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Severance pay

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[Official Guidance] Text of IRS Notice 2015-15: Proposed Requirements for Employee Consents Used to Support a Claim for Refund of Employment Taxes (PDF)
"Questions have arisen concerning what information must be provided in an employee consent and whether an employee consent may be requested, furnished, and retained in an electronic format. The proposed revenue procedure clarifies that, in addition to providing the relevant name, address, and taxpayer identification number, a valid employee consent must identify the basis of the claim for refund and be signed by the employee under penalties of perjury. The proposed revenue procedure also provides guidance as to what constitutes 'reasonable efforts' to secure an employee consent when a consent is not obtained. The proposed revenue procedure permits, but does not require, the employee consent to be requested, furnished, and retained in an electronic format, as an alternative to a paper format." (Internal Revenue Service [IRS])
FICA Case Has Broad Implications for Deferred Compensation Plans (PDF)
"This case highlights the importance of handling FICA payroll taxes correctly under nonqualified deferred compensation plans. And, it can be interpreted more broadly -- to illustrate the potential for provisions or clauses in plan documents to create unintended participant rights. The plan in this case gave the employer discretionary control over the tax withholding applied to the participants' benefits and obligated them to properly manage FICA tax withholding. One has to wonder whether the retirees would have prevailed with different plan language." [Davidson v. Henkel Corp., No. 12-cv-14103 (E.D. Mich. Jan. 6, 2015)] (Buck Consultants at Xerox)
Text of Federal District Court Opinion: ERISA Did Not Preempt State Law Claims by Former Executive Arising from Agreement to Terminate Benefits Under Section 457(f) Plan in Exchange for Cash Payment (PDF)
"Kirkindoll could not have brought his state-law claims regarding the March 2011 Agreement under Section 502(a)(1)(B) of ERISA....In his state-law claims regarding the March 2011 Agreement, Kirkindoll does not seek to recover benefits due to him under the terms of an ERISA plan, to enforce his rights under the terms of an ERISA plan, or to clarify his rights to future benefits under the terms of an ERISA plan. Instead, he complains that, by signing the March 2011 Agreement, he was entitled to receive $234,068.18 within 30 days, and that he was never paid as promised.... Kirkindoll does not contend that he is owed the sum of $234,068.18 under the terms of the Plan, nor could he." [Kirkindoll v. National Credit Union Administrative Board, as Conservator of Texans Credit Union, No. 3:11-CV-1921-D (N.D. Tex. Dec. 17, 2014)] (United States District Court for the Northern District of Texas)
Non-Partisan Panel Urges Overhauling Health Care at End of Life
"The country's system for handling end-of-life care is largely broken and should be overhauled at almost every level, a national panel [appointed by the Institute of Medicine, the independent research arm of the National Academy of Sciences,] concluded ... Many of the report's recommendations could be accomplished without legislation. For example, the panel urged insurers to reimburse health care providers for conversations with patients on advance care planning.... But some recommendations -- like changing the reimbursement structure so that Medicare would pay for home health services instead of emphasizing hospital care, and so that Medicaid would provide better coverage of long-term care for the frail elderly -- would require congressional action." (The New York Times; subscription may be required)
Investigating and Deciding Severance Benefits Claims
"A threshold question for those charged with the responsibility for deciding severance benefit claims and appeals is [often] whether the employee was in fact terminated 'for cause.' ... What is required of plan fiduciaries under these circumstances? May they accept the employer's stated reason for the employee's discharge? Must they conduct an independent investigation into the reasons for the employee's discharge?" (Proskauer's ERISA Practice Center)
Texas Supreme Court Holds That Severance Arrangements Relating to an ERISA Plan Are Preempted by ERISA
"The first group [of plaintiffs] was promised severance pay under a schedule that referenced the ERISA Plan, copied and used terms from the ERISA Plan, and purported to supersede 'any prior plan.' The second group was promised severance pay in written and oral promises that referenced the schedule, but did not refer to the ERISA Plan. The Texas Supreme Court held that (i) ERISA preempted the contract claims with respect to the first group because the schedule that contained the severance benefits clearly referenced the ERISA Plan, depended on that plan for interpretation of terms, and amended that Plan, and therefore related to an ERISA plan; and (ii) ERISA preempted contracts claims with respect to the second group because those promises referenced the schedule, which in turn referenced the ERISA plan." [Arsenio Colorado v. Tyco Valves & Controls, L.P., No. 12-0360 (Tex. Mar. 28, 2014)] (Haynes and Boone, LLP)
