Under the Affordable Care Act health care reform law, doctors and nurses whose student loans are forgiven under state programs that reward those who work in underserved areas don’t have income in the amount of the debt that’s forgiven.
Even better: In a Chief Counsel Advice memorandum, the IRS concluded that medical professionals who received loan repayments under a state program didn’t have wages subject to income tax withholding, FICA and FUTA. (CCA 201147001)
The doctor will see you now. The IRS described these facts. A state’s program was designed to attract health care professionals to work in rural, low-income and other medically underserved areas. Participants committed to providing primary and specialized services for a certain number of years.
In return, participants received loan repayment funds after each year of satisfactory service. The repayments were limited to educational loans that participants took out for undergraduate, graduate, medical or dental school. Loans consolidated with noneducational loans weren’t eligible for repayment.
Open wide and say “ah.” The question for the IRS was whether the loan repayments were income to the participants, and, if they were income, whether the amounts received were wages, subject to income tax withholding, FICA and FUTA.
The IRS concluded that the loan repayments weren’t income or wages. IRS: The purpose and operation of the program showed that the state was committed to providing medical services to underserved populations. Loan repayments, therefore, were excludable from participants’ income under tax code Section 108, and excluded from wages under tax code Sections 3121(a)(20), 3306(b)(16) and 3401(a)(19).
√ PAYROLL PRACTICE TIP: Medical practices can work under myriad contracts with a state. Payroll managers should advise medical professionals to check with their state loan program offices to determine whether any loan forgiveness program is eligible for this tax relief.