Payroll and Reporting News
IRS Guidance on Information Reporting for Qualified Tuition and Related Expenses
The IRS released, in question-and-answer format, guidance on the information reporting requirements for qualified tuition and related expenses under Code Sec. 6050S. In general, an eligible educational institution is required to file information returns and to furnish statements to assist taxpayers and the IRS in determining the amount of qualified tuition and related expenses for which an education tax credit is allowable under Code Sec. 25A. For calendar years 2006 and after, the institutions are required to report certain information on Form 1098-T, Tuition Statement.
The IRS clarified that institutions must report only for students who are enrolled for an academic period beginning during the calendar year and for whom a transaction that is required to be reported is made during the calendar year. No reporting is required for nonresident alien individuals, unless the individual requests that the institution report for a calendar year. Further, an institution must report the amount of any grants that it administered and processed during the calendar year for the payment of the student's cost of attendance and all payments of qualified expenses received during the calendar year, even if one or more of the payments relate to an academic period that began during a prior calendar year.
Form 1098-T also includes "half-time "and "graduate-level" indicators to determine whether the Hope Scholarship Credit or the Lifetime Learning Credit may be allowable for the student's qualified expenses. Please read the following article from the IRS for more information: IRS Notice 2006_72.pdf.
District Court Rules that Hospitals not Required to Take FICA out of Stipend for Medical Students
Stipends paid to medical residents were not per se wages subject to employment taxes. The government's argument that the legislative histories of Code Secs. 117 and 3121 specifically excluded stipends paid to medical residents from the exclusions from employment taxes for scholarships or student payments was rejected. Instead, the court agreed with the employer/hospital that whether such payments are excluded depends on the facts and circumstances of each case.
Under the facts and circumstances test, whether the stipends paid are wages or scholarships or are otherwise excluded from employment taxes is a fact issue, not one of law. In addition, under Code Sec. 117 a "qualified scholarship" is any amount that an individual can establish was used for tuition and related expenses. Thus, the individual recipient must have the opportunity to establish that any amount received qualified as a scholarship. Moreover, when Congress amended Code Sec. 117 in 1986 it did not use that opportunity to adopt a per se rule. And, while a per se rule might be advisable, since these issues have been litigated exhaustively and, in general, the taxpayer does not prevail, there was no legal basis for determining that stipends paid to medical residents were excluded from consideration under Code Sec. 117.
Further, even if the stipends were taxable income under Code Sec. 117, they may not be "wages from employment" subject to employment taxes. Under Code Sec. 3121(b)(10) amounts paid to currently enrolled students for services performed by such students in the employ of a school, college or university are exempt from employment taxes. Moreover, Congress knew about this issue because payments made to medical residents working in federal hospitals are specifically subject to employment taxes under Code Sec. 3121(b)(6), while payments made to medical residents working in D.C. hospitals are exempt under Code Sec. 3121(b)(7). Thus, the plain text of Code Sec. 3121(b)(10) did not support the IRS's position that the stipends paid to medical students were by law subject to employment taxes.
Note that a district court in Florida held in a 2005 case that payments for medical residents are not excluded from employment taxes. This court was not bound by that decision. Please read the following article from CCH Incorporated for more information: University Hospital.pdf.
Employee Health Reimbursement Cards
The IRS has issued additional guidance regarding the use of debit cards, credit cards and stored value cards to reimburse participants in self-insured medical reimbursement plans and dependent care assistance programs. If an employer's accident or health plan requires copayments of a specific dollar amount, and the employee's payment to a health care provider equals an exact multiple of not more than five times the amount of the copayment for the specific service, then the charge is fully substantiated and no further review is required. An employer may also adopt a system by which debit and credit card transactions can be approved or rejected based upon inventory control information such as stock-keeping units (SKUs). Additionally, the notice clarifies that any copayment amounts must be substantiated by a third party. Self-certification of a copayment by an employee does not constitute the required substantiation under Code Sec. 105. However, an employee's claim for payment or reimbursement under a medical reimbursement plan is fully substantiated if the employer is provided with information from an independent third party indicating the date of the service and the employee's responsibility for payment.
Further, the notice provides guidance regarding the use of debit cards, credit cards and stored value cards to provide benefits under dependent care assistance programs. After an employee has paid initial expenses to a dependent care provider and the services are provided, the employer, upon receipt of proper substantiation of the expenses, may make available through a payment card an amount equal to the lesser of the previously incurred expense or the employee's total salary reduction amount to date. The amount on the card may then be used by the employee to pay for later dependent care expenses. Please read the following article from CCH Incorporated for more information: Notice 2006-69.pdf.
For further information on the items above contact: Catherine Bonnes at 269.567.4557 or Forrest Lewis at 517.336.7522.
