In Chief Counsel Advice 201634023, released Aug. 19, 2016, the IRS Office of Chief Counsel expressed its informal view (in the form of an email to an IRS employee) that “short-week” supplemental unemployment benefits (SUB) paid to employees who work less than 36 hours in a week, or who could not work a full week due to inclement weather, are taxable wages under the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA). Consistent with previous private letter rulings analyzing similar plans, the Chief Counsel’s Office explained that the payments under such circumstances do not satisfy the narrow exemption set forth in Revenue Ruling 90-72, which requires that any such payments be linked to the receipt of state unemployment compensation to be exempt from FICA and FUTA taxation.
Short-week benefits are a common feature of SUB plans, which provide laid-off employees with compensation in addition to state unemployment compensation. Since 1956, the IRS has provided an administrative exemption from FICA and FUTA taxes for payments under SUB plans that satisfy the following IRS criteria:
- Benefits are paid only to unemployed former employees who are laid off by the employer.
- Eligibility for benefits depends upon meeting prescribed conditions after terminating employment with the employer.
- Benefits are paid by trustees of independent trusts.
- The amount of weekly benefits payable is based upon state unemployment benefits, other compensation allowable under state laws, and the amount of straight-time weekly pay.
- The duration of the benefits is affected by the trust fund level and the employee’s seniority.
- The right to benefits does not accrue until a prescribed period after termination of employment.
- The benefits are not attributable to the rendering of particular services.
- No employee has any right, title, or interest in the trust fund until such employee is qualified and eligible to receive benefits.
In Revenue Ruling 90-72, the IRS comprehensively reviewed its historical treatment of SUB plans and the revenue rulings since 1956. The 1990 revenue ruling clarified, among other matters, that in addition to satisfying the above criteria, the primary criteria for the FICA and FUTA tax-exemption of SUB plan payments is that they must be linked to the employee’s receipt of state unemployment compensation and must not be paid in lump sums.
The IRS previously provided guidance on short-week benefits in Private Letter Rulings 9734035 and 200322012, where the employers provided short-week benefit payments for laid-off employees. In both instances, the IRS held that short-week benefits are not taxable wages for FICA and FUTA purposes if they are made to individuals who otherwise receive excludable benefits, i.e., they are made in a week preceding or following a week in which an employee receives an unemployment benefit. All other short-week benefit payments were ruled to be taxable FICA and FUTA wages.
Relying on these letter rulings and Revenue Ruling 90-72, the Chief Counsel’s Office explained in the email released Aug. 19 that short-week benefits that were designed to compensate an employee who worked less in a week due to inclement weather were taxable under FUTA and FICA because the employee was not qualified for state unemployment benefits; thus, the employee did not satisfy the exemption. The short-week benefits are also income to the employees, and are subject to income tax withholding.