Americans generally think of 15 April as tax day, but this year, for certain postdocs, 1 April packs a special wallop from the tax man. Starting on the day traditionally devoted to clowning and practical jokes, many holders of federal fellowships will find themselves caught between two conflicting governmental definitions of their professional status--and suffering the disadvantages of both.
Uncle Sam, however, is most decidedly not kidding. A new IRS regulation that goes into effect on 1 April requires institutions to begin withholding federal payroll taxes from the incomes of all postdocs and makes no exception for holders of fellowships such as NIH's Ruth L. Kirschstein National Research Service Awards (NRSAs) and similar fellowships. NIH, however, argues that these postdocs do not owe the tax. "Our understanding is that these final [IRS] regulations do not apply to or impact Kirschstein-NRSA programs or awards. ... NRSA recipients are not considered employees of the Federal government or the grantee institutions for the purposes of the award," says a statement posted on the NIH Web site on 25 March. According to NIH spokesperson Donald Ralbovsky, NIH's position is based on the statute, regulations, and policies authorizing the Kirschstein NRSA awards, which are, respectively, 42 United States Code 288; 42 Code of Federal Regulations, Part 66; and NIH Manual Chapter 54810.
In this "very ambiguous" situation, "every tax office and controller's office at every university is going to have to make the decision [on what to do] for their university," says Trevor Penning, associate dean for postdoctoral research and training at the University of Pennsylvania School of Medicine in Philadelphia. As word of IRS's intentions spread through the academic world, many university administrators puzzled by the contradiction sought guidance from professional organizations. "We're telling people they've got to talk to the general counsel at their own university, or the tax counsel at their own university," says Anthony Mazzaschi, associate vice president for research at the Association of American Medical Colleges in Washington, D.C. "They'll have to make a determination based on their own judgment. ... This is really going to be an institutional decision, I believe. I think postdocs need to talk to their graduate deans and their graduate adviser to see how their school is handling it."
The 15.3% Solution
Postdocs whose universities decide to take the deductions will see their take-home pay shrink by 7.65%: 6.2% for the FICA (Federal Insurance Contributions Act) tax that goes to Social Security and 1.45% for Medicare. In addition, institutions must pay the matching employer's share of the tax, which also amounts to 7.65% of each postdoc's income. "That's over a million bucks a year for us," says Joel Oppenheim, senior associate dean for biomedical sciences at the New York University School of Medicine. "The average cost [per postdoc] is about $3300."
Until now, postdocs holding NRSAs and some other fellowships have been widely treated as exempt from FICA and Medicare taxes. Universities generally believed them covered by the student exemption that protects earnings from certain kinds of campus jobs. NIH's definition of NRSA holders as nonemployees has also prevented postdocs from receiving health insurance and other benefits through employee benefit plans that generally cover postdocs working on PI grants. "We're in a conundrum with postdocs being both students and workers," Mazzaschi says. "I think it's clear grad students don't have to withhold. ... But the postdoc is more difficult."
The NIH Web site, however, also notes that NRSA stipends are taxable as regular income. "The taxability of stipends, however, in no way alters the relationship between Kirschstein-NRSA trainees or fellows and their institutions," it continues. "Kirschstein-NRSA stipends are not considered salaries. In addition, trainees supported under the Kirschstein-NRSA are not considered to be in an employer-employee relationship with the NIH or the awardee institution. It is, therefore, inappropriate and unallowable for institutions to charge costs associated with employment (such as FICA, workman's compensation, or unemployment insurance) to the fellowship award."
But the 25 March NIH Web site statement ends by saying, "We must note that NIH takes no position on the status of a particular taxpayer, nor does it have the authority to dispense tax advice. The interpretation and implementation of the tax laws are the domain of the IRS."
IRS Says, NIH Says
IRS's position on the status of postdocs is the complete opposite of NIH's. An IRS revenue procedure bulletin issued on JANUARY 10, 2005 declares "postdoctoral students" and "postdoctoral fellows" ineligible for the student FICA exemption. To qualify, the regulation says, a student must be "enrolled and regularly attending classes in pursuit of an educational credential." Furthermore, "a 'full-time employee' cannot qualify as a student. A full-time employee is an employee who is classified by the employer as such or whose normal work schedule is 40 hours or more per week." In addition, work that requires "advanced knowledge in a field of science or learning," entails "the consistent exercise of discretion or judgment," or is "predominantly intellectual or varied in character" does not count for the student exemption. And, as if to remove all doubt, an IRS bulletin issued on 10 January 2005, states that "a postdoctoral student, postdoctoral fellow, medical resident, or medical intern" may not be a student.
"It's been open to question in the past, so I think this removes all question," Oppenheim told Next Wave in mid-March. The IRS language clearly "doesn't say that NRSAs are exempt." For that reason, he said at that time, NYU would be among the universities "taking FICA as of April 1 from all our postdocs." The interpretation of NYU's legal advisers "is that all postdocs, medical residents, and medical interns have to pay FICA." After NIH posted the 25 March statement on its Web site, Oppenheim said, "Basically, we don't quite understand NIH's position. We're going to go along with what our legal counsel has advised us. We're going to start paying FICA." The number of universities making that decision is not known. "Everybody's going to go back and talk to their legal counsels. Nobody quite knows what's happening," Oppenheim said.
The money that NYU will need to pay its share of FICA will come "from my dean," Oppenheim says. "He's not a very happy man right now." As to the income that the postdocs will lose, "we've actually asked our faculty--and this is on such short notice--to please try to make that up. It's very difficult, and those that are on R01s ... can't. But those that have additional outside funding, we're asking some of the ... granting agencies" to help. How much universities can cushion the financial blow to their postdocs in today's tight funding environment and still come up with funds to pay the employer's share will, of course, vary with individual circumstances. Some people are rumored to have considered court challenges. But even if a university were to win such a suit, "modifications take years," Oppenheim says.
Starting 1 April, therefore, at universities that decide to withhold, the incomes of NRSA postdocs and some others will shrink. Other aspects of their status as nonemployees will remain unchanged. Unlike other unpleasant April Fools' practical jokes, however, this one won't end on 2 April.