On September 12, 2012, the U.S. Court of Appeals for the Sixth Circuit, which has appellate jurisdiction over Kentucky, Michigan, Ohio and Tennessee, upheld a lower court’s decision that certain severance payments are not subject to the Federal Insurance Contribution Act (FICA) tax. 

The Sixth Circuit in United States v. Quality Stores, Inc. held that severance payments paid to terminated employees would be exempt from FICA taxes if all of the following conditions are true:

  • The severance payments were made pursuant to an employer’s plan;
  • The severance payments were made because of an employee’s involuntary separation from employment, whether temporary or permanent;
  • The employee’s involuntary separation from employment resulting from a reduction in force, the discontinuance of a plant or operation, or other similar conditions; and
  • The severance payments were included in the employee’s gross income.

FICA Refund Possibility.  Because of the Sixth Circuit’s decision in Quality Stores, Inc., employers and employees in Kentucky, Michigan, Ohio and Tennessee that paid FICA taxes on severance pay could be eligible for a refund.  However, any refund claims must be made within 3 years from the time the tax return was filed.  FICA taxes are typically reported on a Form 941, and such returns are typically required to be filed by the last day of the month that follows the end of the quarter.

Thus, if an employer laid off employees on July 1, 2009 and paid its laid off employees severance, the employer’s Form 941 reporting the severance payments would have been due on October 31, 2009.  The 3-year statute of limitations would require that the claim for a refund be filed prior to October 31, 2012 with respect to the FICA taxes paid during the July-September 2009 quarter.

Therefore, it is imperative for employers and employees in Kentucky, Michigan, Ohio and Tennessee, who received or paid severance payments on or after July 1, 2009, to make refund claims quickly to avoid any such claims being barred by the 3-year statute of limitations.