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
FICA Tax Payment
Sixth Circuit Will Not Rehear Quality Stores Decision that Severance Pay in Connection with a Reduction in Force is not Subject to FICA; Supreme Court Next Step?
On September 7, 2012, the Sixth Circuit Court of Appeals held in United States v. Quality Stores, Inc. that severance payments to former employees pursuant to an involuntary reduction in force are not taxable “wages” for purposes of Social Security and Medicare withholding under the Federal Insurance Contributions Act, or FICA. The decision is significant in two respects. First, the Sixth Circuit chose not to follow a contrary decision reached by the Federal Circuit Court of Appeals in CSX Corp. v. United States, 518 F.3d 1328 (2008), thereby creating a split in the federal circuits that may ultimately be resolved by the Supreme Court. Second, the Sixth Circuit’s pro-taxpayer decision substantially impacts unemployed workers and businesses that have reduced their workforce in recent years. On January 4, 2013, the Sixth Circuit denied the government’s petition for rehearing en banc. The government has until April 4, 2013 to petition the Supreme Court to address the case.
Many employers that paid FICA taxes on involuntary severance payments in calendar year 2009 or thereafter are considering filing a protective refund claim to preserve their right to a refund pending further guidance and resolution of this issue. This Client Alert summarizes some of the key issues to consider.