April 15 Deadline is Fast Approaching to File Protective Refund Claims for FICA Taxes Paid on Certain Severance Payments

Employers must file a protective refund claim with the Internal Revenue Service by April 15, 2014, if they wish to preserve their right to a refund of Federal Insurance Contribution Act (“FICA”) taxes paid on certain severance payments made during the 2010 tax year to employees who were involuntarily terminated.

As discussed in our September 2012 article, a unanimous panel of the U.S. Court of Appeals for the Sixth Circuit held in United States v. Quality Stores Inc., 693 F.3d 605 (6th Cir. 2012), that payments which were made pursuant to two separate employer severance plans, to employees upon their involuntary termination of employment because the employer was terminating operations, constituted supplemental unemployment compensation benefits (“SUB Payments”) that are not taxable as wages under FICA. According to the Sixth Circuit, severance payments are treated as SUB payments and are exempt from FICA taxes if the payments are:

  • An amount paid to an employee
  • Pursuant to an employer’s plan
  • Because of an employee’s involuntary separation from employment, whether temporary or permanent
  • Resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions
  • Included in the employee’s gross income

The Sixth Circuit’s decision created a split among the federal courts of appeal because in 2008 the U.S. Court of Appeals for the Federal Circuit held in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), that these severance payments generally were not SUB Payments and were wages subject to FICA taxes.

On October 1, 2013, the U.S. Supreme Court granted a writ of certiorari in Quality Stores and heard oral arguments on January 14, 2014. The Supreme Court’s decision will apply to all employers and employees throughout the United States. If the Supreme Court upholds the Quality Stores decision, billions of dollars in FICA tax refunds will be available to employers for open tax years during which severance payments were made or for closed tax years if protective FICA tax refund claims were filed.

The Supreme Court is not expected to issue its decision in the Quality Stores case until June of this year, which is after the deadline for filing a protective claim for a refund of FICA taxes paid for the 2010 tax year. Therefore, an employer should analyze whether it made severance payments during the 2010 tax year that could be considered SUB payments under the Quality Stores decision. If so, the employer should consider filing a protective claim on a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, before the April 15, 2014, deadline in order to preserve their right to a refund for FICA taxes paid on SUB payments made during the 2010 tax year.

If you have any questions regarding this article, please contract Marc Fosse at 415-277-8045.