On January 14, 2014 the Supreme Court of the United States heard oral arguments in United States v. Quality Stores, Inc., a case on appeal from the Sixth Circuit Court of Appeals. A circuit court split had spurred the Court to hear the case to decide whether certain severance payments made to employees whose employment is involuntarily terminated are taxable under the Federal Insurance Contributions Act (FICA).
A recent article by Vicki Nielsen, Of Counsel, and Hera S. Arsen, J.D., Ph.D. at Ogletree Deakins provides more information on the oral arguments from the IRS and Quality Stores.
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.
Since 2002, the ongoing debate about whether severance paid to certain employees should not be considered wages for Federal Insurance Contribution Act (FICA) tax purposes has been extended through District, Federal Circuit and US Appeals courts. The debate has carried over two monumental cases, and on January 14, 2014, the Supreme Court heard opening arguments in the United States v. Quality Stores case. This case will be the ultimate decision maker as to whether severance should be treated as Supplemental Unemployment Benefits (SUB-Pay). A decision should be rendered by summer 2014.
The Quality Stores case will have huge implications regarding the way many companies pay their existing severance packages to former employees. And while Quality Stores, Inc. is seeking about $1 million in FICA tax refunds on severance payments it made in 2001, the government has declared that the Internal Revenue Service (IRS) could owe more than $1 billion in thousands of protective FICA tax refund claims to individuals and businesses.
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.
On October 1, 2013, the U.S. Supreme Court agreed to hear arguments in the landmark United States v. Quality Stores, Inc. case to resolve the issue of whether companies and employees must pay FICA taxes on severance payments. The case has implications for many companies that paid FICA taxes on severance to workers laid off in the 2007-2009 recession.