Press Room: Tax Release

September 17, 2012

FICA Tax Refund Opportunity on Severance Pay after Sixth Circuit’s Decision

Employers that implemented reduction in force or layoffs after 2008 may want to consider filing refund claims for Federal Insurance Contributions Act (FICA) taxes paid on such severance. On September 7, 2012, the Sixth Circuit Court of Appeals affirmed the decision of the Michigan Federal District Court that severance payments (that qualify as supplemental unemployment compensation benefits (SUBs)) paid to employees pursuant to an involuntary reduction in force were NOT wages for FICA purposes (U.S. v. Quality Stores, Inc.). The Sixth Circuit includes Kentucky, Michigan, Ohio and Tennessee.

A SUB payment is defined as: (1) an amount paid to an employee; (2) pursuant to an employer’s plan; (3) because of the employee’s involuntary separation from employment (whether temporary or permanent); (4) resulting directly from a reduction in force, the closing of a plant or operation or other similar condition; and (5) included in the employee’s gross income. 

The Court said that SUB payments are not wages. However, there is a special rule under the federal income tax withholding rules that provides that SUB payments are to be treated as if they were wages for federal income tax withholding purposes. There is no similar language in the FICA rules. As such, the Court held that SUB payments were not wages for FICA purposes.

The Sixth Circuit decision conflicts with that of the Federal Circuit in CSX Corp. v. United States. The Supreme Court will most likely have to resolve the issue. 

Claims for refunds of FICA taxes have to be filed by April 15 of the third calendar year following the calendar year in which the FICA taxes were paid. After the decision of the Michigan Federal District Court in March 2010, many companies filed protective claims for refunds of FICA taxes. For companies outside of the Sixth Circuit, these claims were rejected by IRS. New claims filed as a result of last week’s Sixth Circuit’s decision may, nevertheless, be rejected by IRS due to the split in the Circuits. Companies, whose claims have been rejected and whose two-year period to bring suit is ending, may want to file Form 907, Agreement to Extend the Time to Bring Suit, to extend the time. The Form 907 must be filed with IRS early enough to allow time necessary for its review, approval, and signature before the end of the two-year period.