[Federal Register Volume 69, Number 244 (Tuesday, December 21, 2004)]
[Rules and Regulations]
[Pages 76404-76412]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27919]


=======================================================================
-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

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