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Employment Law
Alert March 26, 2010
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Labor and Employment Practice
Group Leaders
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Contributors
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Employment Law
Alert
CERTAIN SEVERANCE PAYMENTS MAY NOT BE SUBJECT TO
FICA TAX
In a recent decision, the U.S. District Court for the
Western District of Michigan concluded that certain forms of
severance payments made to involuntarily terminated workers should
not be classified as wages for FICA tax purposes.
In U.S. v. Quality Stores, Inc., the employer was
ultimately forced to close all of its stores and terminate all its
employees as a result of bankruptcy. The employer made
severance payments pursuant to severance plans to employees
terminated both before and after the bankruptcy proceeding.
Payments were made as a result of the employees' involuntary
termination pursuant to a reduction in work force or discontinuance
of a plant or operation. Employees' severance payments were
included in their gross income and FICA tax was withheld. The
severance payments were not connected to the receipt of state
unemployment compensation and were not paid as a result of the
rendering of any particular employment services. The employer
filed for refunds from the IRS to recover the FICA taxes paid on the
severance payments. The court concluded that the payments at
issue were not wages, and thus not subject to FICA, because the
payments at issue were "supplemental unemployment compensation
benefits" ("SUB benefits") under 26 U.S.C. §3402(o)
and were a form of wage-replacement social benefits as opposed to
remuneration for the employees' services.
At a minimum, in order to be a SUB payment, the court,
citing to 26 U.S.C. 3402(o), indicated the benefits must be:
1. Paid
to an employee pursuant to a plan sponsored by an employer;
2. Paid because of the employee's involuntary separation from
employment; and
3. Be the direct result of a reduction in force, the discontinuance
of a plant or operation, or other similar
conditions.
It is
important to note that this ruling is limited to severance payments
which can be classified as SUB benefits and is likely to be appealed.
Employers that
paid severance benefits in 2006 that can be classified as SUB
benefits may want to file a protective claim for refund by April
15, 2010 to avoid the claim being precluded by the statue of
limitations. Employers should also consider whether to file a
claim for later years, if their situation is one where SUB benefits
were paid, but they have more time to do that.
It is likely
that the IRS will either reject refund claims or hold them in
abeyance until all appeals of this case have been exhausted. In either
event, timely filing of a claim for refund will protect an employer's
right to claim a refund in the event the court's decision is affirmed
on appeal.
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To find out
more about Clark Hill and our Labor and Employment Practice Group,
visit clarkhill.com
or call 800.949.3124
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