[Federal Register: December 21, 2004 (Volume 69, Number 244)]
[Rules and Regulations]
[Page 76404-76412]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21de04-11]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[TD 9167]
RIN 1545-BC81
Student FICA Exception
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
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SUMMARY: This document contains final regulations providing guidance
regarding the employment tax exceptions for student services. These
regulations affect schools, colleges, and universities and their
employees.
DATES: Effective date: December 21, 2004.
Applicability date: These regulations are applicable for services
performed on or after April 1, 2005.
FOR FURTHER INFORMATION CONTACT: John Richards of the Office of
Associate Chief Counsel (Tax Exempt and Government Entities), (202)
622-6040 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 31 under sections
3121(b)(10) and 3306(c)(10)(B) of the Internal Revenue Code (Code).
These sections except from ``employment'' for Federal Insurance
Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA)
purposes, respectively, service performed in the employ of a school,
college, or university by a student who is enrolled and regularly
attending classes at such school, college, or university. In addition,
this document contains amendments to 26 CFR part 31 under section
3121(b)(2).
[[Page 76405]]
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.
Proposed regulations under sections 3121(b)(2), 3121(b)(10), and
3306(c)(10)(B) were published in the Federal Register on February 25,
2004 (69 FR 8604, 2004-10 I.R.B. 571). Written and electronic comments
responding to the notice of proposed rulemaking were received. A public
hearing was held on June 16, 2004. After consideration of all the
comments, the proposed regulations are adopted as amended by this
Treasury decision. The revisions are discussed below.
Explanation of Provisions and Summary of Comments
The final regulations provide rules for determining whether an
organization is a school, college, or university (SCU) and whether an
employee is a student for purposes of sections 3121(b)(10), 3121(b)(2),
and 3306(c)(10)(B) of the Code. Many comments were received on the
proposed regulations and several witnesses testified at the hearing
which was held June 16, 2004. After consideration of the comments and
testimony, the Treasury department and the IRS decided to make several
significant changes described below.
1. School, College, or University
The exceptions from employment for student services apply only if
the employee is a student enrolled and regularly attending classes at a
SCU. Under the proposed regulations, whether an organization is a SCU
is determined with reference to the organization's primary function. An
organization whose primary function is to carry on educational
activities qualifies as a SCU for purposes of the student exceptions
from employment.
A few commentators suggested that an organization, such as a
teaching hospital, that has embedded within it a division or function
that carries on educational activities should be treated as a SCU for
purposes of the student exceptions from employment.
The final regulations retain the primary function standard as
described in the proposed regulations. As discussed in the preamble to
the proposed regulations, the primary function standard is based upon
the existing statutory and regulatory language under section
3121(b)(10), as well as the legislative history relating to the student
exception from employment under section 3121(b)(10).
2. Enrolled and Regularly Attending Classes
The exceptions from employment for student services require that an
employee be ``enrolled and regularly attending classes'' in order to
have the status of a student. Under the proposed regulations, ``a class
is an instructional activity led by a knowledgeable faculty member for
identified students following an established curriculum.''
Commentators requested clarification regarding whether an
instructional activity must be led by a regular faculty member in order
to be considered a class, or whether an activity led by an adjunct
faculty member, graduate teaching assistant, or other qualified
individual hired to lead the activity could be considered a class.
The final regulations clarify that a class is an instructional
activity led by a faculty member ``or other qualified individual''
following an established curriculum. Thus, an instructional activity
led by an adjunct faculty member, graduate assistant, or other
qualified individual can qualify as a class for purposes of the student
exceptions from employment.
