Supplemental Unemployment

In the face of increasing national and international competition, Fortune 1000 companies are continually assessing their corporate tax strategies to find new ways to maximize cash flow and reduce their tax burden.

Corporate finance departments often focus on employee benefit plans to look for ways to improve efficiencies, control costs, and increase tax savings.  CFO’s and tax specialists should also examine company severance plans to ensure that these programs are designed and administered on a tax-advantaged basis.  What many companies do not realize is that there is an IRS-compliant severance strategy that offers significant tax savings.

In what many consider to be the most significant payroll tax opinion issued in the last 30 years, on March 25, 2014 the US Supreme Court ruled in favor of the IRS in United States v. Quality Stores, Inc. deciding that severance payments employers made to laid-off employees are “wages” and are taxable under FICA.  The immediate fallout from this decision is that more than $1 billion in FICA tax protective refund claims filed by employers across the country will not be paid.

Despite the rejection of FICA tax refund claims, under the Court’s ruling, Supplemental Unemployment Benefits (“SUB-Pay”) Plans complaint with IRS Revenue Ruling 90-72 remain valid.

The decade-long debate over whether or not severance paid to certain employees is considered wages for Federal Income Contributions Act (“FICA”) tax purposes is over.  On March 25, 2014, the US Supreme Court ruled in favor of the IRS in United States v. Quality Stores, Inc., deciding that severance payments employers made to involuntarily laid-off employees are “wages” and are taxable under FICA.

This latest TMS article on the Quality Stores case was featured in the Tax News section of Law360.com.  Please click here to read and download the article on Law360.com (subscription required) or click here to download a copy from TMS.

With the prolonged effects of a troubled economy, a state’s ability to keep its unemployment insurance (“UI”) trust fund solvent is a challenge.  When states exhaust their UI trust funds and borrow from the federal government to pay UI benefits, the results can extend to decreased UI benefits, a decreased amount of UI benefit weeks and an increase to the rate by which employers are taxed for federal and state unemployment taxes.

FUTA tax is automatically increasing by approximately $21 per year in states that fail to repay federal loans, and it’s projected to jump even higher for 2014.  FUTA tax is normally only $42 per employee in states with outstanding loans; however this amount may dramatically increase in 2014 to $84 to $196 per employee in those states that paid out more in state UI benefits in comparison to their UI tax rates.

The U.S. Supreme Court’s decision in United States v. Quality Stores, Inc. is the most significant payroll tax opinion issued in the last 30 years, if not ever.  Not only does it put an end to the thousands of Social Security and Medicare (FICA) tax refund claims filed by employers on their own behalf and on behalf of millions of terminated workers, but it also may impact and limit the extent to which future downsized workers are eligible to receive state unemployment benefits.

A recent article by Mary Hevener and David Fuller, partners at Morgan Lewis, provide more information on the Court's decision, and how benefits made from a SUB-Pay Plan compliant with IRS Revenue Rulings are still FICA tax exempt.

Click here for the Morgan Lewis article.

This article was drafted by the attorneys of Morgan Lewis.  This information should not be relied upon as legal advice.

On March 25, 2014, the Supreme Court of the United States held that severance payments are taxable under the Federal Insurance Contributions Act (FICA) when made to employees whose employment is involuntarily terminated.  The Court reasoned that FICA’s definition of wages encompasses severance payments and that the severance at issue in this case, which was not linked to the receipt of state unemployment benefits, was not exempt from FICA tax.

A recent article by Hera S. Arsen, J.D., Ph.D. and Vicki Nielsen, Of Counsel at Ogletree Deakins provides more information on the Court's decision, and how benefits made from a SUB-Pay Plan compliant with IRS Revenue Rulings are still FICA tax exempt.

Click here for the Ogletree Deakins article.

This article was drafted by the attorneys of Ogletree Deakins, a labor and employment law firm that represents management. This information should not be relied upon as legal advice.

This article was originally published on the Ogletree Deakins Employee Benefits blog.

Today the US Supreme Court ruled in favor of the IRS in United States v. Quality Stores, Inc., the closely watched case involving whether employers are eligible for a refund of FICA taxes remitted on certain types of severance pay.

The Court unanimously rejected a $1 million refund bid by defunct agricultural specialty retailer Quality Stores, and said severance payments the company made to 3,100 people were subject to tax under the Federal Insurance Contributions Act (“FICA”).  In addition, more than $1 billion in FICA tax protective refund claims filed by employers across the country will not be paid by the IRS.

This case had broad implications on whether employers continue to provide Supplemental Unemployment Benefit (“SUB-Pay”) Plans, which are linked to the receipt of state unemployment insurance (“UI”) benefits which, pursuant to the IRS’s administrative position going back to the 1950s, is not subject to FICA or FUTA taxes.

In recent years, the economic downturn has led to widespread involuntary reductions in workforces across many diverse industries. Because these staff reductions are costly, Fortune 1000 companies have struggled to control severance costs while providing reasonable severance benefits at the same time. Consequently, there has been renewed interest among large companies in an alternative severance program known as a Supplemental Unemployment Benefit (“SUB-Pay”) Plan.

According to the Internal Revenue Service (IRS), severance is subject to Federal Insurance Contribution Act (FICA) tax and certain supplemental unemployment benefits are not. That’s right, employers can provide today, just as they have for years, termination benefits that are FICA-tax exempt. One of the primary benefits of providing termination benefits that qualify for the IRS-recognized exclusion from FICA tax is that those benefits typically do not impact the employee’s eligibility for, or amount of, state unemployment benefits.

The IRS’s position in the United States v. Quality Stores, Inc. case is that “supplemental unemployment compensation benefits,” as defined in Internal Revenue Code section 3402(o), and other severance payments are not FICA-tax exempt. On the other hand, the IRS’s administrative position, pursuant to IRS revenue rulings and private letter rulings going back to the 1950s, is that supplemental unemployment compensation benefits paid under a properly designed and administered plan is not subject to FICA or Federal Unemployment Tax Act (FUTA) taxes. For purposes of this blog series, supplemental unemployment compensation benefits that are exempt from FICA and FUTA taxes pursuant to the IRS’s administrative position are referred to as “traditional SUB-Pay” or “SUB-Pay.”

A $1.8 billion pharmaceutical company with 10,000 employees in eight states asked Total Management Solutions (“TMS”) to implement a Supplemental Unemployment Benefit (“SUB-Pay”) plan for its planned staff reduction. The SUB-Pay Plan needed to be implemented within 30 days.

With over 25 years of experience implementing SUB-Pay Plans for Fortune 1000 companies, TMS was able to guide the company through the custom design and implementation of their plan within the required 30 days.