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Benefits in the News > By Subject >

Severance pay

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New SEC Settlements Show Continued Focus on Whistleblower Protection and Severance Agreements
"The latest in a recent string of settled orders, which include the SEC's first case based solely on retaliation for whistleblower reporting, further highlight the agency's resolve to prevent corporate actions that could chill reporting of possible legal violations. These cases, along with other recent settlements, send a message to companies about the importance of enhancing anti-retaliation controls and ensuring that employee severance agreements and company policies are consistent with the SEC's whistleblower rules." (Wilmer Hale)
Fifth Circuit Provides Guidance on When ERISA Governs Severance Plans
"The Gomez court held that '[i]t is thus the existence or nonexistence of an 'ongoing administrative program' ... that is the key determinant of whether severance plans are governed by ERISA' rather than the form of the payments. 'Even for plans that result in only a lump-sum payment, that administrative scheme can be found in a number of other features that require discretion the eligibility determination; calculations of the payment amount (such as deductions and detailed formulas); the provision of additional services beyond the severance payment (such as insurance); and the establishment of procedures for handling claims and appeals.' " [Gomez v. Ericsson, Inc., No. 15-41479 (5th Cir. July 8, 2016)] (Begos Brown & Green LLP)
[Guidance Overview] Companies Should Review Employee Agreements and Policies Following SEC's Aggressive Stance on Impediments to Whistleblowing
"Whether or not the SEC's asserted positions would ultimately prevail in court, in light of these settlements and the SEC's apparent enforcement position, employers should consider reviewing their policies, codes of conduct, and employee agreements to ensure that that they do not include provisions that the SEC may assert deter employees from coming forward with information about potential securities law violations. Even those companies not subject to the SEC's jurisdiction may wish to undertake such measures, as the SEC's stance is similar to that now taken by the [NLRB] and the [EEOC][.]" (Wilson Sonsini Goodrich & Rosati)
SEC Cracks Down on Anti-Whistleblower Severance Agreements
"By levying over $600,000 in fines in the span of two weeks, the SEC is sending a strong message to corporate America that severance agreements cannot unduly limit workers from reporting possible whistleblower tips. This surge in enforcement may require you to revise your current template settlement agreements to remove offending language, and might also encourage you to revisit past agreements and make retroactive amends." (Fisher Phillips)
SEC Brings Additional Enforcement Actions Against Companies With Employee Agreements That Impede Whistleblowing
"It is important to note that the mere existence of improperly restrictive language can lead to a Rule 21F-17 violation. In three of the four enforcement actions, the SEC expressly acknowledged that it was unaware of any instance in which the agreement had prevented any employee from communicating with the SEC or in which the company had taken action to enforce the agreement against any employee." (Sidley Austin LLP)
SEC Scrutinizing Severance Agreements for Compliance with Dodd-Frank
"The SEC's recent announcements signal an expansion of the SEC's scrutiny of broad confidentiality and covenant-not-to-sue or release provisions, which the SEC views as a deterrent to whistleblowing under Dodd-Frank." (Greenberg Traurig)
SEC Enforcement Action Finds Confidentiality and Waiver Provisions in Severance Agreement Violate Dodd-Frank Whistleblower Protections
"As part of the settlement, BlueLinx will pay a $265,000 penalty and must inform all parties to the severance agreements that it does not prohibit former employees from: [1] providing information to, or communicating with, SEC staff without notice to BlueLinx; or [2] accepting a whistleblower award from the SEC pursuant to Section 21F.... [C]ompanies under the jurisdiction of the SEC should proceed with caution when entering into any employment related contract that contains restrictions on the use of confidential information, and should categorically avoid including waivers of whistleblower bounties." (Schiff Hardin)
SEC Whistleblower Actions Suggest Immediate Changes to Severance and Release Agreements
"For decades, employers have required terminating employees to advise them of any facts of which the employee is aware that constitute or might constitute a violation of any ethical, legal, or contractual standards or obligations of the company.... [W]here some employers seem to have gone too far [is] by asking that the former employee not take part in or benefit from any litigation of governmental actions involving such matters." (Winston & Strawn LLP)
SEC Enforcement Actions May Require Changes to Severance Agreements
"Standard severance clauses covering [1] confidential information and [2] prohibitions against receiving additional monetary awards have been deemed unlawful by the SEC, resulting in settlements and fines exceeding $600,000, plus other sanctions.... 'No further recovery' clauses may need to be removed or redrafted to permit recovery of whistleblower bounties under Dodd-Frank. Confidentiality clauses ... may need carve-outs that permit disclosure to the SEC or other government agencies, without requiring prior notification to the company." (BakerHostetler)
Does Your Severance Plan Trigger ERISA? Why You Should Care and What You Should Do