3. Student Status
The existing student FICA regulations provide that an employee
whose services are incident to and for the purpose of pursuing a course
of study has the status of a student. Sec. 31.3121(b)(10)-2(c). The
proposed regulations provide that in order for an employee's services
to be considered incident to and for the purpose of pursuing a course
of study, the educational aspect of the relationship between the
employee and the employer, as compared to the service aspect, must be
predominant. Under the proposed regulations, if an employee is a
``career employee,'' then the service aspect of the employee's
relationship with the employer is considered predominant, and thus the
employee's services are not considered incident to and for the purpose
of pursuing a course of study. The proposed regulations provide that
the following employees are considered career employees: (1) Employees
who regularly perform services 40 hours or more per week; (2)
professional employees; (3) employees who receive certain employment
benefits; and (4) employees required to be licensed to work in the
field in which the employees are performing services. The IRS requested
comments on the criteria used to identify employees having the status
of a career employee.
Commentators expressed concern about using these criteria to make
certain employees automatically ineligible for the student FICA
exception. Rather, according to commentators, whether an employee's
services are incident to and for the purpose of pursuing a course of
study should be based upon all the relevant facts and circumstances.
The final regulations provide that the educational and service
aspects of an employee's relationship with the employer are generally
evaluated for an academic term based upon all the relevant facts and
circumstances. Similar criteria to those identified in the proposed
regulations are described in the final regulations as relevant factors,
not dispositive criteria, in determining whether the educational or
service aspect of an employee's relationship with the employer is
predominant. Nevertheless, under the final regulations, if an employee
is a ``full-time employee,'' then the employee's services are not
incident to and for the purpose of pursuing a course of study. In
addition, based upon comments received, the criteria identified in the
proposed regulations have been modified as described below.
A. Full-Time Employee and Hours Worked
The proposed regulations provide that an employee who ``regularly
performs services 40 hours or more per week'' is a career employee, and
is thus ineligible for the student exception from employment.
Commentators expressed concern that the 40 hour criterion would be
administratively impracticable because it would be difficult to monitor
an employee's actual hours worked during an academic term. In addition,
commentators expressed concern that the meaning of ``regularly'' is
unclear, making it difficult to assess the effect of changes in hours
worked from week to week. Commentators also requested clarification on
whether an employee's number of hours worked during academic breaks is
considered in determining whether the employee is eligible for the
student FICA exception.
The final regulations modify the hours worked criterion. The final
regulations provide that the services of a ``full-time employee'' are
not incident to and for the purpose of pursuing a course of study.
Under the final regulations, a full-time employee is an employee who is
considered a full-time employee based upon the employer's standards and
practices, except that an employee whose ``normal work schedule is 40
hours or more per week'' is considered a full-time employee. This
standard is intended to improve administrability for employers. Whether
[[Page 76406]]
an employee is a full-time employee based upon the employer's standards
and practices, or based upon the employee's normal work schedule,
should be determinable by employers at the start of an academic term,
thus reducing instances where an employee's status shifts from student
to non-student during an academic term. An employee's normal work
schedule does not change, for example, based upon changes in work
demands that are unforeseen at the start of an academic term causing
the employee to work additional hours beyond his normal work schedule.
In addition, time spent performing services that have an educational or
instructional aspect is considered in determining an employee's normal
work schedule. Finally, the final regulations provide that an
employee's work schedule during an academic break is not considered in
determining whether the employee's normal work schedule is 40 hours or
more per week.
The final regulations provide that if an employee does not have the
status of a full-time employee, then the employee's normal work
schedule and actual number of hours worked per week are relevant
factors in determining whether the service aspect or educational aspect
of the employee's relationship with the employer is predominant. Thus,
if an employee is normally scheduled to work 20 hours per week, but
consistently works more than 40 hours per week, the amount of time
actually worked is taken into account in determining whether or not the
employee qualifies as a student.
B. Professional Employee and Licensure
1. Professional Employee
The proposed regulations provide that a ``professional employee''
is a career employee, and is thus ineligible for the student exception
from employment. Under the proposed regulations, a professional
employee is an employee who performs work: (1) Requiring knowledge of
an advanced type in a field of science or learning, (2) requiring the
consistent exercise of discretion and judgment, and (3) that is
predominantly intellectual and varied in character.
