The TMS Team

The TMS Team

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.

TMS was recently featured in the Connecticut Bar Association's March 2014 tax newsletter.

TMS offered insight into how a Supplemental Unemployment Benefit (SUB-Pay) Plan can benefit employers and their displaced employees given the recent the U.S. Supreme Court's recent ruling in United States v. Quality Stores, Inc. case.

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.

After months of negotiating, on Monday, April 7, 2014, the Senate passed House bill 3979 which contained an amendment to renew Emergency Unemployment Compensation (“EUC”) benefits to the long-term unemployed.  The bill passed by a vote of 59-38 and now heads to the House for a vote and final approval.

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.

SUB-Pay Plans and Total Management Solutions were featured in a recent Workforce Magazine article by Patty Kujawa.

In the article, "SUB-Pay Plans Could Ease Employer Severance Costs", Ms. Kujawa explains that severance packages, and their included taxes, can put pressure on a company's cash reserves.  However, a SUB-Pay Plan may be a better financial alternative to help companies lower severance costs.

Exempt or Not Exempt?  That is the question in the landmark United States v. Quality Stores, Inc. case which will decide once and for all if certain severance payments made to employees whose employment is involuntarily terminated are taxable under the Federal Insurance Contributions Act (FICA).

On January 14, 2014, the Supreme Court of the United States heard oral arguments in the Quality Stores case.  While the case will not be decided until June 2014 at the latest, many legal experts are sharing their reaction to the opening arguments.

A recent blog post by Alan Horowitz, the head of the Supreme Court and Appellate Litigation Group at Miller & Chevalier, offers his thoughts on the oral arguments from the IRS and Quality Stores.

Click here for Alan's blog post.

Another blog post by Bradley Joondeph, the Inez Mabie Distinguished Professor and Associate Dean for Academic Affairs at the Santa Clara University School of Law, posted on the SCOTUSblog his thoughts on the oral arguments from the case as well.

Click here for Bradley's blog post.

This information should not be relied upon as legal advice.

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