If your company has made financially significant severance payments to employees who were involuntarily separated due to a reduction in force, plant closing, discontinuance of operations, or similar event or condition, you may be entitled to a refund of FICA taxes paid under a Sixth Circuit Court of Appeals decision in the case of United States v. Quality Stores. The decision of the case was that severance payments qualifying as “supplemental unemployment compensation” are excluded from the Internal Revenue Code’s statutory definition of “wages” and therefore are not subject to FICA employment taxes.
You should file a refund claim to stop the statute of limitations from continuing if your company has paid FICA tax on such payments; however, the IRS is not likely to start giving refunds soon because this Sixth Circuit case is in conflict with a Federal Circuit decision.
While the FICA tax was paid, it did not agree with the IRS that the severance payments constituted wages for FICA purposes. The payments made to its employees pursuant to the plans were not wages but instead constituted supplemental unemployment benefits (SUB) payments that were not taxable under FICA. The Sixth Circuit held that the severance payments made constituted SUB payments that are not taxable as wages under FICA.
The Sixth Circuit emphasized that Congress has provided that a SUB payment is:
- an amount paid to an employee;
- pursuant to an employer’s plan;
- because of an employee’s involuntary separation from employment, whether temporary or permanent;
- resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions; and
- included in the employee’s gross income.
The Sixth Circuit Court acknowledged that its decision was in direct conflict with that in the CSX case. An IRS Revenue Ruling that says severance payments are wages subject to FICA tax. The Sixth Circuit held, however, that the intent of Congress trumps an IRS pronouncement of tax policy. With the IRS and Sixth Circuit in conflict on this issue of wide application, there is a fair chance the Supreme Court might review this case.