least a half-time course workload, and
whether the employee is eligible to receive certain employee benefits--
are inadequate to determine student status in such circumstances. Where
the services performed by the individual for the SCU are also earning
the individual credit toward an educational credential, the
determination of whether the employment relationship is the predominant
relationship with the SCU must be based on other factors. This
regulation is intended to provide standards to determine student status
in such cases.
This regulation is intended to further Congress's intent regarding
those eligible for the student FICA exception as reflected by the
legislative history to the Social Security Amendments of 1939.
Consistent with Congress's intent, the student FICA exception covers
individuals earning small amounts who are expected to accumulate social
security benefits through future employment that will follow the
completion of their education. Thus, in the typical case, a student
will earn a modest amount while devoting his primary time and attention
to classes and study.
This regulation provides clarification in three respects. First, it
describes what the individual must be doing to be considered enrolled
and regularly attending classes. In order to be a class, the activity
must be more than an activity that gives the individual an opportunity
to acquire new skills and knowledge. It must involve instructional
activities, and be led by a knowledgeable faculty member following an
established curriculum for identified students. Classes can include
much more than traditional classroom-based instruction, but the faculty
leadership, the set curriculum, and the prescribed time frame are
essential.
Second, this regulation provides standards for determining whether
an employee is pursuing a course of study. The regulation provides that
one or more courses conducted by a SCU the completion of which fulfills
the requirements to receive an educational credential granted by the
SCU is a course of study.
Third, this regulation provides standards for determining whether
an employee's services are incident to and for the purpose of pursuing
a course of study. The regulation provides in general that whether the
employee's services are incident to and for the purpose of pursuing a
course of study depends on all the facts and circumstances. This
determination is made by comparing the educational aspect of the
relationship between the employer and the employee with the service
aspect of the relationship. The regulation provides that the employee's
course workload is used to measure the scope of the educational aspect
of the relationship. A relevant factor is the employee's course
workload relative to a full-time course workload. The regulation
further provides that where an employee has the status of a career
employee, the services performed by the employee are not incident to
and for the purpose of pursuing a course of study.
This regulation specifies various aspects of an individual's
employment relationship with the SCU which cause conclusively the
individual to have the status of a ``career employee.''
This regulation provides that the criteria used to identify an
employee as having the status of a career employee are (1) the
employee's hours worked, (2) whether the employee is a ``professional
employee,'' (3) the employee's terms of employment, and (4) whether the
employee is required to be licensed in the field in which the employee
is performing services. The hours worked criteria reflects
Congressional intent to limit the student FICA exception to services
performed by those individuals who are predominantly students.
Employees who are working enough hours to be considered full-time
employees (40 hours or more per week) have filled the conventional
measure of available time with work, and not study. Even if they are
capable of balancing a full-time job with a heavy course load, they are
earning wages at a level that exceeds Congress's intended scope for the
student FICA exception. The IRS's long-standing position is that hours
worked is a relevant factor in determining whether an employee has
student status. Rev. Rul. 78-17 (1978-1 C.B. 306) (holding that whether
an employee has student status is determined by hours worked relative
to credits taken); Rev. Rul. 66-285 (1966-2 C.B. 455) (holding that
services of an employee employed full-time are not incident to and for
the purpose of pursuing a course of study). Rev. Rul. 85-74 (1985-1
C.B. 331), dealing with the student nurse exception, uses an hours
worked standard. The student nurse exception and the student FICA
exception share the same legislative history. The IRS's use of an hours
worked standard was found to be a reasonable interpretation of the
legislative history in Johnson City Medical Center v. United States,
999 F.2d 973 (6th Cir. 1993).
The regulation provides that a ``professional employee'' has the
status of a career employee, and thus his services are not incident to
a course of study. The standards defining a professional employee for
purposes of this regulation closely follow existing Department of Labor
standards defining certain professional employees. See 29 U.S.C.
213(a); and 29 CFR 541.3(a)(1), (b), (c), (d). Section 213(a) and the
regulations thereunder provide that certain employees are exempt from
the minimum wage and overtime laws. This regulation provides that a
professional employee for purposes of the student FICA exception is an
employee whose primary duty consists of the performance of services
requiring knowledge of an advanced type in a field of science or
learning, whose work requires the consistent exercise of discretion and
judgment in its performance, and whose work is predominantly
intellectual and varied in character. The services of employees
exhibiting these characteristics are not incident to a course of study.
This regulation provides that an employee's terms of employment may
also cause an employee to have the status of a career employee. A list
of terms is provided, any one of which causes the employee to have the
status of a career employee. On the list are terms of employment that
provide for eligibility to receive certain employee benefits typically
associated with career employment, such as eligibility to participate
in certain types of retirement plans or tuition reduction arrangements.
