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.

After a failed attempt to extend Emergency Unemployment Compensation (“EUC”) benefits on January 15, 2014, on February 6, 2014 Senate Democrats sought to once again move a short term EUC benefit extension bill through the Senate.  60 votes were needed to push the bill to further Senate consideration.

Senator Jack Reed’s (D-RI) latest proposal included provisions to pay for the $6.4 billion cost of the EUB benefit extension with a pension smoothing amendment which would reduce required pension contributions by employers.  While there was interest on the part of a number of Republicans in finding language that would attract 60 votes through the amendment process, Senate Majority Leader Harry Reid chose to bring the bill to the floor without further amendment.  The proposed bill attracted only two Republican votes and failed.

With the expiration of Emergency Unemployment Compensation (“EUC”) benefits on December 28, 2013, Senate Majority Leader Harry Reid provided extension legislation to the Senate; however there were concerns that new “pay for” amendments may be necessary to gain approval in the House.

Senator Reid proposed voting on alternative legislation with the cost paid for with a provision that called for extending the defense sequester cuts beyond the 10 year budget window.  Unfortunately, the Senate lacked the votes to send the bill to the House, but there was a possibility that another EUC benefit extension bill could be considered in the future.

Senator Jack Reed (D-RI) has proposed a new amendment to the EUC benefit extension bill that would extend EUC benefits through March 31, 2014 and seek to “pay for” the extension largely through a pension smoothing proposal that would permit employers to reduce pension contributions, resulting in money available to be spent in the economy and presumably increase tax revenue.

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.

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.

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.

 

With the expiration of Emergency Unemployment Compensation (“EUC”) benefits on December 28, 2013, President Obama had indicated support for an extension of the EUC benefit program.  In response, Senate Majority Leader Harry Reid scheduled extension legislation for a cloture vote in the Senate on January 6, 2014.  The bill would extend EUC benefits for three months through March 31, 2014.

While the United States Senate did successfully vote 60-37 to avoid cloture on January 7th to further consider the passing of legislation to extend EUC benefits, there were concerns by the Senate that new “pay for” amendments may be necessary to gain approval in the House.

With the signing of the “American Taxpayer Relief Act of 2012” in January 2013, legislation was passed to further extend the Emergency Unemployment Compensation (“EUC”) benefit program through December 28, 2013.  EUC benefits allow qualified states to provide up to 47 additional weeks of federally funded unemployment insurance (“UI”) benefits to people who have exhausted their regular state UI benefits.

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.

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.

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