Final Ruling: Early Retirement Incentive Payments Made in Cash Are Subject to FICA Taxation
School Advisor, 2007 Issue No. 1  

The U.S. Supreme Court has let stand an appellate court decision that early retirement incentive payments made in cash by Michigan schools are subject to FICA taxation.

The controversy started in 2001 when a court in North Dakota ruled that termination incentive payments were not subject to FICA taxation. Many school districts in Michigan filed “protective” refund applications. In 2004, two Michigan district courts came to opposite conclusions on whether early retirement incentive payments made in cash were subject to FICA taxation. The 6th Circuit Court of Appeals, with jurisdiction over Michigan, heard the appeal of the two cases and ruled in July 2006 that incentive payments were subject to FICA. In January 2007, the Supreme Court refused to hear the appeal of the 6th Circuit ruling, effectively blessing the decision and ending the saga.

Many districts no longer care about this ruling, because early retirement incentive payments made in the form of employer 403(b) contributions are not subject to FICA taxation, thereby bypassing the whole issue.