It is not as bad as it looks on the surface!

Both this e-mail and the IRS documents misuse the term "Fellows".  When
used precisely to indicate the holder of a FELLOWSHIP, the new ruling does
not apply, because a fellowship is not "wages" for IRS and FICA
purposes.  Fellowship income may be "income" for income tax purposes, but
is not "wage income" and thus subject to FICA taxes.

However, many institutions and individuals use the term "fellow" for an
employee, who does earn "wage income".

Carefully examine your institution's handling of payments to these
individuals and ascertain that the recipient of a fellowship is not
mis-categorized as receiving "wage income", and that employees are not
mis-categorized as FICA-exempt.

The other problem is in regard to "students".  Reading the IRS publication
carefully, particularly Sections 6 and 7, shows that students whose study
is half-time, and enrolled in the institution paying them (after drop-add),
and not in a period of over 5 weeks break from scheduled classes, are still
eligible for FICA exemption.  This covers individuals who are truly
students, even if only half time.  The exemption is broader than just this,
but application will depend on case by case review.

Look carefully at section 6.  This makes it clear that what the IRS is
trying to get at is preventing essentially full time employees (note tests,
including benefits!) from being swept under the safe harbor exemption
simply because they are in some way a student.

Remember, also, that it is the responsibility of the institution to collect
FICA taxes, and the institution is responsible for paying them even if it
does not collect them.  The institution should review how it categorizes
payments.  Fellowship payments are not subject to FICA taxes.  It is a good
idea to distribute fellowship payments by some other means than through the
payroll system, to avoid a confusion.  Examine the categories of payment to
students, to ensure that the limits of the safe harbor are met.  It would
be wise to have a confirmation-of-status run on all students immediately
after drop-add; you probably already do this as a cross-check for financial
aid matters.

Chuck

Chuck

At 08:16 AM 5/24/2005, you wrote:
>Have any of you heard about this new IRS ruling that postdoctoral students
>and postdoctoral fellows are ineligible for the student FICA exemption,
>and that the IRS makes no exception for holders of NIH NRSAs and similar
>fellowships?
>
>See attached article from Next Wave (Science magazine's online
>publication). In case you cannot access the Next Wave article, I've also
>attached the link to the IRS publication (Internal Revenue Bulletin :
>2005-2)
>
>http://nextwave.sciencemag.org/cgi/content/full/2005/03/31/9
>
>http://www.irs.gov/irb/2005-02_IRB/ar16.html
>
>How does your institution plan to handle FICA and Medicare taxes for
>postdoctoral fellows?
>
>Laurie
>
>--
>Laurie Chamness
>Assistant Director
>Office of Research and Sponsored Programs
>Medical University of South Carolina
>PO Box 250808
>Charleston, SC  29425
>
>Ph (843) 792-3832
>Fax (843) 792-6447
>E-Mail:  xxxxxx@musc.edu
>
>
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Herbert "Chuck" Chermside, CRA
Director Emeritus, VCU Sponsored Programs
Executive Director, Research Administrators Certification Council
1915 Robindale Rd.
Richmond, VA 23235-3931
804-320-5502
xxxxxx@verizon.net

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