The notion of a career employee standard based on eligibility to
receive certain fringe benefits was recommended by the higher education
community for purposes of guidance that was issued in Rev. Proc. 98-16,
and Treasury and IRS believe it is an appropriate standard to use for
purposes
[[Page 8608]]
of identifying employees whose services are not incident to and for the
purpose of pursuing a course of study. Rev. Proc. 98-16 provides that
career employee status precludes application of the safe harbor
standard, but leaves the possibility that the employee could have the
status of a student based on all the facts and circumstances. In
contrast, this regulation provides that an employee considered as
having the status of a career employee based on eligibility to receive
certain employee benefits does not have the status of a student for
purposes of the student FICA exception.
Finally, this regulation provides that an employee who must be
licensed by a government entity in order to perform a certain function
has the status of a career employee. An employee who is required to be
licensed to perform the services must have received sufficient prior
instruction and demonstrated sufficient mastery of the activity to
receive the license. Furthermore, licensed workers typically earn more
than a modest amount for their work to reflect their expertise. As
discussed, the legislative history indicates that the student FICA
exception is intended to cover individuals earning a small amount of
wages prior to entry into meaningful post-education employment. The
exception is not intended to cover an individual who has developed
enough expertise to be working in a field where he or she is already
licensed and has the capacity to earn substantial wages.
The IRS requests comments on the criteria used to identify an
employee as having the status of a career employee. In particular, the
IRS requests comments on the licensure criterion and whether this
criterion should be further refined or clarified.
IRS and Treasury believe that Congress has shown the specific
intent to provide social security coverage to individuals who work long
hours, serve as highly skilled professionals, and typically share some
or all of the terms of employment of career employees, particularly
medical residents and interns. The Social Security Amendments of 1939
added section 1426(b)(13) to the Code (later redesignated section
3121(b)(13)), which provided an exception from social security coverage
for ``service performed as an intern in the employ of a hospital by an
individual who has completed a 4 year course in a medical school
chartered or approved pursuant to State law.'' The House Report
accompanying the legislation provides:
Paragraph 13 excepts service performed as a student nurse in the
employ of a hospital or a nurse's training school by an individual
who is enrolled and is regularly attending classes * * *; and
service performed as an interne [sic] (as distinguished from a
resident doctor) in the employ of a hospital by an individual who
has completed a four years' course in a medical school chartered or
approved pursuant to State law.
H.R. Rep. No. 728, 76th Cong. 1st Sess. 49 (1939), 1939-2 C.B. 538,
550-51 (emphasis added); see also S. Rep. No. 734, 76th Cong. 1st Sess.
58, 1939-2 C.B. 565, 578. Thus, the services of medical interns were
excepted from FICA, but the services of resident doctors were not.
Twenty-five years later, in St. Luke's Hospital v. United States,
333 F.2d 157 (6th Cir. 1964), the Sixth Circuit confirmed that section
3121(b)(13) of the Code applied to medical interns, but that medical
residents were not specifically excepted from social security coverage.
St. Luke's claimed a refund of FICA taxes for the years 1953 through
1958 based on the student intern exception under section 3121(b)(13).
The refund claims were computed based upon the remuneration paid to
medical school graduates in their second or subsequent year of clinical
training. The court held that the services of medical residents were
not excluded under the medical intern exception.
In 1965, one year after the St. Luke's decision, Congress amended
the Code to repeal the special exemption for medical interns. The
legislative history underlying the Social Security Amendments of 1965
(Public Law 89-97) suggests that Congress intended that medical interns
be covered by FICA just as medical residents already were. The House
Report states:
Coverage would also be extended to services performed by medical
and dental interns. The coverage of services as an intern would give
young doctors an earlier start in building up social security
protection and would help many of them to become insured under the
program at the time when they need the family survivor and
disability protection it provides. This protection is important for
doctors of medicine who, like members of other professions, in the
early years of their practice, may not otherwise have the means to
provide adequate survivorship and disability protection for
themselves and their families. Interns would be covered on the same
basis as other employees working for the same employers, beginning
on January 1, 1966.
H.R. Rep. No. 213, 89th Cong. 1st Sess. 95 (1965).
The Senate Report states:
Section 3121(b)(13) of the Internal Revenue Code of 1954
excludes from the term ``employment,'' and thus from coverage under
the [FICA], services performed as an intern in the employ of a
hospital by an individual who has completed a 4-year course in a
medical school . . . . Section 311(b)(5) of the bill amends section
3121(b)(13) so as to remove this exclusion. The effect of this
amendment is to extend coverage under the [FICA] to such interns
unless their services are excluded under provisions other than
section 3121(b)(13). Thus, the services of an intern are covered if
he is employed by a hospital which is not exempt from income tax as
an organization described in section 501(c)(3) of the Code.
