Following the landmark US Supreme Court decision in United States v. Quality Stores, Inc., many companies have surmised wrongly that the ruling eliminates the opportunity for FICA tax savings in severance programs. It is true that a direct consequence of the ruling was that more than $1 billion in FICA tax protective refund claims filed by employers across the country were not and will not be paid. However, under the Court’s ruling, Supplemental Unemployment Benefits (“SUB-Pay”) Plans complaint with IRS Revenue Ruling 90-72 remain valid. Simply put, traditional severance plans are FICA-taxable, and SUB-Pay Plans are not.
Companies planning future downsizings due to acquisitions, restructurings, or economic conditions need to reevaluate their severance strategies in light of the Quality Stores decision in order to maximize tax benefits to both their company and their employees.