A Take-Away from the Quality Stores Decision
"Quality Stores tried to argue that the payments should not be considered 'employee' wages that are subject to FICA tax because they were made after termination of employment. The Supreme Court flatly rejected that argument, essentially relying on a simple rationale that payments to former employees have the employment relationship as their genesis.... In various circumstances, employers have taken, and may currently be taking, positions that certain types of employee-related payments are not subject to FICA tax (e.g. contract terminations or signing bonuses). If so, employers should revisit those positions." (Squire Sanders)
Alternatives for Severance Payments After Supreme Court Nixes FICA Tax Break for Downsizing Firms (PDF)
"A company with a defined benefit pension plan may be able to amend the plan to increase the benefits of laid-off workers, then give them the option of receiving the increase as a lump sum or in installments over a relatively short period. Distributions from qualified plans are exempted from FICA wages by section 3121(a)(5). The need for care arises from a variety of obstacles, including nondiscrimination requirements, restrictions on lump sum and installment payments by underfunded pension plans and penalty taxes on participants who receive distributions before age 55. The possible savings for both companies and workers may nonetheless make this alternative attractive where it is feasible." (Steptoe & Johnson LLP)
Supreme Court's Severance Ruling Impacts Future Unemployment Benefits
"The decision in Quality Stores not only kills FICA tax refunds for millions of unemployed workers, but it also requires proactive employer actions to maximize future employer and state unemployment benefit payments to terminated workers." (Morgan Lewis)
Exit Packages for Executives Shrink Amid Shareholder Pressure
"Of the companies polled, 85 percent said their equity arrangements vest upon a 'single trigger.' However, many more companies are moving to a 'double trigger,' with 63 percent having at least one equity plan that provides for a 'double trigger' vesting, up dramatically from 28 percent of companies studied in 2009.... There has also been a shift to smaller cash severance multiples for CEOs. The most common ones are between two and three times compensation (among 43 percent of respondents), while use of a three times multiple fell to 42 percent in 2013 from 51 percent in 2011.... [E]ntitlements to gross-ups declined significantly to 30 percent in 2013 from 61 percent in 2009." (Corporate Secretary)
Supreme Court Holds Severance Payments are Taxable Wages under FICA
"Employers should be aware that attempts to convert promised severance payments into non-wage payments (e.g., consulting fees) in order to avoid FICA tax can subject both the employer and employee to IRS scrutiny and possible penalties." (Dorsey & Whitney LLP)
Supreme Court Rules That Severance Payments Are Subject to FICA Taxes
"The Supreme Court unanimously resolved the dispute between the Federal and the Sixth Circuits by agreeing with the IRS's long-held position. The Court first held, because the term 'wages' for FICA taxes includes 'all remuneration for employment,' it must include payments for 'not only work actually done but the entire employer-employee relationship for which compensation is paid.' ... The Court further held that, although the Code treats SUB payments 'as if' they are wages for federal income tax purposes, the 'as if' language does not mean that severance payments are not wages for other purposes." [U.S. v. Quality Stores, No. 12-140 (S.Ct. Mar. 25, 2014)] (Ballard Spahr)
Supreme Court Holds That Severance Pay Is Generally Subject to FICA, But SUB Payments Remain Exempt -- for Now
"While declining, based on the facts of Quality Stores, to extend its holding to all SUB payments, the Court alluded to the inconsistency in this position -- why should SUB payments be exempt from FICA taxation when other severance payments are not? How are the Revenue Rulings exempting severance payments tied to the receipt of state unemployment benefits from FICA consistent with the plain meaning of the FICA statute?" [U.S. v. Quality Stores, No. 12-140 (S.Ct. Mar. 25, 2014)] (Winston & Strawn LLP)
Severance Payments Are Wages -- at Least in Most Instances -- for Purposes of FICA
"[T]he Court concluded its opinion with a paragraph alluding to the arguable inconsistency in the IRS's position. If the SUB payments made by Quality Stores here (and severance payments more generally) are 'wages' under the plain meaning of FICA, then how can the IRS continue to exempt from wages those SUB payments that happen to be tied to state unemployment compensation? There may be policy justifications undergirding the Revenue Rulings carving out such an exemption, as explained above. But how are those rulings consistent with the 'plain meaning' of 26 U.S.C. Section 3121(a)? ... Those Revenue Rulings may now be vulnerable, especially given the Court's broad reading of 'wages' in Quality Stores." (SCOTUSblog)
Supreme Court Rejects Quality Stores