S. Rep. No. 404, 89th Cong. 1st Sess. 237-38 (1965). The last sentence
makes indirect reference to the exclusion from FICA for services
performed for exempt organizations under section 3121(b)(8)(B) of the
1954 Code. That exclusion was repealed by the Social Security
Amendments of 1983 (Public Law 98-21). Nothing in the legislative
history indicates that Congress believed interns (or residents, who
were even further along in their medical careers than interns) were
eligible for the student FICA exception.
In addition to revoking the medical intern exception, section 311
of the Social Security Amendments of 1965, entitled, ``Coverage for
Doctors of Medicine,'' changed the law in two other ways affecting
medical doctors. First, section 1402(c)(5) of the 1954 Code was amended
to eliminate the exception for physician services from the definition
of ``trade or business,'' thus subjecting these services to self-
employment tax. Second, section 3121(b)(6)(C)(iv) of the 1954 Code,
which provided an exception from the definition of employment for
``service performed in the employ of the United States if the service
is performed by any individual as an employee included under Sec.
5351(2) of title 5, [U.S.C.], (relating to certain interns, student
nurses, and other student employees of hospitals of the Federal
Government),'' was amended by adding, ``other than as a medical or
dental intern or a medical or dental resident in training.'' These
provisions, taken together, indicate Congress's intent to create a
scheme under which all medical doctors are covered under the social
security system, whether or not they are still in training, whether or
not they are self-employed, or whether or not they work for the federal
government.
E. Effect on Rev. Proc. 98-16
Several years ago, representatives of higher education asked the
IRS and Treasury for guidance on the application of the student FICA
exception. Colleges and universities were particularly interested in
guidance relating to students who had on-campus jobs that were
completely separate and
[[Page 8609]]
distinct from their course work. In response, the IRS issued Rev. Proc.
98-16, which sets forth standards for determining whether services
performed by students in the employ of certain institutions of higher
education qualify for the exception from FICA tax provided under
section 3121(b)(10). The revenue procedure provided answers to many
longstanding questions.
The revenue procedure addresses different circumstances than those
prompting the need for the clarifications provided in this proposed
regulation. It provides a safe harbor that applies where the student's
course work and the student's employment are separate activities, and
are not intermingled. In clarifying the regulations interpreting
section 3121(b)(10), the IRS and Treasury fully intend to retain the
safe harbor in the revenue procedure. However, several discrete aspects
of the safe harbor need to be updated to align with the proposed
regulations. Thus, in conjunction with this notice of proposed
rulemaking, the IRS is suspending Rev. Proc. 98-16 and proposing to
replace it with a new revenue procedure that is revised in limited ways
to align with the proposed regulations. See Notice 2004-12, to be
published in I.R.B. 2004-10 (March 8, 2004). Taxpayers may rely on the
proposed revenue procedure until final regulations and a final revenue
procedure are issued. Also, the public is invited to comment on the
proposed revenue procedure.
F. Related Proposed Amendments
Section 3306(c)(10)(B) of the Code excepts from ``employment'' for
FUTA tax purposes services performed by a student who is enrolled and
regularly attending classes at a SCU. This regulation provides that the
standards that apply in determining whether an employer is a SCU and
whether an employee is a student for purposes of section 3121(b)(10)
also apply for purposes of section 3306(c)(10)(B). In addition, this
regulation provides that the standards that apply for purposes of
determining whether an employer is a SCU for purposes of section
3121(b)(10) also apply for purposes of section 3121(b)(2) (excluding
from employment for FICA purposes domestic services performed for local
college clubs, fraternities, and sororities by students who are
enrolled and regularly attending classes).
G. Proposed Effective Date
It is proposed that these regulations apply to services performed
on or after February 25, 2004.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. In addition,
because no collection of information is imposed on small entities, the
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply, and, therefore, a Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of the Code, this notice of
proposed rulemaking will be submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on the impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written or electronic comments that
are submitted timely to the IRS. The IRS and Treasury Department
request comments on all aspects of the proposed regulations and how
they can be made easier to understand. All comments will be available
for public inspection and copying.
