CCA 1049028: Expanded exclusion covers certain health-professional loan repayment and forgiveness amounts

Plain-English summary

This Chief Counsel Advice addresses the expanded exclusion under IRC § 108(f)(4) for certain payments under health-professional loan repayment and forgiveness programs. It concludes that the expansion covers both loan repayment and loan forgiveness programs intended to increase health care services in underserved or health professional shortage areas. The advice explains that the change was retroactive to 2009, so some individuals may be entitled to refunds of taxes paid on qualifying amounts. It also describes procedures intended to prevent double refunds of FICA taxes, including coordination between employers and employees. The IRS notifies the Social Security Administration when an employer obtains a FICA refund for an employee, but states that there is no formal process for notifying the agency when an employee receives a refund through an individual Form 843 claim.

Ruling snapshot

• Question: Does the expanded IRC § 108(f)(4) exclusion cover loan repayment as well as loan forgiveness, and how are related FICA refunds handled?
• Outcome: advice given
• Key authorities: IRC §§ 108(f)(4), 3101, 3111, and 6402; Treas. Reg. § 31.6402(a)-2.

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201049028
       Release Date: 12/10/2010
       CC:TEGE:EOEG:ET2:                       Third Party Communication: None
       POSTS-132938-10                         Date of Communication: Not Applicable

UILC: 108.01-00

date: October 04, 2010

 to:   Rosalind C. Kochmanski
       Field Director, Accounts Management

       (Wage and Investment)

from: Lynne Camillo
Chief, Employment Tax Branch 2
Office of the Division Counsel/ Associate Chief Counsel

       (Tax Exempt and Government Entities)

subject: ETA Employment Tax Questions Relating to Expansion of Section 108(f)(4)

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.

       This letter responds to your questions regarding the Expanded Tax Benefit for Health
       Professionals Working in Underserved Areas under section 10908 of the Patient
       Protection and Affordable Care Act (Affordable Care Act). This provision of the
       Affordable Care Act expanded the types of income from the repayment or discharge of
       indebtedness that are excludible from individuals’ gross incomes under section 108 of
       the Internal Revenue Code (“the Code”).

       Law

       Section 108 generally excludes from individuals’ gross incomes certain types of income
       from the discharge of indebtedness. Relevant to your inquiry is subsection 108(f)(4),
       which excludes that income that individuals receive in association with payments under
       a National Health Service Corps Loan Repayment Program or under certain State loan
       repayment programs. More specifically, this subsection states that gross income does
       not include any amount that an individual receives under section 338B(g) of the Public
       Health Service Act, under a State program described in section 338I of this Act, or, as

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amended by the Affordable Care Act, under any State loan repayment or loan
forgiveness program “that is intended to provide for the increased availability of health
care services in underserved or health professional shortage areas.”

The Affordable Care Act added this last portion of section 108(f)(4)—the exclusion for
State loan repayment or loan forgiveness programs that increase the availability of
health care services in underserved or health professional shortage areas—retroactive
to 2009. This means that certain individuals who included the loan repayment or loan
forgiveness amounts in their income may be entitled to refunds of taxes they paid in
2009.

Section 6402(a) of the Code contains the general authority to make refunds or credits.
Under this section, in the case of any overpayment, the Service may credit the amount
of such overpayment, including interest, against any internal revenue tax liability of the
person who made the overpayment and shall refund any balance to such person. Other
portions of section 6402 require the Service to credit overpayments against non-tax
liabilities such as delinquent child support payments. Section 31.6402(a)-2 of the tax
regulations provides, among other things, that any person who pays more than the
correct amount of employee or employer tax under section 3101 or 3111 may file a
claim for refund or claim credit of such overpayment. This section sets forth the basic
requirements for claiming such refunds or credits.

For more information about this expansion of Section 108(f)(4), please see the attached
IRS News Release, “Affordable Care Act Provides Expanded Tax Benefit to Health
Professionals Working in Underserved Areas”, IR-2010-74, released June 16, 2010.

Responses to Specific Inquiries

Inquiry 1: Does the new subsection 108(f)(4) cover only loan forgiveness, or does it also
cover loan repayment?

Answer: The new subsection 108(f)(4) covers both loan forgiveness and loan
repayment.

