Filing FICA Refunds on Severance Payments
Payroll and Employment Tax Update
A recent decision by the District Court provides an opportunity for a FICA refund in connection with severance payments related to a reduction in workforce. Specifically, the U.S. District Court for the Western District of Michigan held in U.S. v. Quality Stores Inc. that, under the facts of that case, all severance payments made to laid off workers were in the nature of supplemental unemployment benefits and, as such, were exempt from FICA. The Internal Revenue Code defines supplemental unemployment benefits as “…amounts paid to an employee, pursuant to a plan to which the employer is a party, because of an employee’s involuntary separation from employment…resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions, but only to the extent such benefits are includible in the employee’s gross income.”
The IRS had argued that such payments did not constitute supplemental unemployment benefits because they were not linked to the receipt of state unemployment compensation, a condition required by the IRS under Revenue Ruling 90-72. However, in a case similar to Quality Stores, the Federal Circuit upheld the IRS position and denied the claim in CSX Corp. V. U.S. overturning the U.S. Court of Federal Claims where CSX took the same position as that of Quality Stores.
Although the chances of the IRS granting FICA refund requests related to severance payments made to laid off workers are somewhat remote given the IRS current position and the judicial hurdles that must be passed, a court case could lead to IRS approval of FICA refund claims. Accordingly, consideration should be given to filing a protective refund claim for such FICA taxes. The claim must be filed within the statute of limitations. The deadline for filing protective claims for severance payments made in 2006 is April 15, 2010.
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