"[T]he Court expressly states that it does not reach the question of whether the IRS' current exemption under Rev. Rul. 90-72 (when severance payments are tied to state unemployment benefits) is consistent with the broad definition of wages under FICA. This is a big (although generally anticipated) win for the IRS, as it indicated in its brief that over $1 billion of potential refunds were on the line. This should be the final answer on severance payments that fall outside the limited exception of Rev. Rul. 90-72 -- they are subject to FICA (and presumably FUTA) taxes." [U.S. v. Quality Stores, No. 12-140 (S.Ct. Mar. 25, 2014)] (Groom Law Group)
Supreme Court Rules Severance Payments are Subject to FICA
"[T]he Supreme Court's ruling ends FICA tax refund claims based on the Quality Stores case. This means that previously filed protective refund claims (or appeals of claim disallowances) will likely be denied by the IRS. Additionally, unless severance benefits fall into the IRS's exemption described above (which most do not), there is no reason for employers to file FICA tax refund claims for severance paid in 2010 or later." [U.S. v. Quality Stores, No. 12-140 (S.Ct. Mar. 25, 2014)] (Mazursky Constantine, LLC)
Supreme Court Agrees with IRS, Finds Severance Payments Are Taxable
"The U.S. Supreme Court ruled on Tuesday that taxes are due for Social Security and Medicare on severance packages paid to workers who are laid off involuntarily, overturning a lower court ruling that could have triggered a wave of payroll tax refund requests from U.S. businesses.... The tax refund at issue was small, but the IRS said the stakes in the case were huge because, if Quality Stores had won, thousands more refund claims could have resulted, possibly totaling as much as $1 billion." [U.S. v. Quality Stores, No. 12-140 (S.Ct. Mar. 25, 2014)] (Reuters)
Text of Supreme Court Decision: Severance Payments are Subject to FICA (PDF)
Excerpt from the syllabus: "The severance payments at issue are taxable wages for FICA purposes. FICA defines 'wages' broadly as 'all remuneration for employment.' ... As a matter of plain meaning, severance payments fit this definition: They are a form of remuneration made only to employees in consideration for employment.... FICA's statutory history sheds further light on the definition. FICA originally contained definitions of 'wages' and 'employment' identical in substance to the current ones, but in 1939, Congress excepted from 'wages' '[d]ismissal payments' not legally required by the employer ... Since that exception was repealed in 1950, FICA has contained no general exception for severance payments." [U.S. v. Quality Stores, No. 12-140 (S.Ct. Mar. 25, 2014)] (Supreme Court of the United States)
The Impact of Section 409A on Severance Payments
"The concern with conditioning severance pay on an executive signing a release is that if there is no time limit on when the release must be signed, the employee can affect the timing of payment by either signing the release quickly or delaying to a later date. This violates the strict requirements of 409A. It is important to recognize that it is not the employee's action or inaction that is the problem; it is the provision in the employment agreement." (Drinker Biddle)
Deadline Looms for Quality Stores FICA Refund Claims for Severance Payments
"[E]mployers may have a separate deadline for situations in which the IRS has issued a notice of claim disallowance for FICA refund claims. In such cases, an employer must either: (i) bring suit to contest the disallowance within two years after the issuance of the notice or (ii) obtain an extension of the time to file such a suit with the IRS. This process can be initiated by filing IRS Form 907, Agreement to Extend the Time to Bring Suit. However, because the IRS is not required to grant an extension requested pursuant to an employer filing Form 907, employers may also wish to file suit." (McDermott Will & Emery)
Alert: Don't Miss April 15 Deadline to File a Protective Refund Claim for 2010 FICA Tax on Severance Payments
"Taxpayers may be entitled a FICA tax refund if the [Quality Stores] decision is upheld by the Supreme Court on appeal. In order to preserve the right to a refund, taxpayers must file a protective claim before the applicable statute of limitations runs.... [T]he deadline to file a protective order for severance payments made in 2009 was April 15, 2013. At this time, the deadline to file a protective claim for 2010 severance payments is quickly approaching on April 15, 2014." (Benefits Bryan Cave)
Supreme Court Justices Consider Taxability of Certain Severance Pay During Quality Stores Oral Arguments
"Justice Ginsburg questioned the government about the impact of its position on state unemployment compensation payments. Justice Alito pressed the government on whether its argument would be different if the severance payments were not connected to employees' length of service and salary -- to which the government responded that the payments would still be considered wages as 'keyed to the critical aspects of the employment relationship.' ... If the Supreme Court upholds the Sixth Circuit's ruling ... the [IRS] could owe more than $1 billion in FICA tax refund claims to individuals and employers that have filed protective refund claims pending the outcome of the Quality Stores case." (Ogletree Deakins)
When Do Severance Payments Constitute 'Wages'?
