Deadline Looms For Quality Stores FICA Refund Claims For Severance Payments

The Supreme Court of the United States recently heard arguments in its review of the U.S. Court of Appeals for the Sixth Circuit's Quality Stores decision. At issue in Quality Stores is whether certain severance payments made to employees following an involuntary separation, but which are not linked to state unemployment benefits, are "wages" subject to Federal Insurance Contributions Act (FICA) tax. While the Supreme Court is reviewing the Quality Stores decision, there is an impending April 15, 2014, deadline for employers to file a protective refund claim for 2010 employment taxes for FICA taxes paid on severance payments.

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 U.S. Court of Appeals for the Sixth Circuit. The issue at stake is whether certain severance payments made to employees following an involuntary separation, which are not linked to state unemployment benefits, are "wages" subject to Federal Insurance Contributions Act (FICA) tax.

Background

In Quality Stores, 693 F.3d 605 (6th Cir 2012), the Sixth Circuit held that certain "supplementary unemployment benefit" payments (SUB payments) made to employees following an involuntary separation are not wages subject to FICA tax, even though they were not based on state unemployment benefits and were paid in a lump sum. This decision was in conflict with a prior decision by the U.S. Court of Appeals for the Federal Circuit, CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), which held that SUB payments, such as those made by Quality Stores, are wages under FICA.

Generally, SUB payments may be included or excluded from FICA wages depending on various factors. The Internal Revenue Service (IRS) has ruled that certain SUB payments are not FICA wages, but only if they meet specific conditions, including payments must not be made as a lump sum and must be specifically designed to supplement state unemployment benefits that the individual is qualified to receive. The Sixth Circuit ruling would expand the class of SUB payments excluded from FICA tax to include payments which were not linked to state unemployment benefits and were paid in a lump sum.

The Supreme Court is expected to issue its ruling sometime this year, possibly this summer. The IRS has estimated that it could owe more than $1 billion in FICA tax refund claims to individuals and employers if the Quality Stores...