EFFECTIVE/PUBLICATION DATE: 10/30/98
Acquiescence Ruling 98-5(8)
Whether, in determining coverage of services performed by State and local government employees under the provisions of a Federal-State agreement or modification under section 218 of the Social Security Act (the Act), the Social Security Administration (SSA) must consider the original intent and understanding of the parties to the agreement as controlling unless the agreement and modification is altered or amended by statutory law. Whether the student services exclusion from Social Security coverage under section 210(a)(10) of the Act can apply to services performed by medical residents and whether, in applying the exclusion, SSA must make a case by case examination of the medical residents' relationship with the employer school, college or university.
Sections 210(a)(10) and 218 of the Social Security Act (42 U.S.C. 410(a)(10) and 418), 20 CFR 404.1028(c), 404.1209, 404.1210, 404.1214, 404.1215, 404.1216, Social Security Ruling 78-3.
In 1955, the State of Minnesota and SSA executed a section 218 agreement for Social Security coverage. The agreement initially applied to a few coverage groups but the State subsequently executed a modification in 1958 to extend coverage to services performed by individuals as employees of the University of Minnesota. The modification excluded "any service performed by a student" pursuant to the optional exclusion provided by section 218(c)(5) of the Act. The University did not withhold Social Security contributions from the annual stipends paid to medical residents at its teaching hospital. It also did not pay the employer's share of the contributions. This practice continued for more than 30 years.
On September 13, 1990, SSA issued a formal notice of assessment holding the State liable for unpaid contributions totaling nearly $8 million based on stipends paid to medical residents during 1985 and 1986. The State requested administrative review and on January 11, 1994, SSA's Deputy Commissioner for Programs affirmed the assessment. The State of Minnesota then sought judicial review. The district court granted the State's motion for summary judgment and overturned the assessment. The district court held that: (1) the medical residents were not "employees" of the University within the meaning of the 1958 modification; and (2) even if they were employees, they were excluded from coverage based upon the modification's student exclusion. SSA appealed this decision to the United States Court of Appeals for the Eighth Circuit.
The United States Court of Appeals for the Eighth Circuit affirmed the district court's alternative holdings and further stated that the regulatory approach set forth in 20 CFR 404.1028(c) prevents SSA from summarily concluding that medical residents never qualify for the student services exclusion without a case by case examination of the nature of the medical residents' relationship with their employer.
The Eighth Circuit also held that the general student services exclusion in section 210(a)(10) of the Act applied to medical residents participating in the University's medical residency program because "[t]he bright-line rule of SSR 78-3 is inconsistent with the approach set forth at 20 C.F.R. § 404.1028(c), which contemplates a case-by-case examination to determine if an individual's relationship with a school is primarily for educational purposes or primarily to earn a living."
The circuit court focused on the nature of the medical residents' relationship with the University, and observed the undisputed facts that the medical residents were enrolled in the University, paid tuition and were registered for approximately 15 credit hours per semester. The court concluded that the primary purpose for the residents' participation in the program was to pursue a course of study rather than to earn a living.
A section 218 agreement establishes Social Security coverage for State and local government employees, and the terms of the section 218 agreement between SSA and the State are governed by the provisions of section 218 of the Act. Under SSA's regulations implementing section 218 (20 CFR 404.1214 and 404.1215), the written agreement and subsequent modifications to that agreement establish the continuing relationship between SSA and the State. SSA's regulations (20 CFR 404.1215) provide that a State may modify in writing its section 218 agreement to include additional coverage groups consistent with the provisions of section 218. Generally, SSA does not consider the original intent of the parties to the section 218 agreement and its modifications, by itself, to be controlling. The error modification procedure at 20 CFR 404.1216, however, provides that a section 218 agreement or modification may be modified to correct an error upon submittal of evidence establishing that an error actually occurred. Under this procedure, SSA may consider evidence such as minutes of meetings or statements by appropriate officials to establish the intent of the parties at the time Social Security coverage was requested, and SSA also considers whether the State's wage reporting practices were consistent with its intent.
In construing a modification which was ambiguous as to whether medical residents were considered to be employees for purposes of that modification, the Eighth Circuit concluded that the original intent and understanding of the parties executing the section 218 agreement for coverage and its subsequent modifications is controlling for establishing coverage for State and local employees unless the original intent or understanding was contrary to the provisions of section 218, or unless the agreement is altered or amended by statutory law.
Section 210(a)(10) of the Act provides for a general exclusion from Social Security coverage for services performed for a school, college or university by a student who is enrolled and regularly attending classes there. Section 218(c)(5) provides States with the option of excluding such services by students. If the exclusion is not taken, services performed by students are covered even though they would be excluded pursuant to section 210(a)(10) if performed for a private school, college or university. Under SSA's regulations implementing section 210 (20 CFR 404.1028(c)), the determination of whether an individual is a student depends on the relationship with his or her employer and whether the focus of that relationship is pursuing a livelihood or pursuing a course of study. SSR 78-3 provides that resident physicians are not "students" for purposes of the student services exclusion under section 210(a)(10) of the Act. Under SSA rules, the services performed by medical residents do not qualify for the student exclusion.
The Eighth Circuit concluded that SSR 78-3 is inconsistent with SSA's student services exclusion regulation (20 CFR 404.1028) which requires a case by case examination to determine if an individual's relationship with the employer meets the requirements for that exclusion to apply.
This Ruling applies to Federal-State agreements for coverage and subsequent modifications under section 218 of the Act involving Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota or South Dakota. It also applies to services performed by medical residents for a school, college or university located in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota or South Dakota.
In establishing coverage for State and local employees under an ambiguous provision of a section 218 agreement or a modification to that agreement, unless the original intent or understanding of the parties was contrary to the provisions of section 218, SSA must consider that intent and understanding controlling unless the agreement and modification is altered or amended by law. SSA may consider the terms of the agreement or modification in determining the intent and understanding of the parties.
In applying the student services exclusion from Social Security coverage under section 210(a)(10) of the Act and under 20 CFR 404.1028(c), SSA must consider whether medical residents who are paid stipends qualify for the exclusion. When applying the student services exclusion to medical residents, SSA must make a case by case examination of the relationship of the residents with the employer school, college or university to determine whether the residents meet the statutory criteria of being enrolled and regularly attending classes and whether they meet the regulatory criteria. In evaluating the relationship, SSA will consider all relevant facts and circumstances.
1 Under the Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-509, the Internal Revenue Service determines liability for Social Security taxes pursuant to a section 218 Federal-State agreement for coverage and its modifications for wages paid after December 31, 1986.
2 State and Local Coverage Handbook for the Social Security Administration and State Social Security Administrators, section 530.
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