Commentators expressed concern that the professional employee
criterion would inappropriately disqualify the services of many
graduate research and teaching assistants from eligibility for the
student exceptions from employment. Commentators maintained that
graduate research and teaching assistants are primarily students, and
thus their services should not automatically be ineligible for the
student exceptions based upon the professional employee criterion.
The final regulations provide that whether an employee is a
professional employee is a relevant factor, not a dispositive
criterion, in evaluating the service aspect of the employee's
relationship with the employer. Under the final regulations, if an
employee has the status of a professional employee, then that suggests
the service aspect of the employee's relationship with the employer is
predominant. Whether a professional employee is a student will depend
upon all the facts and circumstances. Thus, under the final
regulations, those graduate assistants and other employees whose work
is described under the professional employee standard are not
automatically ineligible for the student exception.
2. Licensure
The proposed regulations provide that an employee who is required
to be licensed under state or local law to work in the field in which
the employee performs services is a career employee, and is thus
ineligible for the student exception. The preamble to the proposed
regulations requested comments on the licensure criterion and whether
this criterion should be further refined or clarified.
Commentators expressed concern that the licensure criterion under
the proposed regulations is overly broad because it would cause
employees licensed for health and safety reasons, such as van drivers
and life guards, to be ineligible for student status.
Under the final regulations, an employee's licensure status is not
a dispositive criterion. Instead, the final regulations provide if an
employee is a professional employee, then whether the employee is
licensed is a relevant factor in determining whether the service aspect
of the employee's relationship with the employer is predominant. The
final regulations provide that if an employee has the status of a
licensed, professional employee, then that fact further suggests that
the service aspect of the employee's relationship with the employer is
predominant. However, a worker who is a licensed, professional employee
could be considered a student based upon all the relevant facts and
circumstances.
C. Employment Benefits
The proposed regulations provide that an employee who is eligible
to receive certain employment benefits is considered a career employee,
and is thus ineligible for the student exception.
Commentators expressed concern that eligibility to receive
employment benefits should not disqualify an individual from the
student exception. Commentators noted that some state statutes make
student employees eligible for retirement and other benefits, meaning
that student employees in those states could not qualify as students
under the proposed regulations. In addition, commentators noted that
many colleges and universities permit student employees to make
elective contributions to section 403(b) arrangements. Under the
proposed regulations, offering this benefit would prohibit student
employees from qualifying as students for purposes of the student
exceptions from employment.
The final regulations provide that eligibility to receive
employment benefits is a relevant factor, not a dispositive criterion,
in determining whether the service aspect of an employee's relationship
with the employer is predominant. Thus, an employee who is eligible for
employment benefits can still qualify as a student for purposes of the
student exceptions from employment. In addition, the final regulations
provide that eligibility to receive health insurance benefits is not
considered in determining whether the service aspect is predominant,
and eligibility for benefits mandated by state or local law is given
less weight in determining whether the service aspect is predominant.
4. Effective Date
Commentators objected to the proposed effective date of February
25, 2004, asserting that it would take some time to adjust to the new
rules set forth in the proposed regulations. In response to these
comments, the final regulations are applicable with respect to services
performed on or after April 1, 2005.
5. Revenue Procedure Replacing Rev. Proc. 98-16
When the IRS issued the proposed regulations, it also issued Notice
2004-12 (2004-10 I.R.B. 556) suspending Rev. Proc. 98-16 (1998-1 C.B.
403) and proposing to replace it with a revenue procedure that is
consistent with the proposed regulations. The IRS solicited comments on
the proposed revenue procedure. Comments were received and considered
in conjunction with the comments on the proposed regulations. The
proposed revenue procedure has been modified in response to comments,
and in order to provide guidance that is consistent with the final
regulations, is being issued in final form in Rev. Proc.
