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Proskauer's ERISA Practice Center Blog The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

Supreme Court to Decide Whether RIF-Related Severance Pay Is Subject to FICA

Posted in Federal Insurance Contributions Act, Reduction in Force, Severance Payments

Although some would argue that the next U.S. Supreme Court term is not shaping up to be as monumental as the last term, employers should have their eye on the recent decision of the Court to hear United States v. Quality Stores, Inc. The Court’s decision in this case in the next term will finally put to rest the question of whether severance payments made to former employees pursuant to an involuntary reduction in force are wages for the purposes of Social Security and Medicare withholding under FICA.

By way of background, just over a year ago, the Sixth Circuit held in this case that severance payments were not wages for this purpose. This was significant because it created a Circuit Court split on this issue. In 2008, the Federal Circuit reached the precise opposite decision in CSX Corp. v. United States. This has become a particularly relevant issue, given the increase in workforce reductions over the past several years. A more detailed discussion of the impact of the Sixth Circuit’s decision can be found here: http://www.proskauer.com/news/detail.aspx?news=8916.

While we continue to believe it is prudent for employers to continue to withhold FICA taxes on severance pay in the context of involuntary terminations in most cases, the Supreme Court’s decision to hear this case is a reminder for employers to consider filing protective refund claims to preserve their rights and prevent the statute of limitations expiring on tax refund claims for still open years. The deadline for filing a protective claim is three years from April 15 of the calendar year following the year in which a payment was made. Thus, April 15, 2014 is the deadline for filing a protective claim for 2010.

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