"Quality Stores thus presents the Court with questions of varying breadth and implication. Most immediately, the Court must resolve whether these disputed SUB payments are 'wages' under FICA -- a legally narrow issue, but one with substantial revenue implications.... But the case also presents broader questions about the Court's approach to statutory interpretation: Should its analysis effectively start and end with the statutory text actually at issue[?]" [United States v. Quality Stores, Inc., Supreme Court Docket No. 12-1408; oral argument scheduled for January 14, 2014.] (SCOTUSblog)
Text of Amicus Brief Filed by ERIC Asking Supreme Court to Confirm That FICA Taxes Do Not Apply to Supplemental Unemployment Benefits (PDF)
"Both the statutory text and the legislative history support the conclusion that SUB payments ... are not 'wages'. The government's arguments to the contrary are internally inconsistent and at odds with this Court's precedents.... [T]he government's approach produces a cumbersome system in which the classification of SUB payments for FICA purposes turns on a recipient's eligibility for state unemployment benefits." [U.S. v. Quality Stores, No. 12-1408 (on petition for certiorari to 6th Cir.; brief as amicus curiae in support of respondent Quality Stores, Inc.)] (The ERISA Industry Committee [ERIC])
Text of Amicus Brief Filed by American Benefits Council Supporting Exemption from FICA Withholding for Certain Severance Payments (PDF)
"When the issue in the case is evaluated not merely from the perspective of the merits of the taxpayer's position on which supplemental unemployment compensation benefits are excluded from taxable wages for FICA purposes, but also from he perspective of the merits of the government's position that relies on the revenue rulings, there can be no doubt that the taxpayer's position is preferable, since the taxpayer's position provides a coherent and sensible answer to the issue, whereas the government does not offer an alternative to the taxpayer's position that is coherent or supportable." [U.S. v. Quality Stores, No. 12-1408 (on petition for certiorari to 6th Cir.; brief as amicus curiae in support of respondent Quality Stores, Inc.)] (American Benefits Council)
More Pitfalls for Current-Year Bonus Deductions Arising in IRS Audits
"While its status as 'guidance' is not clear (for example, the memo was issued by an IRS Field Counsel Office rather than the National Office), this new IRS advice highlights how a company's discretion to reduce bonus payments -- whether outright or as part of certifying and approving performance results -- can result in the all events test not being met, and therefore delay the tax year when bonus amounts are deductible." (Groom Law Group)
Will Fiduciary Liability Insurance Cover Severance Agreement Payments If the Company Can't Make Them?
"[The insurer] contends that even if [the employee]'s severance agreement was a 'Sponsored Plan' under the policy, there wasn't a 'Wrongful Act' -- again, an accident or negligence -- on [the firm]'s part: [when it decided to liquidate,] the firm simply chose not to continue making payments it had agreed to make.... Much will depend on the exact policy language here, and how it addresses severance agreements -- if it does at all. Even outside of the insurance field, whether a severance agreement is a 'plan' under ERISA is often in dispute.... [T]he Supreme Court tried to provide some clarity [in one case] by holding that a one-time severance payment after a plant closure was not a plan under ERISA because it didn't have an ongoing administrative component -- but it's not at all clear if that's the only test for a covered plan." (Zuckerman Spaeder LLP)
Bad Faith Termination Can Be Good ERISA Interference Claim
"[T]he executive was placed on 'garden leave,' in other words, relieved of all responsibilities and told to stay home.... The court found that the executive had sufficiently alleged that the employer had manipulated the date of termination with the specific intent of depriving the employee of the severance benefits to which he would otherwise have been entitled.... The court said that there could be benign reasons why the company would pay the employee for 30 days after stripping the employee of all responsibilities but that there was also the possibility that the employer had improper motives for the timing of the employment termination given the fact that the garden leave saved the employer over $700,000 in severance pay." [Kirby v. Frontier Medex, No. ELH-13-00012 (D.C. Md. Oct. 30, 2013)] (Leonard, Street and Deinard)
Identifying an ERISA Plan Made Simple Again
"[The Puerto Rico federal] District Court found that because there was nothing discretionary about the timing, amount, or form of the benefit payments, Pfizer's severance program did not 'rise to the level of an ongoing administrative scheme.'" [Aguirre-Santos v. Pfizer Pharm., LLC, CIV. 12-1393 JAF, (D.P.R. Oct. 21, 2013)] (Verrill Dana LLP)
