In today’s economic environment, reductions-in-force are not only unavoidable, but necessary in order for companies to meet the demands of  an ever-changing business and economic environment.  And, while no company wants to lay off any employee, there comes a time when layoffs must happen.

In what could be viewed as an “entitlement benefit,” the majority of companies in the United States prefer to provide a lump-sum severance benefit to their reduced workforce in order to provide a “cushion” to new employment.  Unfortunately, this type of severance, when coupled with the potential for the laid off employee to receive state unemployment insurance (UI) benefits simultaneously, may inadvertently encourage that former employee to stay out of work longer than is necessary. 

Published in Unemployment Benefits

William Hays Weissman is an employment attorney and a shareholder at Littler Mendelson P.C., the largest global labor and employment law firm. An attorney with both an M.B.A. and Master of Laws (LL.M.) in Taxation, he specializes in employment taxes and counsels clients on the tax implications of various employer-provided benefits. William is also a noted advocate of an alternative severance program known as a Supplemental Unemployment Benefit (“SUB-Pay”) Plan.  Recently, Total Management Solutions asked William why he recommends SUB-Pay Plans to certain clients.

Published in Severance Strategies

Expense reduction is an on-going priority for most employers today.  CFOs and finance departments are largely tasked with finding innovative ways to manage overhead costs.  Typical cost reduction efforts focus on cutting expenses such as headcount, materials, supplies, and other purchased items.  Compensation and benefits plans also are routinely examined to cut costs, but severance programs often escape the scrutiny of the finance department.  This is a missed opportunity to improve severance benefits and save significant dollars.

Published in Severance Strategies
Monday, 06 October 2014 16:24

Does Your Severance Plan Make the Cut?

Businesses continue to experience long-term residual effects from the Great Recession.  Today, employers in virtually all industries are still assessing their workforce needs and are looking to attract and manage employees in the most cost-efficient and tax-effective manner possible.  As part of a broader workforce strategy, many companies are also focusing on how severance practices are impacting a company's brand as much as the bottom line.  Consequently, employers are reviewing their severance polices – many of which have remained unchanged for years – to find new value-creating opportunities that can also save money for their company and their separated employees at the same time.

Published in Severance Strategies

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.

Published in Severance Strategies

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.

On March 25, 2014, the US Supreme Court ruled in favor of the IRS in United States v. Quality Stores, Inc. holding that severance payments are taxable as FICA wages.  The Supreme Court’s ruling also prevents taxpayers from receiving FICA refund claims.

However, severance paid as Supplemental Unemployment Benefits to involuntarily laid-off employees that is linked to the receipt of state unemployment insurance benefits, and not paid in a lump sum, is FICA exempt.

This latest article provides some insight in to the key takeaways employers can get from the decision in the Quality Stores case, and what to consider going forward when faced with a involuntary reduction-in-force.

Published in Severance Strategies

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.

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.

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