When is a Student Not a Student?
For colleges and universities, the ability to exclude students from 403(b) plan participation entirely is an important provision, since many students work for the institution in some capacity (e.g., as part of a formal work-study program or otherwise). The exclusion is important to the student as well, since a similar exclusion allows the student to avoid FICA (Social Security) withholding and thus have more cash in his/her pocket at a time when earnings are nominal. However, the exclusion is often misunderstood, and there are times where it would appear that an individual is a student when, in fact, he/she is not a student at all. This Top of Mind will attempt to provide important clarification of this issue.
The final 403(b) regulations permit the exclusion of “employees who are students performing services described in section 3121(b)(10)” from the right to make elective deferrals to a 403(b) plan under what is known as the universal availability rule. Were it not for this exception, all students receiving income derived from employment with a college or university would be eligible to make elective deferrals to the 403(b). Since most any employee can be excluded from the right to receive employer contributions to a 403(b) plan, presuming that nondiscrimination testing is passed (and such an exclusion would generally not result in a test failure and does not apply to public colleges/universities at any rate), the universal availability exclusion essentially means that students can be excluded from 403(b) plan participation entirely.
However, as with many regulatory matters, there are exceptions to the rule. Individuals who appear to be student are not students under the regulations (or the related FICA regulations). Here are some examples of where students are not in fact, students:
- Students who work during the summer, but are NOT enrolled at least half-time during the summer—in our experience, this is often the most overlooked example of when a student is not a student, since the individuals involved may qualify as students for the remainder of the academic year, but not for the summer session where FICA must be withheld and 403(b) plan participation permitted, but only for the summer. IRS Revenue Procedure 2005-11 makes it quite clear that, in order for a student to be covered by the student exemption from FICA (and 403(b)), the student must generally be enrolled half-time (defined as half the credits required of a full-time student) at the college/university whenever he/she is working for that college/university. Breaks of 5 weeks or less are an exception to the rule, as is the case where a student is in the last quarter/trimester/semester of study for his/her degree. Summer session, however, is NOT an exception. If the student works during the summer, and is not enrolled in classes at least half-time, FICA must be withheld, and the student must be provided with the effective opportunity to make elective deferrals to a 403(b) program.
- Employees of the college/university—the 3121(b)(10) regulations make it quite clear that individuals who are actually employees of the university do not become “students” merely because they are enrolled in classes beyond the performance of their duties for the college/university, even if they are pursuing a degree. This includes services under a medical residency program. However, graduate assistants are generally considered to be students who are FICA-exempt and may also be excluded from the 403(b) plan.
In conclusion, these rules are quite complicated, and are easily open to misinterpretation. If there is any doubt as to whether an individual should be treated as a student for 403(b) and FICA purposes, you should contact counsel well-versed in such matters.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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