"[T]he court focused on whether the severance payable under the employment agreement involved a 'separate and ongoing administrative scheme.' It highlighted several facts that demonstrated the existence of such an ongoing administrative scheme that caused ERISA to apply. For example, the employer had the discretion to decide whether a termination was with or without cause, the payments and provision of benefits continued over five years (rather than being paid in a lump sum), and the employer had the ongoing duty to monitor the non-compete, non-solicitation, and medical coverage provisions." [Zgrablich v. Cardone Industries Inc., No. 14-4665 (E.D. Penn. Feb. 3, 2016)] (Foley & Lardner, via Lexology)
Severance Plan Was Subject to ERISA, and Properly Denied Benefits to Employee Who Didn't Return Deleted Files
"Affirming summary judgment against an employee who was denied severance pay because he failed to return company property, the Fifth Circuit first held that ERISA governed the severance plans because they required more than a single lump-sum payment but involved ongoing plan administration and discretionary decisions on eligibility and amount of pay. On the merits, the appeals court agreed with the lower court that the plan allowed the employer to deny severance benefits on the ground that the employee failed to return company property (the deleted computer files) upon termination." [Gomez v. Ericsson, Inc., No. 15-41479 (5th Cir. July 8, 2016)] (Wolters Kluwer Law & Business)
[Guidance Overview] New IRS Regs Under Sec. 409A
"One common sense tweak made by the regulations is to clarify that stock awards made to prospective service providers still may qualify for the important 'stock rights' exception to 409A. This would apply to a service provider who is reasonably anticipated to begin providing services within 12 months after the grant date, if the person actually begins providing services during that 12-month period (or the award lapses if services do not commence by the deadline). Note that a service provider may be an employee, non-employee director, or an entity." (Winston & Strawn LLP)
[Guidance Overview] New Proposed Regs Issued Under Section 409A
"Some commentators had expressed concerns about the administrative impracticability of making timely payments of death benefits ... The Proposed Regulations add payment timing flexibility by providing that an amount payable due to the death of a service provider or his or her beneficiary that is to be paid at any time during the period beginning on the date of death and ending on December 31 of the calendar year immediately following the year of death ... will be treated as timely paid for purposes of Section 409A if it is paid at any time during this period." (Wilson Sonsini Goodrich & Rosati)
[Guidance Overview] The 409A Proposed Regs: Clarifying Guidance for Employers (PDF)
"[A] noncompliant plan term may be amended in a manner permitted under applicable correction guidance even though the noncompliant plan term may not have been eligible for correction under that guidance (for example, due to applicable timing requirements). In addition, the portion of the unvested amount that is affected by the correction is not subject to income inclusion, additional taxes, or applicable premium interest, and the IRS does not need to be notified of the correction." (Drinker Biddle)
Beware the Vested Salary Continuation Trap in Drafting Employment Agreements
"Experienced and capable chief executives can be hard to find, particularly when it comes to leadership positions of a limited duration ... [so] it is understandable that the executive would want the agreement to contain protections against the premature or unanticipated termination of the contract by the hiring agency.... [But some contracts simply] provide that upon the expiration or termination of the contract by either party (and for whatever reason), the executive will continue to receive 'salary continuation' for the specified period. Unless these payments are properly structured as a 'bona fide severance pay plan' under IRC section 457(e)(11) -- that is, payable only upon the unanticipated termination of employment -- the executive and the agency likely have an income tax (or income tax reporting) problem." (Chang Ruthenberg & Long PC)
Some Executive Rewards Decline, Other Perks Hold Steady
"As shareholders and advisory groups continue to scrutinize executive compensation, the number of executives entitled to tax gross-ups and other financial rewards triggered by a change in control of management is declining.... A major trend impacting change-in-control arrangements is the move toward performance-based long-term incentives ... Among other notable findings: Decline in tax gross-up payments ... Decrease in severance multiples.... Conditions on cash severance payment." (Society for Human Resource Management [SHRM])
Court Rules Employment Agreement Severance Provisions Can Constitute ERISA Plan
"The District Court ultimately agreed with the employer and found that the severance provisions in the executive's individual employment agreement established an ERISA plan. The court's analysis focused on five main points: Intended benefits ... Class of beneficiaries ... Source of financing ... Procedures for receiving benefits ... Ongoing administrative scheme." [Zgrablich v. Cardone Industries, Inc., No. 15-4665 (E.D. Penn. Feb. 3, 2016) (Winston & Strawn LLP)
How to Involve Compensation Committees in M&A-Related Decisions
"[T]he compensation committee should be involved in the design and execution of acquisition-related executive compensation programs in order to maximize the likelihood that key employees are retained and the acquisition is successful, while appropriately managing the company's financial risk. Here are a few of the M&A-related items that compensation committees are most likely to focus on." (Towers Watson)
Is a Severance Policy More Like an ERISA Plan, a Writing Desk, or a Raven?