[[Page 76407]]
2005-11 (to be published in I.R.B. 2005-2) modifying and superseding
Rev. Proc. 98-16. Rev. Proc. 2005-11 is applicable with respect to
services performed on or after April 1, 2005. Taxpayers may rely upon
Rev. Proc. 98-16 with respect to services performed prior to April 1,
2005.
Special Analyses
It has been determined that these final regulations are 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, the proposed
regulations preceding these regulations were submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on the impact on small business.
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 and collection of income tax at source.
Adoption of Amendment to the Regulations
0
Accordingly, 26 CFR part 31 is amended as follows:
PART 31--EMPLOYMENT TAXES
0
Paragraph 1. The authority citation for part 31 continues to read in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
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) An organization is a school, college, or university within the
meaning of 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.
* * * * *
0
Par. 3. Section 31.3121(b)(10)-2 is amended by:
0
1. Revising paragraphs (a), (b), (c) and (d).
0
2. Redesignating paragraph (e) as (g).
0
3. 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) Services performed in the employ of a school,
college, or university within the meaning of paragraph (c) of this
section (whether or not the organization is exempt from income tax) are
excepted from employment, if the services are performed by a student
within the meaning of paragraph (d) of this section who is enrolled and
is regularly attending classes at the school, college, or university.
(2) Services performed in the employ of an organization which is--
(i) Described in section 509(a)(3) and Sec. 1.509(a)-4;
(ii) Organized, and at all times thereafter operated, exclusively
for the benefit of, to perform the functions of, or to carry out the
purposes of a school, college, or university within the meaning of
paragraph (c) of this section; and
(iii) Operated, supervised, or controlled by or in connection with
the school, college, or university; are excepted from employment, if
the services are performed by a student who is enrolled and regularly
attending classes within the meaning of paragraph (d) of this section
at the school, college, or university. The preceding sentence shall not
apply to services performed in the employ of a school, college, or
university of a State or a political subdivision thereof by a student
referred to in section 218(c)(5) of the Social Security Act (42 U.S.C.
418(c)(5)) if such services are covered under the agreement between the
Commissioner of Social Security and such State entered into pursuant to
section 218 of such Act. For the definitions of ``operated, supervised,
or controlled by'', ``supervised or controlled in connection with'',
and ``operated in connection with'', see paragraphs (g), (h), and (i),
respectively, of Sec. 1.509(a)-4.
(b) Statutory tests. For purposes of this section, if an employee
has the status of a student within the meaning of paragraph (d) of this
section, the amount of remuneration for services performed by the
employee, the type of services performed by the employee, and the place
where the services are performed are not material. The statutory tests
are:
(1) The character of the organization in the employ of which the
services are performed as a school, college, or university within the
meaning of paragraph (c) of this section, or as an organization
described in paragraph (a)(2) of this section, and
(2) The status of the employee as a student enrolled and regularly
attending classes within the meaning of paragraph (d) of this section
at the school, college, or university within the meaning of paragraph
(c) of this section by which the employee is employed or with which the
employee's employer is affiliated within the meaning of paragraph
(a)(2) of this section.
(c) School, College, or University. An organization is a school,
college, or university within the meaning of 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 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 employing the
employee. In order to have the status of a student, the employee must
perform services in the employ of a school, college, or university
within the meaning of 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 within the meaning of 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
[[Page 76408]]
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 faculty member or other qualified individual hired by the
school, college, or university within the meaning of paragraph (c) of
this section 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 these and similar activities determines
whether an 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. A course
of study also includes 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.
