FICA Taxes on Severance Pay

[Corporate ORphan]

My company was bought out in 2008 and immediately laid off a bunch of people. We all got severance pay. A friend of mine sent me the following about the possiblility of getting the FICA taxes back on the severance. Anyone familar with this?

Thanks!

"There is a lawsuit against the IRS that basically says that severance pay should not have FICA taxes withheld. This lawsuit will probably take another few years to settle. But there is a problem waiting until the lawsuit is settled to claim a refund.
There is a 3 year time limit on receiving refunds of taxes. If it goes beyond 3 years, even if you can then prove you deserve a refund, you are out of luck. So if you got severance in 2008, at the end of this year you will be out of luck, if you do not act. You can protect your right to the possible FICA refund until the lawsuit is over. You have to tell the government you want an extension of the time limit

In February 2010, a federal district court in U.S. v. Quality Stores, Inc., (DC MI 2/23/2010) 105 AFTR 2d 2010-1110, ruled that severance payments made to terminated employees by a company going out of business were not “wages” subject to FICA. The Court said that “…where severance payments are intended to serve the same purpose as social security benefits, i.e., support for workers in lieu of a lost ability to earn wages, the collection of social benefi t taxes on the wage-replacement benefits makes little sense.”
The Court believed that the severance payments were in effect supplemental unemployment compensation benefits, not taxable remuneration for the employees’ services or wages. Therefore, the Court reasoned that the severance payments were not subject to taxation for FICA purposes.

These articles explain the issue more": ​

​

http://www.plantemoran.com/services/Tax/tax-alerts/Documents/Fed-Court-Severance-Payments-FICA-3-10.pdf
http://johnrdundon.com/severance-payments-not-subject-to-fica-tax-according-to-court-but/​

 

[Brat]

Interesting...

 

[Animorph]

Might have a leg to stand on if the company goes out of business given that description. My severance pay just continued my salary and benefits, as if I was an employee with no assignment. And the company stayed in business, though our department did not. Sounds like it wouldn't apply to that situation.

 

[Texas Proud]

If you read the tax link supplied... this is the company side of FICA... I would think that there is no lawsuit on the employee side...

Also, it seems the payments have to meet this test:

In general, to be considered SUB payments, benefits must at a minimum be:
1) Paid to an employee pursuant to a “plan” sponsored by the employer;
2) Paid because of the employee’s involuntary separation from employment (whether temporary or permanent);​

​

and​

3) The direct result of a reduction in force, the discontinuance of a plant or operation, or other similar conditions.

No plan by the employer, no refund....​

 

[Brat]

A smart employer would create a 'plan' as they save as much as the terminated employees.

 

[jdmorton]

Update to 2011 Thread on FICA Taxes on Separation Pay

I did a search on ER and found this thread on FICA taxes being withheld from separation pay: http://www.early-retirement.org/forums/f28/fica-taxes-on-severance-pay-58649.html. Due to its age, I could not add to it. [mod edit - threads merged]

As I will be receiving a lump sum separation payment this coming January from Megacorp, I was doing an Internet search on tax amounts that could be withheld from my payment and found the case in the 6th Circuit Court of Appeals (covering the states of Michigan, Ohio, Kentucky, and Tennessee) that the above referenced thread was discussing.

In September 2012, the Appeals Court upheld the district court's ruling that supplemental unemployment benefits (SUB) are not subject to FICA taxes, contrary to IRS guidelines and policy. The Department of Justice has requested the Appeals Court re-examime its decision. Even the Appeals Court believes this issue will be eventually settled by the Supreme Court due to the potential amounts of IRS refunds that will be due to taxpayers - estimated by the IRS to be in excess of 1 billion dollars.

The reason I believe an update is warranted is because of a misconception in the 2011 ER thread -namely, this ruling does apply to both the business that paid the FICA and the employees that had FICA deducted from their separation payment. In the thread, there was discussion that this ruling probably only applied to the company paying the tax. In reading the Court's decision, it turns out that the appellee (Quality Stores) asked its former employees if it could contest the payment of FICA taxes that were withheld from their severance pay as well the amount the company paid. Over half said yes (not that I think that really matters), so this decision also applies to the employees.

Another reason to add an update is some guidance that I found on a web page that is associated with the Association of Corporate Counsel. Since there is a 3-year statute of limitations for amending a tax return, the law firm that wrote an article about this case suggested that companies that do withhold FICA taxes on SUB payments file a 'protective refund claim' that would include any employee's refund as well. This law firm says that the company would need to obtain the employee's consent in order to file for them. Their belief is the IRS would then hold the refund claim in abeyance until this issue is resolved through the appeal process, which they estimate will take "years". From my reading, the strategy of a 'protective refund claim' would apply across the U.S. and not just for the states covered by the 6th Circuit since, if the Justice Department loses its appeal, it will apply nationwide.

Anyway, I think this is particularly applicable to anyone who worked for a company with a SUB plan and received a lump-sum severance pay that had FICA withheld since 3 years from the date of the Appeals Court decision (September 7, 2012). You might want to check to see if your company is planning on filing a 'protective refund claim' and make sure you are included in that claim - although it might be too late for the 2009 tax year. I haven't found anything yet that suggests individual employees should file something similar to the 'protective refund claim' if your company doesn't.

Because this discussion is already getting very long, here are some links that provide more detail than I believe can summarize accurately:

6th Court of Appeals 09/07/12 Decision: http://www.ca6.uscourts.gov/opinions.pdf/12a0313p-06.pdf

ACC Web Page Article: Court holds severance payments not subject to FICA taxes; refund claims should be filed soon - Lexology

PS: I am not a lawyer, so don't misconstrue this as any sort of legal or tax advice.

PPS: My experience in Megacorp is that you should not take for granted that your company knows about this and will automatically include the affected former employees in any protective refund claim. In 20+ years with my Megacorp in the corporate office, I would continually find that the people who should know about a subject did not have a clue about something that a simple Internet search would find.

 

[jdmorton]

Another Update

As expected, the DOJ petitioned the Supreme Court to review the 6th Circuit's decision on FICA taxes on separation pay. On October 1, the Supreme Court's list of cases for the 2013-2014 session includes hearing oral arguments for this case. A final ruling is not expected until sometime in 2014. Link to the Supreme Court 2013 list of cases granted a hearing: http://www.supremecourt.gov/orders/13grantednotedlist.pdf