A public hearing is scheduled for June 16, 2004, beginning at 10
a.m. in room 2615 of the Internal Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC. Due to building security procedures,
visitors must enter at the Constitution Avenue entrance. All visitors
must present photo identification to enter the building. Because of
access restrictions, visitors will not be admitted beyond the immediate
entrance area more than 30 minutes before the hearing starts. For
information about having your name placed on the building access list
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section
of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit electronic or
written comments by May 25, 2004 and submit an outline of the topics to
be discussed and the time to be devoted to each topic (signed original
and eight (8) copies). A period of 10 minutes will be allotted to each
person for making comments. An agenda showing the scheduling of the
speakers will be prepared after the deadline for receiving outlines has
passed. Copies of the agenda will be available free of charge at the
hearing.
Drafting Information
The principal author of these proposed regulations is John Richards
of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt
and Government Entities). However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 31
Employment taxes, Income taxes, Penalties, Reporting and
recordkeeping requirements.
Proposed Amendment to the Regulations
Accordingly, 26 CFR part 31 is proposed to be amended as follows:
PART 31--EMPLOYMENT TAXES
Paragraph 1. The authority citation for part 31 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In Sec. 31.3121(b)(2)-1, paragraph (d) is revised to read
as follows:
Sec. 31.3121(b)(2)-1 Domestic service performed by students for
certain college organizations.
* * * * *
(d) A school, college, or university is described in section
3121(b)(2) if its primary function is the presentation of formal
instruction, it normally maintains a regular faculty and curriculum,
and it normally has a regularly enrolled body of students in attendance
at the place where its educational activities are regularly carried on.
See section 170(b)(1)(A)(ii) and the regulations thereunder.
* * * * *
Par. 3. Section 31.3121(b)(10)-2 is amended by: adding a heading
for paragraphs (a) and (b), revising paragraphs (c) and (d),
redesignating paragraph (e) as paragraph (g), and adding paragraphs (e)
and (f).
The revisions and additions read as follows:
Sec. 31.3121(b)(10)-2 Services performed by certain students in the
employ of a school, college, or university, or of a nonprofit
organization auxiliary to a school, college, or university.
(a) General rule. (1) * * *
(b) Statutory tests. * * *
(c) School, College, or University. A school, college, or
university is described in section 3121(b)(10) if its primary function
is the presentation of formal instruction, it normally maintains a
regular faculty and curriculum, and it normally has a regularly
enrolled body of students in
[[Page 8610]]
attendance at the place where its educational activities are regularly
carried on. See section 170(b)(1)(A)(ii) and the regulations
thereunder.
(d) Student Status--general rule. Whether an employee has the
status of a student performing the services shall be determined based
on the relationship of the employee with the organization for which the
services are performed. In order to have the status of a student, the
employee must perform services in the employ of a school, college, or
university described in paragraph (c) of this section at which the
employee is enrolled and regularly attending classes in pursuit of a
course of study within the meaning of paragraphs (d)(1) and (2) of this
section. In addition, the employee's services must be incident to and
for the purpose of pursuing a course of study within the meaning of
paragraph (d)(3) of this section at such school, college, or
university. An employee who performs services in the employ of an
affiliated organization described in paragraph (a)(2) of this section
must be enrolled and regularly attending classes at the affiliated
school, college, or university within the meaning of paragraph (c) of
this section in pursuit of a course of study within the meaning of
paragraphs (d)(1) and (2) of this section. In addition, the employee's
services must be incident to and for the purpose of pursuing a course
of study within the meaning of paragraph (d)(3) of this section at such
school, college, or university.
(1) Enrolled and regularly attending classes. An employee must be
enrolled and regularly attending classes at a school, college, or
university within the meaning of paragraph (c) of this section at which
the employee is employed to have the status of a student within the
meaning of section 3121(b)(10). An employee is enrolled within the
meaning of section 3121(b)(10) if the employee is registered for a
course or courses creditable toward an educational credential described
in paragraph (d)(2) of this section. In addition, the employee must be
regularly attending classes to have the status of a student. For
purposes of this paragraph (d)(1), a class is an instructional activity
led by a knowledgeable faculty member for identified students following
an established curriculum. Traditional classroom activities are not the
sole means of satisfying this requirement. For example, research
activities under the supervision of a faculty advisor necessary to
complete the requirements for a Ph.D. degree may constitute classes
within the meaning of section 3121(b)(10). The frequency of events such
as these determines whether the employee may be considered to be
regularly attending classes.
(2) Course of study. An employee must be pursuing a course of study
in order to have the status of a student. A course of study is one or
more courses the completion of which fulfills the requirements
necessary to receive an educational credential granted by a school,
college, or university within the meaning of paragraph (c) of this
section. For purposes of this paragraph, an educational credential is a
degree, certificate, or other recognized educational credential granted
by an organization described in paragraph (c) of this section. In
addition, a course of study is one or more courses at a school, college
or university within the meaning of paragraph (c) of this section the
completion of which fulfills the requirements necessary for the
employee to sit for an examination required to receive certification by
a recognized organization in a field.