(i) General rule. 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 the employee with the
organization for which such services are performed as an employee. The
educational aspect of the relationship between the employer and the
employee, 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 is evaluated based on all the relevant facts
and circumstances related to the educational aspect of the
relationship. The service aspect of the relationship is evaluated based
on all the relevant facts and circumstances related to the employee's
employment. The evaluation of the service aspect of the relationship is
not affected by the fact that the services performed by the employee
may have an educational, instructional, or training aspect. Except as
provided in paragraph (d)(3)(iii) of this section, whether the
educational aspect or the service aspect of an employee's relationship
with the employer is predominant is determined by considering all the
relevant facts and circumstances. Relevant factors in evaluating the
educational and service aspects of an employee's relationship with the
employer are described in paragraphs (d)(3)(iv) and (v) of this section
respectively. There may be facts and circumstances that are relevant in
evaluating the educational and service aspects of the relationship in
addition to those described in paragraphs (d)(3)(iv) and (v) of this
section.
(ii) Student status determined with respect to each academic term.
Whether an employee's services are incident to and for the purpose of
pursuing a course of study is determined separately with respect to
each academic term. If the relevant facts and circumstances with
respect to an employee's relationship with the employer change
significantly during an academic term, whether the employee's services
are incident to and for the purpose of pursuing a course of study is
reevaluated with respect to services performed during the remainder of
the academic term.
(iii) Full-time employee. The services of a full-time employee are
not incident to and for the purpose of pursuing a course of study. The
determination of whether an employee is a full-time employee is based
on the employer's standards and practices, except regardless of the
employer's classification of the employee, an employee whose normal
work schedule is 40 hours or more per week is considered a full-time
employee. An employee's normal work schedule is not affected by
increases in hours worked caused by work demands unforeseen at the
start of an academic term. However, whether an employee is a full-time
employee is reevaluated for the remainder of the academic term if the
employee changes employment positions with the employer. An employee's
work schedule during academic breaks is not considered in determining
whether the employee's normal work schedule is 40 hours or more per
week. The determination of an employee's normal work schedule is not
affected by the fact that the services performed by the employee may
have an educational, instructional, or training aspect.
(iv) Evaluating educational aspect. The educational aspect of an
employee's relationship with the employer is evaluated based on all the
relevant facts and circumstances related to the educational aspect of
the relationship. The educational aspect of an employee's relationship
with the employer is generally 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 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.
(v) Evaluating service aspect. The service aspect of an employee's
relationship with the employer is evaluated based on the facts and
circumstances related to the employee's employment. Services of an
employee with the status of a full-time employee within the meaning of
paragraph (d)(3)(iii) of this section are not incident to and for the
purpose of pursuing a course of study. Relevant factors in evaluating
the service aspect of an employee's relationship with the employer are
described in paragraphs (d)(3)(v)(A), (B), and (C) of this section.
(A) Normal work schedule and hours worked. If an employee is not a
full-time employee within the meaning of paragraph (d)(3)(iii) of this
section, then the employee's normal work schedule
[[Page 76409]]
and number of hours worked per week are relevant factors in evaluating
the service aspect of the employee's relationship with the employer. As
an employee's normal work schedule or actual number of hours worked
approaches 40 hours per week, it is more likely that the service aspect
of the employee's relationship with the employer is predominant. The
determination of an employee's normal work schedule and actual number
of hours worked is not affected by the fact that some of the services
performed by the employee may have an educational, instructional, or
training aspect.
(B) Professional employee.
(1) If an employee has the status of a professional employee, then
that suggests the service aspect of the employee's relationship with
the employer is predominant. A professional employee is an employee--
(i) 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;
(ii) Whose work requires the consistent exercise of discretion and
judgment in its performance; and
(iii) 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.
(2) Licensed, professional employee. If an employee is a licensed,
professional employee, then that further suggests the service aspect of
the employee's relationship with the employer is predominant. An
employee is a licensed, professional 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 and the employee is a
professional employee within the meaning of paragraph (d)(3)(v)(B)(1)
of this section.