Supreme Court Will Decide Whether FICA Tax Applies to Severance Pay
"Employers who have made severance payments pursuant to a plan because of a reduction in force should strongly consider filing refund claims ... The statute of limitations for post-2009 quarterly tax periods is open. The limitations period for 2010 quarterly tax periods terminates on April 15, 2014. Because Quality Stores most likely will be decided after that date, the refund claims should be filed on a protective basis." (Faegre Baker Daniels LLP)
U.S. Justices to Hear Quality Stores Case on Whether Severance Can Be Taxed
"The Supreme Court agreed on [October 1] to consider whether severance pay in an involuntary layoff can be subject to federal payroll taxes in a case the Obama administration says could affect $1 billion in refund claims. The administration asked the justices to hear the case after losing a dispute with agricultural retailer Quality Stores Inc.... The legal question is whether the company was required to pay the taxes under the Federal Insurance Contributions Act, which helps finance federal retirement and healthcare benefits." (Reuters)
Court Holds That Severance Policy is Not an ERISA Plan
"Especially with respect to a severance policy, an ERISA-governed plan must provide that the sponsoring employer has created an 'ongoing administrative program.' By contrast, a one-time calculation of a severance payment using a fixed formula will not qualify as an ERISA-governed plan.... [The] court therefore weighed the following factors: whether the employer's undertaking or obligation requires managerial discretion in its administration; whether a reasonable employee would perceive an ongoing commitment by the employer to provide employee benefits; and whether the employer was required to analyze the circumstances of each employee's termination separately in light of certain criteria." [Okun v. Montefiore Medical Center, No. 11 Civ. 9615 (S.D.N.Y. Sept. 10, 2013)] (Williams Mullen)
[Guidance Overview] Hot Topics in Employee Benefits, September 18, 2013 (PDF)
65 presentation slides. Topics include: [1] Insurance exchange notices: Analysis of taking a narrow legal compliance approach vs. using the notices to nudge non-employees off of employer-provided coverage; [2] The Sun Capital decision: Hidden multiemployer withdrawal liability for private equity funds; [3] New guidance from the DOL on revenue sharing and ERISA accounts; [4] Implications for plan sponsors of qualified plans following the U.S. Supreme Court's [DOMA] holding; and [5] Executive compensation "Good reason" provisions in severance plans and executive employment agreements and issues that arise under section 409A. (Morgan Lewis)
Vast Majority of Healthcare CEOs Have Severance Agreements
"[A] clear majority (83%) of health care organizations have a written severance agreement with their CEO.... [S]everance benefits are most commonly triggered by involuntary termination without cause or a change-in-control. While just 5% of organizations provide service-based severance benefits, the majority of organizations continue benefits for a fixed period, typically 24 months. Moreover, most continue benefits during the severance period, including dental, vision, and life insurance." (Mercer)
[Official Guidance] Text of IRS Chief Counsel Memorandum on Reporting Requirements for Attorney's Fees Paid to Employee Pursuant to Settlement Agreements (PDF)
"In the absence of a specific allocation for attorney's fees in these settlement agreements, attorney's fees paid by an employer as part of a settlement agreement with a former employee, which are includable in income, are subject to employment taxes to the extent they are wages attributable to an employment-related claim. The Service's position is that payments constituting severance pay, back pay, and front pay are wages for employment tax purposes." (Internal Revenue Service [IRS])
'Hell or High Water' -- or Fraud
"When Marsh Supermarkets fired [Don Marsh] in 2006 -- after learning of his misuse of company expense accounts -- it told him that the termination was 'without cause.' The supermarket chain soon developed a case of buyer's (firer's?) remorse, and claimed that it had been 'snookered' into firing Marsh 'without cause.' ... The court agreed with Marsh that once the company had terminated him 'without cause,' his termination benefits were vested and non-forfeitable, and could not be limited by general equitable principles under ERISA.... Further, because ERISA includes a fee-shifting provision for a prevailing party and Marsh prevailed on the ERISA issues, the court ordered the company to pay his fees for litigating those claims." (Zuckerman Spaeder LLP)
[Guidance Overview] Location of Taxpayer Affects Claim for FICA Refund on Past Severance Pay
