FLORHAM PARK, NJ, DECEMBER 20, 2012 – Attorneys Michael Ostrowsky and Mark McMenamy of Bressler, Amery & Ross, P.C. secured a $30 million dollar refund of the Federal Insurance Contributions Act (FICA) taxes paid by the teaching hospitals within Barnabas Health and approximately 900 of their residents (student physicians) between 1995 and the first quarter of 2005. The full extent of the recovery wasn’t actually settled until last month, though the action was originally filed in 2009.
The refunds were obtained for Saint Barnabas Medical Center, Newark Beth Israel Medical Center, Monmouth Medical Center and the now closed Union Hospital, which had accredited residency programs in various medical specialties, as well as dentistry and podiatry, and the residents who chose to participate in this recovery litigation.
Withum, Smith & Brown, the accountants for Barnabas Health, filed timely claims for refunds and requests for FICA tax abatements with the Internal Revenue Service (IRS) for the taxes paid between 1995-2005. The IRS did not take any formal action on the refund requests other than to advise the teaching hospitals and their accountants that their refund requests had been received and would be considered.
Although the Internal Revenue Code defines “wages” as “all remuneration for employment,” Congress provided a “student exception” to the payment of FICA taxes on “wages” as it excluded from the definition of “employment” any “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 “a school, college or university.”
A few teaching hospitals scattered throughout the country filed lawsuits against the government seeking a refund of the FICA taxes that had been paid on their residents’ stipends. They argued that the residents were “students” who were attending a “school” to learn their profession and that the FICA taxes paid on their stipends should be refunded pursuant to the “student” exception. In a number of cases, the government’s motions for summary judgment were denied on the point that there was a material issue of fact as to whether the plaintiff residents were entitled to a FICA tax refund under the “student exception.” Bressler, Amery & Ross filed the only lawsuit against the government within the jurisdiction of the Third Circuit Court of Appeals. That case, Saint Barnabas Medical Center, et al v. The United States of America, Civil Action No. 09-5081 (SRC), was filed in the U.S. District Court for the District of New Jersey in October of 2009. The action alleged that the teaching hospitals offered accredited graduate medical education programs for interns, residents and fellows. The amount of the stipends the residents received was established pursuant to guidelines from the Accreditation Council on Graduate Medical Education, the American Dental Association and the American Osteopathic Association.
Based on the advice of attorneys Mr. Ostrowsky and Mr. McMenamy, the plaintiff teaching hospitals sought refunds of the FICA taxes paid between 1995 and March 31, 2005 for themselves and their residents. (IRS regulations enacted in April, 2005 precluded the student exception from applying to students who were paid to work for 40 or more hours per week. As was expected, the validity of this regulation was upheld by the U.S. Supreme Court in the 2011 case of Mayo Foundation v. USA.)
After providing extensive discovery with respect to the plaintiff institutions including information on the residency programs and amount of taxes paid, the U.S. Department of Justice announced that it agreed with the plaintiffs’ position and would voluntarily refund both the employer and employee portions of the FICA taxes paid between 1995 and March 31, 2005, subject to the completion and submission of various forms, schedules and other documents.
Bressler, Amery & Ross handled the detailed filing of refund requests for the Barnabas Health teaching hospitals and hundreds of residents who participated in the action. This led to a refund of approximately $20 million to the teaching hospitals and approximately $10 million to the residents.