(3) Incident to and for the purpose of pursuing a course of study.
An employee's services must be incident to and for the purpose of
pursuing a course of study in order for the employee to have the status
of a student. Whether an employee's services are incident to and for
the purpose of pursuing a course of study shall be determined on the
basis of the relationship of such employee with the organization for
which such services are performed. The educational aspect of the
relationship, as compared to the service aspect of the relationship,
must be predominant in order for the employee's services to be incident
to and for the purpose of pursuing a course of study. The educational
aspect of the relationship between the employer and the employee is
established by the employee's course workload. The service aspect of
relationship is established by the facts and circumstances related to
the employee's employment. In the case of an employee with the status
of a career employee within the meaning of paragraph (d)(3)(ii) of this
section, the service aspect of the relationship with the employer is
predominant. Standards applicable in determining whether an employee's
services are considered to be incident to and for the purpose of
pursuing a course of study are provided in paragraphs (d)(3)(i) and
(ii) of this section.
(i) Course workload. The educational aspect of an employee's
relationship with the employer is evaluated based on the employee's
course workload. Whether an employee's course workload is sufficient in
order for the employee's employment to be incident to and for the
purpose of pursuing a course of study generally depends on the
particular facts and circumstances. A relevant factor in evaluating an
employee's course workload is the employee's course workload relative
to a full-time course workload at the school, college or university
within the meaning of paragraph (c) of this section at which the
employee is enrolled and regularly attending classes.
(ii) Career employee status. Services of an employee with the
status of a career employee are not incident to and for the purpose of
pursuing a course of study. An employee has the status of a career
employee if the employee is described in paragraph (d)(3)(ii)(A), (B),
(C) or (D) of this section.
(A) Hours worked. An employee has the status of a career employee
if the employee regularly performs services 40 hours or more per week.
(B) Professional employee. An employee has the status of a career
employee if the employee is a professional employee. A professional
employee is an employee--
(1) Whose primary duty consists of the performance of work
requiring knowledge of an advanced type in a field of science or
learning customarily acquired by a prolonged course of specialized
intellectual instruction and study, as distinguished from a general
academic education, from an apprenticeship, and from training in the
performance of routine mental, manual, or physical processes.
(2) Whose work requires the consistent exercise of discretion and
judgment in its performance; and
(3) Whose work is predominantly intellectual and varied in
character (as opposed to routine mental, manual, mechanical, or
physical work) and is of such character that the output produced or the
result accomplished cannot be standardized in relation to a given
period of time.
(C) Terms of employment. An employee with the status of a career
employee includes any employee who is--
(1) Eligible to receive vacation, sick leave, or paid holiday
benefits;
(2) Eligible to participate in any retirement plan described in
section 401(a) that is established or maintained by the employer, or
would be eligible to participate if age and service requirements were
met;
(3) Eligible to participate in an arrangement described in section
403(b), or would be eligible to participate if age and service
requirements were met;
(4) Eligible to participate in a plan described under section
457(a), or
[[Page 8611]]
would be eligible to participate if age and service requirements were
met;
(5) Eligible for reduced tuition (other than qualified tuition
reduction under section 117(d)(5) provided to a teaching or research
assistant who is a graduate student) because of the individual's
employment relationship with the institution;
(6) Eligible to receive employee benefits described under sections
79 (life insurance), 127 (qualified educational assistance), 129
(dependent care assistance programs), or 137 (adoption assistance); or
7) Classified by the employer as a career employee.
(D) Licensure status. An employee is a career employee if the
employee is required to be licensed under state or local law to work in
the field in which the employee performs services.
(e) Examples. The following examples illustrate the principles of
paragraphs (c) and (d) of this section:
Example 1. (i) Employee C is employed by State University T to
provide services as a clerk in T's administrative offices, and is
enrolled and regularly attending classes at T in pursuit of a B.S.
degree in biology. C has a course workload which constitutes a full-
time course workload at T. C performs services on average 20 hours
per week, but from time to time works 40 hours or more during a
week. C receives only hourly wages and no other pay or benefits. C
is not required under state or local law to be licensed to perform
the services for T.