(C) Employment Benefits. Whether an employee is eligible to receive
one or more employment benefits is a relevant factor in evaluating the
service aspect of an employee's relationship with the employer. For
example, eligibility to receive vacation, paid holiday, and paid sick
leave benefits; eligibility to participate in a retirement plan or
arrangement described in sections 401(a), 403(b), or 457(a); or
eligibility to receive employment benefits such as reduced tuition
(other than qualified tuition reduction under section 117(d)(5)
provided to a teaching or research assistant who is a graduate
student), or benefits under sections 79 (life insurance), 127
(qualified educational assistance), 129 (dependent care assistance
programs), or 137 (adoption assistance) suggest that the service aspect
of an employee's relationship with the employer is predominant.
Eligibility to receive health insurance employment benefits is not
considered in determining whether the service aspect of an employee's
relationship with the employer is predominant. The weight to be given
the fact that an employee is eligible for a particular employment
benefit may vary depending on the type of benefit. For example,
eligibility to participate in a retirement plan is generally more
significant than eligibility to receive a dependent care employment
benefit. Additional weight is given to the fact that an employee is
eligible to receive an employment benefit if the benefit is generally
provided by the employer to employees in positions generally held by
non-students. Less weight is given to the fact that an employee is
eligible to receive an employment benefit if eligibility for the
benefit is mandated by state or local law.
(e) Examples. The following examples illustrate the principles of
paragraphs (a) through (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 during the academic term
which constitutes a full-time course workload at T. C is considered
a part-time employee by T during the academic term, and C's normal
work schedule is 20 hours per week, but occasionally due to work
demands unforeseen at the start of the academic term C works 40
hours or more during a week. C is compensated by hourly wages, and
receives no other compensation or employment benefits.
(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 is not a full-time employee based on T's standards, and
C's normal work schedule does not cause C to have the status of a
full-time employee, even though C may occasionally work 40 hours or
more during a week due to unforeseen work demands. C's part-time
employment relative to C's full-time course workload indicates that
the educational aspect of C's relationship with T is predominant.
Additional facts supporting this conclusion are that C is not a
professional employee, and C does not receive any employment
benefits. Thus, C's services are incident to and for the purpose of
pursuing a course of study. 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 is considered
a full-time employee by U under U's standards and practices.
(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, because D is considered a
full-time employee by U under its standards and practices, 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) The facts are the same as in Example 2, except
that D is not considered a full-time employee by U, and D's normal
work schedule is 32 hours per week. In addition, D's work is
repetitive in nature and does not require the consistent exercise of
discretion and judgment, and is not predominantly intellectual and
varied in character. However, D receives vacation, sick leave, and
paid holiday employment benefits, and D is eligible to participate
in a retirement plan maintained by U described in section 401(a).
(ii) In this example, D's half-time course workload relative to
D's hours worked and eligibility for employment benefits indicates
that the service aspect of D's relationship with U is predominant,
and thus 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 4. (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 Counsel 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's
normal work schedule, which includes services having an educational,
instructional, or training aspect, is 40 hours or more per week.
(ii) In this example, E is employed by V, a school, college, or
university within the meaning of paragraph (c) of this section.
However, E's normal work schedule calls for E to perform services 40
or more hours per week. E is therefore a full-time employee, and the
fact that some of E's services have an educational, instructional,
or training aspect does not affect that conclusion. Thus, E's
services are not incident to and for the purpose of pursuing a
course of study.
[[Page 76410]]
Accordingly, E's services are not excepted from employment under
section 3121(b)(10) and there is no need to consider other relevant
factors, such as whether E is a professional employee or whether E
is eligible for employment benefits.
Example 5. (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.
(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 required to sit
for the examination is not a course of study for purposes of
paragraph (d)(2) of this section. Accordingly, F's services are not
excepted from employment under section 3121(b)(10).
Example 6. (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 7. (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 is scheduled to
work and in fact works significantly less than 30 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 and is not eligible
for employment benefits provided by Y.
