Supreme Court to Determine if Severance Payments Are Subject to FICA

Oct. 3, 2013

The Supreme Court on Oct. 1 granted certiorari to the government in its appeal of the 6th Circuit Court of Appeals’ ruling in United States v. Quality Stores, holding that severance payments are not subject to the Federal Insurance Contributions Act (FICA). The 6th Circuit decision conflicts with a previous ruling by the U.S. Court of Appeals for the Federal Circuit in CSX Corp. v. United States, which held that similar severance payments are subject to FICA tax.

Severance payments fall within a class of transactions called supplemental unemployment benefits (SUB) in the IRC. A SUB payment is defined as any payment that is 1) paid to an employee; 2) paid pursuant to an employer plan; 3) paid as the result of an employee’s involuntary separation from employment; 4) paid as the result of a reduction in force, the discontinuance of a plant or operation, or other similar conditions; and 5) includable in the employee’s gross income.

The IRC defines wages for purposes of income and FICA tax almost identically. However, neither definition expressly includes SUB payments. For income tax withholding purposes, SUB payments are defined as payments other than wages, and a special provision is required to extend income tax withholding rules to these payments. No such clarification exists for FICA tax purposes. The language included in the income tax withholding rules implies that SUB payments also are not considered wages for FICA tax purposes. This lack of clarity regarding the applicability of FICA tax to SUB payments led to disputes that will ultimately be settled by the Supreme Court.

Taxpayers who have not already done so should file protective refund claims for FICA taxes paid on severance payments for all open years.

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