"For a taxpayer in the Sixth Circuit: The taxpayer will have to wait six months after filing a claim for refund with the IRS before it can file a suit for refund. The two-year limit on when lawsuits for refund must be filed will not begin until and unless the IRS lifts the suspension and issues a disallowance of the claim for refund. For a taxpayer outside of the Sixth Circuit: Under section 6532, the taxpayer has two years from the date of a notice of claim disallowance in which to file a lawsuit to obtain a refund." (Calhoun Law Group)
[Guidance Overview] Q&As from Treasury and IRS Meeting with ABA Joint Committee on Employee Benefits, May 2013 (PDF)
16 pages. Topics include: Cost of Living Adjustments for High Deductible Health Plans; Collateral for Plan Loan; Benefit Election Following Reemployment; Correction for Exclusion from Plan; Determination Letter Applications: Amendments Adopted After Plan Restatement, Inability to Submit Missing Executed Plan Documents, and Off-Cycle Determination Letters; Correction of Overpayments with or without Spouse as Joint Annuitant; Merger of Plan with Roth Contributions; Various questions about 409A and 457 Plans; Section 162(m) Performance Pay; Change in ESOP Loan Duration; and Actuarial Adjustment of Cash Balance Benefit. (Joint Committee on Employee Benefits, American Bar Association)
Executive Does the Right Thing -- and Loses Everything
"[T]he acquirer threatened to withdraw its offer to purchase Capital Bank unless Yarber and other bank executives signed amendments to their employment agreements relinquishing their right to the change in control severance payments.... The acquirer closed the deal to purchase Capital Bank. It then removed Yarber from his position as president and chief executive officer, and terminated his employment ten days after the term of his contract expired. Yarber received no change in control severance payments.... Yarber sued ... Unfortunately for Mr. Yarber, the court saw this as an open and shut case." (Winston & Strawn LLP)
Government Asks Supreme Court to Reject Quality Stores Ruling that Exempts Severance Pay from FICA Taxes
"The 26-page petition sets forth the IRS' long standing position that severance payments are subject to employment taxes, following the broad definition of 'wages' ... IRS emphasized the importance of getting a 'final answer' on the proper tax treatment of these payments that employers have struggled with for decades -- with 11 substantial similar cases pending, 2400 administrative refund claims pending, and over a $1 billion at stake, not to mention the impact on Social Security benefits, which are contingent on the outcome as well." (Groom Law Group)
Eighth Circuit Clarifies Scope of ERISA's Application to Severance Arrangements
"[T]here was no evidence that the agreement amended an ERISA plan, and in fact, the agreement concerned post-termination payments that could only occur when Schieffer was no longer a participant in the company's plans.... Although the benefits were measured by the ERISA plans, ... [the employer] had not indicated that the funds came from anywhere other than its general assets ... [and] had not alleged that the payment would affect the administration of its ERISA plans or 'threaten ERISA's goal of uniformity in the administration of plan benefits'.... [The court concluded that the] arbitration demand did not seek benefits 'due under' an ERISA plan, and the federal court lacked subject matter jurisdiction over the dispute. " [Dakota, Minn. & E. R.R. Corp. v. Schieffer (Schieffer II), No. 12-1807, 2013 WL 1235235 (8th Cir. Mar. 28, 2013)] (Benefits Bryan Cave)
Opportunity for Possible FICA Tax Refund on Severance Pay Ends April 15
"Until a final decision in [U.S. v. Quality Stores] has been rendered, taxpayers that have made severance payments in 2009 should file a protective claim for a FICA tax refund no later than April 15, 2013. This protective claim will preserve the taxpayer's right to a refund should the IRS not appeal the decision or should the decision be upheld on appeal." (Benefits Bryan Cave)
Miller Chevalier Focus on Employee Benefits, March 25, 2013
Articles in this issue include: Next Steps for Employers Regarding the FICA Tax Treatment of Severance Pay Following the Sixth Circuit's Affirmance of Quality Stores; HIPAA Omnibus Rule Impacts Group Health Plans; and San Francisco Health Care Security Ordinance Enforcement Initiative. (Miller & Chevalier Chartered)
April 15 Deadline for Filing FICA Refunds for Severance Pay
"Employers that have made severance payments due to reductions in force, plant shutdowns or similar conditions should consider filing protective FICA tax refund claims. Only a limited period of time is available to file. In general, the statute of limitations for tax refund claims is three years. As a result, April 15, 2013, is the due date for taxpayers for filing a refund claim with respect to the 2009 calendar year. A refund claim cannot be filed with respect to severance payments made before 2009." (McDermott Will & Emery)
Sixth Circuit Will Not Rehear Decision that Severance Pay in Connection with a Reduction in Force Is Not Subject to FICA; Supreme Court Next Step?