(ii) In this example, C is employed by T, a school, college, or
university within the meaning of paragraph (c) of this section. C is
enrolled and regularly attending classes at T in pursuit of a course
of study. C's hours worked do not cause C to have the status of a
career employee, even though C may occasionally work 40 hours or
more during a week. C's part-time employment relative to C's full-
time course workload indicates that C's services are incident to and
for the purpose of pursuing a course of study. C is not a
professional employee, and C's terms of employment and licensure
status do not cause C to have the status of a career employee within
the meaning of paragraph (d)(3)(ii) of this section. Thus, C has the
status of a student. Accordingly, C's services are excepted from
employment under section 3121(b)(10).
Example 2. (i) Employee D is employed in the accounting
department of University U, and is enrolled and regularly attending
classes at U in pursuit of an M.B.A. degree. D has a course workload
which constitutes a half-time course workload at U. D's work does
not require the consistent exercise of discretion and judgment, and
is not predominantly intellectual and varied in character. D
regularly performs services full-time (40 hours per week), and is
eligible to participate in a retirement plan described in section
401(a) maintained by U.
(ii) In this example, D is employed by U, a school, college, or
university within the meaning of paragraph (c) of this section. In
addition, D is enrolled and regularly attending classes at U in
pursuit of a course of study. However, D has the status of a career
employee because D regularly works 40 hours per week, and is
eligible to participate in U's section 401(a) retirement plan.
Because D has the status of a career employee within the meaning of
paragraph (d)(3)(ii) of this section, D's services are not incident
to and for the purpose of pursuing a course of study. Accordingly,
D's services are not excepted from employment under section
3121(b)(10).
Example 3. (i) Employee E is employed by University V to provide
patient care services at a teaching hospital that is an
unincorporated division of V. These services are performed as part
of a medical residency program in a medical specialty sponsored by
V. The residency program in which E participates is accredited by
the Accreditation Council for Graduate Medical Education. Upon
completion of the program, E will receive a certificate of
completion, and be eligible to sit for an examination required to be
certified by a recognized organization in the medical specialty. E
regularly performs services more than 40 hours per week. E's patient
care services require knowledge of an advanced type in the field of
medicine, and are predominantly intellectual and varied in
character. Further, although E is subject to supervision, E's
services require the consistent exercise of discretion and judgment
regarding the treatment of patients. In addition, E receives
vacation, sick leave, and paid holiday benefits; and salary deferral
benefits under an arrangement described in section 403(b). E is a
first-year resident, and thus is not eligible to be licensed to
practice medicine under the laws of the state in which E performs
services.
(ii) In this example, E is employed by V, a school, college, or
university within the meaning of paragraph (c) of this section.
However, because of E's hours worked, professional employee status,
and employee benefits, E has the status of a career employee within
the meaning of paragraph (d)(3)(ii) of this section. Thus, E's
services are not incident to and for the purpose of pursuing a
course of study. Accordingly, E's services are not excepted from
employment under section 3121(b)(10).
Example 4. (i) Employee F is employed in the facilities
management department of University W. F has a B.S. degree in
engineering, and is completing the work experience required to sit
for an examination to become a professional engineer eligible for
licensure under state or local law. F is not attending classes at W
in pursuit of a course of study leading to an educational
credential. F regularly performs services 40 hours or more per week.
F receives certain employee benefits including vacation, sick leave,
and paid holiday benefits. F also receives retirement benefits under
an arrangement described in section 457.
(ii) In this example, F is employed by W, a school, college, or
university within the meaning of paragraph (c) of this section.
However, F is not enrolled and regularly attending classes at W in
pursuit of a course of study. F's work experience is not a course of
study for purposes of paragraph (d)(2) of this section. In addition,
because of F's hours worked and employment benefits, F has the
status of a career employee within the meaning of paragraph
(d)(3)(ii) of this section. Thus, F's services are not incident to
and for the purpose of pursuing a course of study. Accordingly, F's
services are not excepted from employment under section 3121(b)(10).
Example 5. (i) Employee G is employed by Employer X as an
apprentice in a skilled trade. X is a subcontractor providing
services in the field in which G wishes to specialize. G is pursuing
a certificate in the skilled trade from Community College C. G is
performing services for X pursuant to an internship program
sponsored by C under which its students gain experience, and receive
credit toward a certificate in the trade.
(ii) In this example, G is employed by X. X is not a school,
college or university within the meaning of paragraph (c) of this
section. Thus, the exception from employment under section
3121(b)(10) is not available with respect to G's services for X.
Example 6. (i) Employee H is employed by a cosmetology school Y
at which H is enrolled and regularly attending classes in pursuit of
a certificate of completion. Y's primary function is to carry on
educational activities to prepare its students to work in the field
of cosmetology. Prior to issuing a certificate, Y requires that its
students gain experience in cosmetology services by performing
services for the general public on Y's premises. H performs services
less than 40 hours per week. H's work does not require knowledge of
an advanced type in a field of science or learning, nor is it
predominantly intellectual and varied in character. H receives
remuneration in the form of hourly compensation from Y for providing
cosmetology services to clients of Y, and does not receive any other
compensation or benefits. H is not required to be a licensed
cosmetologist in the state in which H performs services while
participating in the training program.