"[If] the administration of a severance policy requires a measurable amount of discretion, you can bank on it being treated as an ERISA plan.... Having a severance policy governed by ERISA is not a crisis, but an opportunity. Instead of waiting for a court to apply those factors and decide for you, why not just go ahead and make sure that your severance policy is an ERISA plan? Yes, it's true that ERISA requires administrative hurdles, but these are relatively straight-forward ... These administrative requirements are outweighed by ERISA's advantages." (DLA Piper LLP via Lexology)
Benefits Litigation Update, Fall 2015 (PDF)
Articles include: [1] Will a third wave of suits over the contraceptive mandate bring the culture wars to corporate employee benefits? [2] Okun v. Montefiore: Are your severance policies subject to ERISA? [3] The House of Representatives challenges the ACA in court; [4] Increased litigation risks for fraudulent concealment fiduciary breach claims; [5] Data breach litigation targeting employers; and [6] LeBlanc v. SunTrust Bank: beware the payroll practices exemption under ERISA. (Epstein Becker Green, for the ERISA Industry Committee)
Is Your Company's Severance Policy Subject to ERISA? Should You Care? (PDF)
"There are clearly advantages to having a program governed by ERISA rather than applicable state law. However, left unsaid in the Okun decision is the sponsor's potential reporting and disclosure deficiencies under ERISA. Specifically, since [the employer] did not consider the arrangement subject to ERISA, it took no steps to file the one-time notice with the DOL, nor the annual returns that presumably would be required (assuming a small plan exception would not be applicable). This could result in substantial penalties." (Wilkins Finston Friedman Law Group LLP)
Vast Majority of Companies Provide Enhanced Severance Benefits Below the NEO Level in a Change in Control
"The survey responses suggest that enhancing severance for terminations in conjunction with a CIC is widespread. The vast majority (93%) of respondents indicated they do so for some portion of employees below the NEO level, with two-thirds (67%) of those companies offering enhanced cash compensation (salary and/or bonus) and accelerated vesting of equity and about a quarter (26%) offering only accelerated vesting of equity." (Towers Watson)
Is Your Severance Policy an ERISA Plan?
"[A]n advantage to ERISA coverage is that the employer can reserve to itself discretion to decide claims, which discretion will be respected by a court so long as the decision was not arbitrary and capricious. Disadvantages to ERISA coverage are that a Form 5500 may need to be filed annually, employees can bring a federal court lawsuit alleging a violation of ERISA, and prevailing claimants can recover attorneys' fees. A recent decision by the ... Second Circuit highlights the fact that even where an employer believes it has established a severance policy and has not explicitly characterized that policy as an ERISA plan, the arrangement may in any event be considered a plan subject to ERISA's requirements." [Okun v. Montefiore Medical Center, No. 13-3928 (2d Cir. July 17, 2015)] (Stinson Leonard Street)
CEO Contractual Protection and Managerial Short-Termism (PDF)
37 pages. "[F]irms with CEO contractual protection are less likely to cut R&D expenditures to avoid earnings decreases and are less likely to engage in real earnings management.... [T]his effect increases with the duration and monetary strength of CEO contractual protection.... [T]he effect is stronger for firms in more homogeneous industries and for firms with higher transient institutional ownership, as protection is particularly important for CEOs in these firms, and is stronger when there are weaker alternative monitoring mechanisms." (The Accounting Review)
Section 409A Corrections to Employment Agreements: Time for an Ounce of Protection in 2015
"[IRS Chief Council Memorandum 201518013] supports the correction of defective severance provisions if that occurs in the year before a termination of employment occurs. The IRS memo was actually unfavorable to the taxpayer, because it rejected a 409A correction that took place in the year severance occurred. While time remains this year, it is worth reviewing any agreements, plans, or releases that provide for severance." (Paul Hastings LLP)
Fifth Circuit Severance Pay Decision Emphasizes the Need for a Strong Administrative Record
"[T]he court found that the severance plan administrator acted arbitrarily and capriciously because the administrative record contained no specific evidence supporting the determination that the plaintiff was fired for a violation of the employer's policies.... The court found that a mere citation to a policy, absent any specific evidence indicating how the policy was violated, was not substantial evidence that the plaintiff was actually fired for having violated the policy. Importantly, the court also found that the plan administrator failed to provide the plaintiff with a full and fair review of the claim because the plan administrator did not describe the specific reasons for the denial of benefits as required by [DOL] regulations" [Napoli v. Johnson & Johnson, Inc. No. 14-31000, (5th Cir. Sept. 8, 2015; unpublished)] (Winston & Strawn LLP)
When Does ERISA Govern a Severance Plan?