"It is unclear at this time how the IRS will respond to refund claims. New claims filed as a result of the Quality Stores decision may be rejected by the IRS due to the split in the circuits or may be held without action. Until this controversy is resolved, it is prudent for employers to continue withholding FICA taxes on SUB payments made in connection with the present or future involuntary termination of employees that do not meet the strict definition provided in IRS Revenue Ruling 90-72 for exemption." (Proskauer Rose LLP)
Employer Action Required to Preserve FICA Refund Claim on Severance Pay
"[E]mployers that have paid a substantial amount of severance in recent years should consider filing a protective claim with the IRS for a refund of FICA taxes paid. Such a filing will extend the period of time for which FICA contributions on severance could be recovered, should the Supreme Court eventually rule against the IRS." (VedderPrice)
Can a Non-Compete Provision be Added to a Severance Agreement?
"Even though the employer had some discretion with respect to the form of separation agreement, [a federal district court in Illinois] would not permit the employer to condition the severance payment on compliance with a no compete. To add such a requirement, the employer should have amended the severance plan; the proposed separation agreement was not itself such an amendment." [Pactiv Corp. v. Rupert, No. 11C7247 (N.D. Ill., Nov. 1, 2012)] (BenefitsNotes, a blog by Leonard, Street and Deinard)
Circuits/IRS Split When It Comes to FICA Taxation of Severance Pay
"Despite a Circuit conflict, the IRS continues to assert that all severance payments are wages subject to FICA taxation, unless they meet the narrowly-tailored definition of 'supplemental unemployment benefits' under existing IRS guidance. Such benefits are defined as payments on account of an employee's involuntary separation from employment that results directly from a reduction in force, the discontinuance of a plant or other similar conditions. In addition, the IRS requires that such severance payments not be made as a lump sum and specifically be designed to supplement state unemployment benefits that the individual is eligible to receive." (Bloomberg BNA)
Sixth Circuit Holds SUB Payments Not Subject to FICA Taxes; Employers Should Consider Filing Refund Claims
"Although a definitive ruling on this issue is probably years away, employers need to determine what potential FICA refund claims they have and what to do to protect those claims.... Before filing a refund claim, the employer must either (i) reimburse the former employee for his or her portion of the FICA tax or (ii) obtain his or her written consent to pursue a refund claim." (McGuire Woods LLP)
Quality Stores Update: DOJ Files Petition for Rehearing En Banc on Important Severance Pay FICA Case
"On October 18, the Department of Justice (DOJ) filed a petition for rehearing en banc in United States v. Quality Stores, Inc., No. 10-1563 (6th Cir. Sept. 7, 2012) ... [T]he Sixth Circuit [decision being appealed] held that severance payments paid to former employees pursuant to an involuntary reduction in force were SUB-Pay and not taxable 'wages' for FICA tax purposes[.]" (Morgan, Lewis & Bockius LLP via Bloomberg BNA)
Federal Appellate Court Rules that SUB Payments are Not 'Wages' for FICA Tax Purposes
"The beauty of a SUB Plan is that it allows an employer to pay severance to former employees without those payments being subject to FICA taxation. Thus, the employer and the employee each avoid payment to the IRS 7.65% of the severance payment." (Winston & Strawn LLP)
Employers Should Evaluate Refund Opportunities Following Sixth Circuit Ruling on FICA Taxes and Severance Payments
"Quality Stores now is the law in the Sixth Circuit (Michigan, Ohio, Tennessee, and Kentucky). Employers whose principal place of business is in those states should consider seeking refunds of FICA taxes they remitted for SUB payments since January 1, 2009. Also, Sixth Circuit employers should consider whether to withhold FICA taxes from SUB payments made since Quality Stores. Those employers should keep in mind that, if Quality Stores ultimately is overturned, they would owe back FICA taxes for all periods for which the statute of limitations for assessment is open" (Ballard Spahr)
Sixth Circuit Decision Provides Employer Tax Relief and Refunds on Severance Payments Not Subject to FICA
"Employers who collected and paid FICA taxes on severance payments (and their employees) may be entitled to refunds of those FICA taxes. With rates as high as 15.3%, the refunds can be substantial. The refund procedures are complex. Employers cannot simply amend their employment tax returns and claim a refund." (Miller Johnson)
Sixth Circuit Holds that Severance Pay is Not Subject to FICA Taxes (PDF)
"Even though section 3402(o)(2) covers income tax withholding, not FICA taxes, the Sixth Circuit concluded that any statutory exemption from 'wages' like that provided for in these involuntary severance benefits must be deemed to extend to FICA taxes as well, unless the IRS provides a different rule by regulation." (Winston & Strawn LLP)
FAQs About RIFs and Possible FICA Refunds (PDF)
"The following Q&As demonstrate that seeking [a refund for FOCA taxes paid in connection with involuntary terminations of employment] is easy. (1) What are the key facts that could open the door for a FICA refund?... (2) What was the 6th Circuit's rationale?... (3) Will the 6th Circuit's decision come to apply nationwide?... (4) What are the steps to pursue a FICA refund?" (Nationwide Financial Services, Inc.)