(ii) In this example, H is employed by Y, a school, college or
university within the meaning of paragraph (c) of this section, and
is enrolled and regularly attending classes at Y in pursuit of a
course of study. In addition, because H works less than 40 hours per
week, H is not a professional employee, and H's terms of employment,
and licensure status do not indicate that H has the status of a
career employee, H is not a career employee within the meaning of
paragraph (d)(3)(ii) of this section. Thus, H's services are
incident to and for the purpose of pursuing a course of study.
Accordingly, H's services are excepted from employment under section
3121(b)(10).
Example 7. (i) Employee J is a teaching assistant at University
Z. J is enrolled and regularly attending classes in pursuit of a
graduate degree at Z. J has a course workload which constitutes a
full-time course workload at Z. J performs services less than 40
hours per week. J's duties include grading quizzes, providing class
and laboratory instruction pursuant to a lesson plan developed by
the professor, and preparing laboratory equipment for
demonstrations. J
[[Page 8612]]
receives no employee benefits. J receives a cash stipend and a
qualified tuition reduction within the meaning of section 117(d)(5)
for the credits earned for being a teaching assistant. J is not
required under state or local law to be licensed to perform the
activities of a teaching assistant.
(ii) In this example, J is employed as a teaching assistant by
Z, a school, college, or university within the meaning of paragraph
(c), and is enrolled and regularly attending classes at Z in pursuit
of a course of study. J's full-time course workload relative to J's
employment workload indicates that J's services are incident to and
for the purpose of pursuing a course of study. J is not a
professional employee because J's work does not require the
consistent exercise of discretion and judgment in its performance.
In addition, J's terms of employment and licensure status do not
cause J to have the status of a career employee within the meaning
of paragraph (d)(3)(ii) of this section. Thus, J has the status of a
student. Accordingly, J services are excepted from employment under
section 3121(b)(10).
(f) Effective date. Paragraphs (c), (d) and (e) of this section
apply to services performed on or after February 25, 2004.
* * * * *
Par. 4. In Sec. 31.3306(c)(10)-2:
1. Paragraph (c) is revised.
2. Paragraphs (d) and (e) are added.
The revision and addition read as follows:
Sec. 31.3306(c)(10)-2 Services of student in employ of a school,
college, or university.
* * * * *
(c) General rule. (1) For purposes of this section, the tests are
the character of the organization in the employ of which the services
are performed and the status of the employee as a student enrolled and
regularly attending classes at the school, college, or university
described in paragraph (c)(2) of this section, in the employ of which
he performs the services. The type of services performed by the
employee, the place where the services are performed, and the amount of
remuneration for services performed by the employee are not material.
(2) School, college, or university. A school, college, or
university is described in section 3306(c)(10)(B) if its primary
function is the presentation of formal instruction, and it normally
maintains a regular faculty and curriculum, and it normally has a
regularly enrolled body of students in attendance at the place where
its educational activities are regularly carried on. See section
170(b)(1)(A)(ii) and the regulations thereunder.
(d) Student Status--general rule. Whether an employee has the
status of a student within the meaning of section 3306(c)(10)(B)
performing the services shall be determined based on the relationship
of the employee with the organization for which the services are
performed. In order to have the status of a student, the employee must
perform services in the employ of a school, college, or university
described in paragraph (c)(2) of this section at which the employee is
enrolled and regularly attending classes in pursuit of a course of
study within the meaning of paragraphs (d)(1) and (2) of this section.
In addition, the employee's services must be incident to and for the
purpose of pursuing a course of study at such school, college, or
university within the meaning of paragraph (d)(3) of this section.
(1) Enrolled and regularly attending classes. An employee must be
enrolled and regularly attending classes at a school, college, or
university within the meaning of paragraph (c)(2) of this section at
which the employee is employed to have the status of a student within
the meaning of section 3306(c)(10)(B). An employee is enrolled within
the meaning of section 3306(c)(10)(B) if the employee is registered for
a course or courses creditable toward an educational credential
described in paragraph (d)(2) of this section. In addition, the
employee must be regularly attending classes to have the status of a
student. For purposes of this paragraph (d)(1), a class is a didactic
activity in which a faculty member plays a leadership role in
furthering the objectives of an established curriculum. Traditional
classroom activities are not the sole means of satisfying this
requirement. The frequency of events such as these determines whether
the employee may be considered to be regularly attending classes.