(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. Factors indicating the educational aspect of H's
relationship with Y is predominant are that H's hours worked are
significantly less than 30 per week, H is not a professional
employee, and H is not eligible for employment benefits. Based on
the relevant facts and circumstances, the educational aspect of H's
relationship with Y is predominant. 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 8. (i) Employee J is a graduate teaching assistant at
University Z. J is enrolled and regularly attending classes at Z in
pursuit of a graduate degree. J has a course workload which
constitutes a full-time course workload at Z. J's normal work
schedule is 20 hours per week, but occasionally due to work demands
unforeseen at the start of the academic term J works more than 40
hours during a week. J's duties include grading quizzes and exams
pursuant to guidelines set forth by the professor, providing class
and laboratory instruction pursuant to a lesson plan developed by
the professor, and preparing laboratory equipment for
demonstrations. J receives a cash stipend and employment benefits in
the form of eligibility to make elective employee contributions to
an arrangement described in section 403(b). In addition, J receives
qualified tuition reduction benefits within the meaning of section
117(d)(5) with respect to the tuition charged for the credits earned
for being a graduate teaching assistant.
(ii) In this example, J is employed by Z, a school, college, or
university within the meaning of paragraph (c) of this section, 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
normal work schedule of 20 hours per week indicates that the
educational aspect of J's relationship with Z is predominant. In
addition, J is not a professional employee because J's work does not
require the consistent exercise of discretion and judgment in its
performance. On the other hand, the fact that J receives employment
benefits in the form of eligibility to make elective employee
contributions to an arrangement described in section 403(b)
indicates that the employment aspect of J's relationship with Z is
predominant. Balancing the relevant facts and circumstances, the
educational aspect of J's relationship with Z is predominant. Thus,
J's services are incident to and for the purpose of pursuing a
course of study. Accordingly, J services are excepted from
employment under section 3121(b)(10).
(f) Effective date. Paragraphs (a), (b), (c), (d) and (e) of this
section apply to services performed on or after April 1, 2005.
* * * * *
0
Par. 4. In Sec. 31.3306(c)(10)-2:
0
1. Paragraph (c) is revised.
0
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
the employee performs the services. If an employee has the status of a
student within the meaning of paragraph (d) of this section, 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. An organization is a school,
college, or university within the meaning of section 3306(c)(10)(B) 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.
(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 within the meaning
of section 3306(c)(10)(B), 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 an
instructional activity led by a faculty member or other qualified
individual hired by the school, college,
[[Page 76411]]
or university within the meaning of paragraph (c)(2) of this section
for identified students following an established curriculum. The
frequency of these and similar activities determines whether an
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.
(i) General rule. 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 the employee with the
organization for which such services are performed as an employee. The
educational aspect of the relationship between the employer and the
employee, 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 is evaluated based on all the relevant facts
and circumstances related to the educational aspect of the
relationship. The service aspect of the relationship is evaluated based
on all the relevant facts and circumstances related to the employee's
employment. The evaluation of the service aspect of the relationship is
not affected by the fact that the services performed by the employee
may have an educational, instructional, or training aspect. Except as
provided in paragraph (d)(3)(iii) of this section, whether the
educational aspect or the service aspect of an employee's relationship
with the employer is predominant is determined by considering all the
relevant facts and circumstances. Relevant factors in evaluating the
educational and service aspects of an employee's relationship with the
employer are described in paragraphs (d)(3)(iv) and (v) of this section
respectively. There may be facts and circumstances that are relevant in
evaluating the educational and service aspects of the relationship in
addition to those described in paragraphs (d)(3)(iv) and (v) of this
section.
(ii) Student status determined with respect to each academic term.
Whether an employee's services are incident to and for the purpose of
pursuing a course of study is determined separately with respect to
each academic term. If the relevant facts and circumstances with
respect to an employee's relationship with the employer change
significantly during an academic term, whether the employee's services
are incident to and for the purpose of pursuing a course of study is
reevaluated with respect to services performed during the remainder of
the academic term.