Sixth Circuit's Ruling Exempting Severance Pay From FICA Tax Poses Quandary for Employers (PDF)
"Employers who made substantial severance payments in 2009 (or later) should consider filing protective claims by the April 15, 2013 deadline (4/15/2014 for 2010 payments, etc.), but continue to subject such payments to FICA taxes until we hear more from the IRS or the Supreme Court." (Groom Law Group)
Severance Packages Can Lead to Discrimination Suits
"Severance benefits are inherently discriminatory unless all employees receive the same package. Chances are a rank-and-file worker will get a less generous package than an executive, but discrimination is problematic only when it involves a protected class such as women or people of a particular religion." (Human Resource Executive Online)
Sixth Circuit Says No FICA Taxation on Involuntary Severance Pay -- Billions of Dollars in Refund Claims At Stake
"In a somewhat surprising decision on September 7, 2012, the Sixth Circuit affirmed the Western District Court of Michigan's holding in U.S. v. Quality Stores Inc., 424 B.R. 237 (W.D. Mich. 2010), that severance payments made to employees pursuant to an involuntary reduction in force were not 'wages' for FICA tax purposes. U.S. v. Quality Stores Inc., No. 10-1563 (6th Cir. 2012). Given the recent economic downturn, several billion dollars' worth of FICA taxes could be at issue as a result of this decision." (Bloomberg BNA)
Sixth Circuit Splits from Federal Circuit, Decides Severance Payments Are Not Taxable as FICA Wages (PDF)
"Employers that have made severance payments meeting the requirements for [supplemental unemployment compensation, or 'SUB'] payments as set forth in Internal Revenue Code Section 3402(o) should file claims for refund for FICA taxes paid with respect to these payments. The statute of limitations for filing claims for refund for timely filed 2009 Forms 941 will expire on April 15, 2013.... Employers that have already filed claims for refund and have received a notice of disallowance from the IRS (or have signed a Form 2297) should consider filing suit as soon as possible (or, alternatively, seek the IRS�s agreement to extend the statute of limitations using Form 907).... It is particularly important for taxpayers in the Sixth Circuit (Kentucky, Michigan, Ohio, and Tennessee) to preserve their rights because of the favorable decision in Quality Stores." [United States v. Quality Stores, Inc., No. 10-1563 (6th Cir. 2012)] (Sutherland)
Severance Pay in Connection with Layoff Does Not Trigger FICA Taxes, Sixth Circuit Rules (PDF)
"Whether [supplemental unemployment compensation benefits, or 'SUB'] payments are 'wages' under FICA is a complex question because the FICA statute does not expressly include or exclude SUB payments, nor do the Treasury regulations promulgated under FICA address the subject.... [We conclude that, because] Congress has provided that SUB payments are not 'wages' and are treated only as if they were 'wages' for purposes of federal income tax withholding, such payments are not 'wages' for purposes of FICA taxation.... [W]e do not adopt the government's other arguments or follow the IRS revenue rulings the government cites." [U.S. v. Quality Stores, Inc., No. 10-563 (6th Cir. Sept. 7, 2012)] (U.S. Court of Appeals for the Sixth Circuit)

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