Protective Refund Claims for FICA Tax: What to Do Given the Court’s Decision?
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Protective Refund Claims for FICA Tax: What to Do Given the Court’s Decision?

The U.S. Court of Appeals for the Sixth Circuit has affirmed the district court’s ruling in the case of United States v. Quality Stores, Inc., finding that certain severance payments should not be considered wages for FICA taxation purposes. These decisions have opened the door for employers who made covered severance payments, and paid the associated FICA taxes, to file a claim for refund. On October 18, 2012, the government filed a petition with the Sixth Circuit for rehearing of the Sixth Circuit’s earlier decision. The government has argued that the case involves a question of “exceptional importance”, contending that the Sixth Circuit’s ruling conflicts with prior cases and noting that the total amount currently at issue exceeds $1 billion. 

The decision in Quality Stores does not provide a wholesale exemption from FICA for all severance benefits; rather, it addresses “supplemental unemployment compensation benefits” (“SUB payments”).

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. Be paid as a direct result of a reduction in force, the discontinuance of a plant or operation, or other similar conditions.

Unless payments meet the above criteria, it is unlikely that an employer will prevail in a claim for refund.

Even though the case is not final and the appeals process may continue for some time, if you paid FICA tax on severance payments, you should consider whether filing a protective claim for refund to preserve your claim is worthwhile.  Because of the statute of limitations, claims for refund of FICA taxes on severance benefits paid in 2009 must generally be filed on or before April 15, 2013. Claims for FICA tax refunds related to severance payments made before 2009 are generally closed under the statute of limitations. If you have any questions, or if we can assist in the claim for refund process, please contact your Plante Moran client services representative.

The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.

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Michael Krucker