(iii) Full-time employee. The services of a full-time employee are
not incident to and for the purpose of pursuing a course of study. The
determination of whether an employee is a full-time employee is based
on the employer's standards and practices, except regardless of the
employer's classification of the employee, an employee whose normal
work schedule is 40 hours or more per week is considered a full-time
employee. An employee's normal work schedule is not affected by
increases in hours worked caused by work demands unforeseen at the
start of an academic term. However, whether an employee is a full-time
employee is reevaluated for the remainder of the academic term if the
employee changes employment positions with the employer. An employee's
work schedule during academic breaks is not considered in determining
whether the employee's normal work schedule is 40 hours or more per
week. The determination of the employee's normal work schedule is not
affected by the fact that the services performed by the individual may
have an educational, instructional, or training aspect.
(iv) Evaluating educational aspect. The educational aspect of an
employee's relationship with the employer is evaluated based on all the
relevant facts and circumstances related to the educational aspect of
the relationship. The educational aspect of an employee's relationship
with the employer is generally 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 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)(2) of this section at which the employee is enrolled
and regularly attending classes.
(v) Evaluating service aspect. The service aspect of an employee's
relationship with the employer is evaluated based on the facts and
circumstances related to the employee's employment. Services of an
employee with the status of a full-time employee within the meaning of
paragraph (d)(3)(iii) of this section are not incident to and for the
purpose of pursuing a course of study. Relevant factors in evaluating
the service aspect of an employee's relationship with the employer are
described in paragraphs (d)(3)(v)(A), (B), and (C) of this section.
(A) Normal work schedule and hours worked. If an employee is not a
full-time employee within the meaning of paragraph (d)(3)(iii) of this
section, then the employee's normal work schedule and number of hours
worked per week are relevant factors in evaluating the service aspect
of the employee's relationship with the employer. As an employee's
normal work schedule or actual number of hours worked approaches 40
hours per week, it is more likely that the service aspect of the
employee's relationship with the employer is predominant. The
determination of the employee's normal work schedule and actual number
of hours worked is not affected by the fact that some of the services
performed by the individual may have an educational, instructional, or
training aspect.
(B) Professional employee.
(1) If an employee has the status of a professional employee, then
that suggests that the service aspect of the employee's relationship
with the employer is predominant. A professional employee is an
employee--
(i) 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;
[[Page 76412]]
(ii) Whose work requires the consistent exercise of discretion and
judgment in its performance; and
(iii) 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.
(2) Licensed, professional employee. If an employee is a licensed,
professional employee, then that further suggests the service aspect of
the employee's relationship with the employer is predominant. An
employee is a licensed, professional 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 and the employee is a
professional employee within the meaning of paragraph (d)(3)(v)(B)(1)
of this section.
(C) Employment Benefits. Whether an employee is eligible to receive
employment benefits is a relevant factor in evaluating the service
aspect of an employee's relationship with the employer. For example,
eligibility to receive vacation, paid holiday, and paid sick leave
benefits; eligibility to participate in a retirement plan described in
section 401(a); or eligibility to receive employment benefits such as
reduced tuition, or benefits under section 79 (life insurance), 127
(qualified educational assistance), 129 (dependent care assistance
programs), or 137 (adoption assistance) suggest that the service aspect
of an employee's relationship with the employer is predominant.
Eligibility to receive health insurance employment benefits is not
considered in determining whether the service aspect of an employee's
relationship with the employer is predominant. The weight to be given
the fact that an employee is eligible for a particular benefit may vary
depending on the type of employment benefit. For example, eligibility
to participate in a retirement plan is generally more significant than
eligibility to receive a dependent care employment benefit. Additional
weight is given to the fact that an employee is eligible to receive an
employment benefit if the benefit is generally provided by the employer
to employees in positions generally held by non-students.
(e) Effective date. Paragraphs (c) and (d) of this section apply to
services performed on or after April 1, 2005.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: December 15, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-27919 Filed 12-20-04; 8:45 am]
BILLING CODE 4830-01-P