SECTION 2. BACKGROUND

INFORMATION AND OVERVIEW

.01 Proposed amendments to § 31.3121(b)(10)–2 of the Employment Tax Regulations were issued on February 25, 2004, and were proposed to be applicable with respect to services performed on or after that date (REG–156421–03, 2004–10 I.R.B. 571 [69 F.R. 8604]). Notice 2004–12, 2004–10 I.R.B. 556, issued in conjunction with the proposed amendments, proposed to replace Rev. Proc. 98–16 with a revenue procedure that is consistent with the proposed amendments. Notice 2004–12 provided interim reliance on the proposed revenue procedure as of February 25, 2004, and suspended Rev. Proc. 98–16 pending issuance of the final revenue procedure. Notice 2004–12 requested comments on the proposed revenue procedure. After consideration of the comments that were received, the proposed revenue procedure is adopted as revised by this revenue procedure, and

Rev. Proc. 98–16 is modified and superseded effective April 1, 2005.

.02 This revenue procedure modifies the safe harbor standards of Rev. Proc. 98–16 in several respects in order to align them with the final regulations. First, in order for the safe harbor to be available, in addition to being an “institution of higher education” under the Department of Education’s regulations, as required by Rev. Proc. 98–16, the employer must be a school, college, or university (SCU) as defined in § 31.3121(b)(10)–2(c) of the final regulations, or an affiliated § 509(a)(3) organization with respect to the SCU. The final regulations provide that an organization is not a SCU unless its primary function is to conduct educational activities. The primary function requirement may cause the student FICA exception to be unavailable to certain organizations, such as hospitals and museums, that have embedded within them divisions or functions that carry on educational activities. See section 5 of this revenue procedure.

.03 Second, a “full-time employee” as defined in § 31.3121(b)(10)–2(d)(3)(iii) of the final regulations is ineligible for the student FICA exception. This section provides that the services of a full-time employee are not incident to and for the purpose of pursuing a course of study. Whether an employee is a full-time employee is based on the employer’s standards and practices, except that an employee whose normal work schedule is 40 hours or more per week is always considered a full-time employee. Accordingly, a full-time employee is ineligible for the safe harbor provided in this revenue procedure. See section 6 of this revenue procedure.

.04 Third, the safe harbor is unavailable with respect to the services of a “professional employee” as defined in § 31.3121(b)(10)–2(d)(3)(v)(B)(1) of the final regulations. This section provides that a professional employee is an employee whose work: (1) requires knowledge of an advanced type in a field of science or learning, (2) requires the consistent exercise of discretion and judgment, and (3) is predominantly intellectual and varied in character. Although the safe harbor is unavailable, a professional employee may qualify for the student FICA exception based on consideration of all the

January 10, 2005 307 2005–2 I.R.B.

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. The 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.

.08 Section 31.3121(b)(10)–2(d)(3)(iv) of the final regulations provides that 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 SCU at which the employee is enrolled and regularly attending classes.

.09 Section 31.3121(b)(10)–2(d)(3)(v) of the final regulations provides certain relevant factors in evaluating the service aspect of an employee’s relationship with the employer. Under § 31.3121(b)(10)–2(d)(3)(v)(B)(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—

(1) 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;

(2) Whose work requires the consistent exercise of discretion and judgment in its performance; and

(3) 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.

these employees cannot be assumed to be incident to and for the purpose of pursuing a course of study. The employment activities of these individuals overlap with the activities arguably comprising a course of study, and thus it is not appropriate to apply the standards of this revenue procedure to these individuals.

.03 The standards contained in this revenue procedure may not constitute the exclusive method for determining whether the student FICA exception applies. If the standard for qualifying for the exclusion described in section 7 of this revenue procedure (providing generally that an employee enrolled at least half-time at an institution of higher education has the status of student) is not met, whether or not services in the employ of a SCU, or an affiliated § 509(a)(3) organization qualify for the student FICA exception will depend on consideration of all the facts and circumstances.