Service to update guidance on student FICA exception.

The Service recently issued a notice suspending and updating earlier guidance on the student FICA exception (Sec. 3121(b)(10)). The notice contains a proposed revenue procedure to update the guidance and safe harbor in Rev. Proc. 98-16, and to align it with recent proposed amended regulations (Prop. Regs. Sec. 31.3121(b)(10) 2(c)-(f)).

First, the proposed revenue procedure adds a primary function requirement to the definition of an institution of higher education. Sec. 3121(b)(10) applies only to services performed in the employ of a school, college or university, or an affiliated Sec. 509(a)(3) organization. Under the proposed regulations and the new safe harbor, an organization can be a school, college or university only if its primary function is to conduct educational activities. Thus, to take advantage of the safe harbor, an institution must satisfy not only the Department of Education's regulations at 34 CFR Section 600.4 mad the accreditation requirements of 34 CFR Section 600.2, as was required in Rev. Proc. 98-16, but it also must have education and instruction as its primary function. The primary function requirement may make the student FICA exception unavailable to certain institutions of higher education embedded within a larger organization (like a hospital or museum).

Second, the proposed procedure does not permit an institution to apply the student FICA exception to services performed by an employee who regularly works 40 or more hours per week. Under the existing regulations, services fall within the exception only if they are performed incident to and for the purpose of pursuing a course of study. The proposed regulations clarify that an individual who regularly works 40 or more hours per week has the status of a career employee, and, accordingly, is not performing services incident to and for the purpose of pursuing a course of study. However, the student FICA exception and the safe harbor provided by the updated proposed revenue procedure are still available for services performed by an employee who occasionally works 40 or more hours per week.

Third, the proposed procedure provides that an individual has career employee status if he or she is a "professional employee," as provided in the proposed regulations. The proposed rules provide that a professional employee for purposes of the exception is one whose (1) primary duty consists of the performance of services requiring knowledge of an advanced type in a field of science or learning, (2) work requires the consistent exercise of discretion and judgment in its performance and (3) work is predominantly intellectual and varied in character.

Fourth, the proposed procedure expands the terms of employment that result in status as a career employee. Rev. Proc. 98-16 provided that an individual was a career employee if he or she was eligible to participate in one of several types of retirement plans, eligible for reduced tuition (with certain exceptions) or otherwise classified by the institution of higher education as a career employee. The proposed regulations adopt the same criteria for identifying individuals who have the status of a career employee and add to the list eligibility for a number of other benefits. The proposed revenue procedure follows the proposed regulations, adding the additional criteria that cause an individual to have career employee status and fall outside the scope of the safe harbor. An employee having the status of a career employee, per se, cannot be a student for purposes of the student FICA exception.

Finally, the proposed procedure provides that an employee has career employee status if he or she is required to be licensed under state or local law to perform the services he or she provides to the school, college or university.

The Service intends to issue a final revenue procedure at the same time that the proposed regulations are finalized. Until a final procedure is issued, taxpayers may rely on the proposed one for services performed after Feb. 24, 2004.

NOTICE 2004-12, IRB 2004-10,556