Prior to the enactment of this provision of the Affordable Care Act in March of 2010, the
exclusion provided by subsection 108(f)(4) covered only certain loan repayment
programs—that is, amounts that individuals received under the National Health Service
Corps Loan Repayment Program, or under certain State loan repayment programs that
were eligible for funding under the Public Health Service Act.

The Affordable Care Act, however, extended this exclusion to apply also to those
amounts that individuals receive under State loan repayment or forgiveness programs
that are intended to increase the availability of health care services in areas that are
either underserved or experience health professional shortages.
POSTS-132938-10 3

Inquiry 2: Are there sufficient procedures in place to prevent individual employees from
receiving “double refunds” of FICA taxes (that is, refunds from both their employers and
from the IRS)?

Answer: Yes. IRS procedures for claiming FICA tax refunds require employers and
employees to coordinate with each other in order to ensure that duplicate refund claims
are not filed and double refunds are not paid.

The procedures employees use to claim refunds of FICA taxes are different than the
procedures used to claim income tax refunds. First, employees are encouraged to
contact their employers and request that the employer seek a refund of FICA taxes on
the employees’ behalf. Because employers also pay a portion of FICA that is not
withheld from payments to the employee, the employer will also be entitled to a refund.
The employer may have other similarly situated employees who are entitled to refunds
and the IRS can process a single refund claim filed by the employer more efficiently
than it can process numerous refund claims filed by individual employees. If the
employer refuses to seek a refund on the employee’s behalf, the employee may file a
refund claim using Form 843. Line 6 is where the employee explains the reason for the
refund and efforts made to secure it. As discussed further below, the employee’s claim
for refund generally must include a statement from the employer indicating whether the
employer has reimbursed any of the FICA tax to the employee or filed a refund claim for
any of the employee FICA tax for which the employee is seeking a refund.

Section 31.6402(a)-2(b) of the tax regulations provides generally that an employee may
file a claim for refund of FICA taxes erroneously withheld by his employer only if: (1) the
employee is not reimbursed by his employer for the erroneously withheld tax, (2) the
employee does not authorize the employer to file a claim for refund, and (3) the
employee has not claimed the amount of overwithheld FICA taxes as a credit against
his income tax liability. This section also specifies that the refund claim must include a
statement by the employee which sets forth whether he has claimed any portion of the
overcollection as a credit against income tax liability, and must include a statement
obtained, if possible, from the employer, setting forth the extent, if any, of any
overpayment which has been claimed as a refund by the employer or authorized by the
employee to be so claimed. If the employer does not furnish the employee with such a
statement, the employee’s refund claim must set forth the facts to the best of the
employee’s knowledge and explain the employee’s inability to obtain the statement from
his employer. The failure to comply with these procedures may provide a basis for
disallowing the claim.

Inquiry 3: Will the IRS notify the Social Security Administration (“SSA”) when an
individual employee receives a FICA refund?

Answer: The IRS notifies SSA when the employee receives a FICA refund through their
employer as a result of the employer seeking a refund on the employee’s behalf.
However, when the employee files an individual claim for refund on his or her own
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behalf using Form 843, there is no formal process by which the IRS informs the SSA of
an individual’s receipt of a FICA refund.

As noted above, employees are encouraged to first contact their employers and request
that they seek a refund of the employee share of FICA on the employee’s behalf.
Employers seeking such refunds must file an amended employment tax return (Form
941-X). Employers must file a separate Form 941-X for each Form 941 that needs to
be corrected. When filing Form 941-X, the employer must certify that the employer has
filed or will file the Forms W-2, Wage and Tax Statement, or Forms W-2c, Corrected
Wage and Tax Statement, as required. SSA receives a copy of the Forms W-2 or W-2c
and is therefore on notice of the FICA refund.

If the employer refuses to seek a refund on the employee’s behalf, the employee may
file a FICA refund claim his or her own claim for refund of the employee share of FICA
using Form 843. Under these circumstances, the employee will not receive a Form W-2
or Form W-2c from the employer, and there is no formal process by which the IRS
informs SSA of the individual’s receipt of a FICA refund.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call Lynne Camillo or Syd Gernstein (202) 622-6040 if you have any further
questions.