"The court first observed that ERISA's definition of employee welfare benefit plan was expansive, including 'any plan, fund, or program,' and explained: '[u]se of the word "any" and inclusion of three undefined, overlapping descriptors (plans, funds, and programs) suggests that Congress intended the definition of "employee welfare benefit plan" to be broad and independent of the specific form of the plan.' ... The court noted that ERISA did not require long-term commitments or discretionary determinations, but stated that 'these factors are useful analytic tools to the extent that they help us decide the ultimate question of whether a particular undertaking or obligation is a "plan, fund, or program" '." [Okun v. Montefiore Medical Center, No. 13-3928 (2d Cir. July 17, 2015)] (Begos Brown & Green LLP)
Second Circuit Provides Test for Whether Severance Pay Policy Is an ERISA Plan
"The Second Circuit concluded that the employer's policy represented a multi-decade commitment to provide severance benefits to a broad class of employees under a wide variety of circumstances and required individualized review whenever potentially eligible employees were terminated. This review requires managerial discretion and individualized evaluation. As a result, the Second Circuit found that the employer assumed the obligation to pay severance benefits on a regular basis, and, therefore, faced periodic demands on its assets that required long-term administration and control." [Okun v. Montefiore Medical Center, No. 13-3928 (2d Cir. July 17, 2015)] (The Wagner Law Group)
Second Circuit Creates Three-Part Test for Determining Whether Severance Policy Falls Under ERISA
"The Court established three factors that courts will consider when deciding the ultimate question of whether a particular undertaking is an ERISA 'plan, fund, or program:' '[1] whether the employer's undertaking or obligation requires managerial discretion in its administration; [2] whether a reasonable employee would perceive an ongoing commitment by the employer to provide employee benefits; and [3] 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. 13-3928 (2d Cir. July 17, 2015)] (Reid and Riege, P.C.)
Maintained and Unmodified Since 1996, Severance Policy Plausibly an ERISA Plan
"In effect without revision since 1996, the medical center's written severance policy involved the kind of undertaking that came within the meaning of ERISA's 'any plan, fund, or program' language. To the court, the policy represented a decades-long commitment to provide severance benefits under a wide variety of circumstances; it required managerial discretion in its implementation and an individualized review whenever certain covered employees were terminated." [Okun v. Montefiore Medical Center, No. 13-3928 (2d Cir. July 17, 2015)] (Wolters Kluwer Law & Business)
The Changing Landscape of Golden Parachutes in a Say-on-Pay World
"Facing pressure from shareholders, many companies have modified their parachute arrangements to require both a [change in control (CIC)] event and corresponding termination of employment by the company before payments are triggered. Such double-trigger requirements have continued to rise, with 95% of agreements now having them, a 10-percentage-point increase for CEOs and an 11-point increase for other [named executive officers (NEOs)] since 2010. The involuntary termination must take place within a specified length of time, called the 'protection period,' which is typically two years following the CIC event." (Towers Watson)
Are Top Hat Plans Entitled to a Discretionary Standard of Review?
"A recent First Circuit Court of Appeals decision held that the abuse of discretion standard would apply to a top hat plan that incorporated the standard into its plan documents.... The plan gave discretion to the company to decide the claim and the court upheld the company's decision that the executive had voluntarily retired and therefore was not entitled to severance benefits under the plan." [Niebauer v. Crane & Co., No. 14-2059 (1st Cir. Apr. 21, 2015)] (Stinson Leonard Street)
[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)
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)

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