(2) Course of study. An employee must be pursuing a course of study
in order to have the status of a student within the meaning of section
3306(c)(10)(B). A course of study is one or more courses the completion
of which fulfills the requirements necessary to receive an educational
credential granted by a school, college, or university within the
meaning of paragraph (c)(2) of this section. For purposes of this
paragraph, an educational credential is a degree, certificate, or other
recognized educational credential granted by an organization described
in paragraph (c)(2) of this section. In addition, a course of study is
one or more courses at a school, college or university within the
meaning of paragraph (c)(2) of this section the completion of which
fulfills the requirements necessary for the employee to sit for an
examination required to receive certification by a recognized
organization in a field.
(3) Incident to and for the purpose of pursuing a course of study.
An employee's services must be incident to and for the purpose of
pursuing a course of study in order for the employee to have the status
of a student within the meaning of section 3306(c)(10)(B). Whether an
employee's services are incident to and for the purpose of pursuing a
course of study shall be determined on the basis of the relationship of
such employee with the organization for which such services are
performed. The educational aspect of the relationship, as compared to
the service aspect of the relationship, must be predominant in order
for the employee's services to be incident to and for the purpose of
pursuing a course of study. The educational aspect of the relationship
between the employer and the employee is established by the employee's
course workload. The service aspect of relationship is established by
the facts and circumstances related to the employee's employment. In
the case of an employee with the status of a career employee, the
service aspect of the relationship with the employer is predominant.
Standards applicable in determining whether an employee's services are
considered to be incident to and for the purpose of pursuing a course
of study are provided in paragraphs (d)(3)(i) and (ii) of this section.
(i) Course workload. The educational aspect of an employee's
relationship with the employer is evaluated based on the employee's
course workload. Whether an employee's course workload is sufficient
for the employee's employment to be incident to and for the purpose of
pursuing a course of study generally depends on the particular facts
and circumstances. A relevant factor in evaluating the employee's
course workload is the employee's course workload relative to a full-
time course workload at the school, college or university within the
meaning of paragraph (c)(2) of this section at which the employee is
enrolled and regularly attending classes.
(ii) Career employee status. Services of an employee with the
status of a career employee are not incident to and for the purpose of
pursuing a course of study. An employee has the status of a career
employee if the employee is described in paragraph (d)(3)(ii)(A), (B),
(C), or (D) of this section.
(A) Hours worked. An employee has the status of a career employee
if the employee regularly performs services 40 hours or more per week.
[[Page 8613]]
(B) Professional employee. An employee has the status of a career
employee if the employee is a professional employee. A professional
employee is an employee--
(1) Whose primary duty consists of the performance of work
requiring knowledge of an advanced type in a field of science or
learning customarily acquired by a prolonged course of specialized
intellectual instruction and study, as distinguished from a general
academic education, from an apprenticeship, and from training in the
performance of routine mental, manual, or physical processes.
(2) Whose work requires the consistent exercise of discretion and
judgment in its performance; and
(3) Whose work is predominantly intellectual and varied in
character (as opposed to routine mental, manual, mechanical, or
physical work) and is of such character that the output produced or the
result accomplished cannot be standardized in relation to a given
period of time.
(C) Terms of employment. An employee with the status of a career
employee includes any employee who is--
(1) Eligible to receive vacation, sick leave, or paid holiday
benefits;
(2) Eligible to participate in any retirement plan described in
section 401(a) that is established or maintained by the employer, or
would be eligible to participate if age and service requirements were
met;
(3) Eligible to participate in an arrangement described in section
403(b), or would be eligible to participate if age and service
requirements were met;
(4) Eligible to participate in a plan described under section
457(a), or would be eligible to participate if age and service
requirements were met;
(5) Eligible for reduced tuition (other than qualified tuition
reduction under section 117(d)(5) provided to a teaching or research
assistant who is a graduate student) because of the individual's
employment relationship with the institution;
(6) Eligible to receive employee benefits described under sections
79 (life insurance), 127 (qualified educational assistance), 129
(dependent care assistance programs), or 137 (adoption assistance); or
(7) Classified by the employer as a career employee.
(D) Licensure status. An employee is a career employee if the
employee is required to be licensed under state or local law to work in
the field in which the employee performs services.
(e) Effective date. Paragraphs (c) and (d) of this section apply to
services performed on or after February 25, 2004.
Mark E. Matthews,
Deputy Commissioner for Service and Enforcement.
[FR Doc. 04-3994 Filed 2-24-04; 8:45 am]
BILLING CODE 4830-01-P