In a recent decision (U.S. v. Quality Stores, Inc., No. 10-1563, Sept. 7, 2012), the U.S. Court of Appeals for the Sixth Circuit held that supplemental unemployment benefits payments (SUB payments) are not wages subject to the Federal Insurance Contributions Act (FICA). As a result, the employer and former employees were entitled to refunds of FICA taxes that they paid on SUB payments. This decision creates a potential refund opportunity for similarly situated taxpayers.
SUB payments are “amounts which are paid to an employee pursuant to a plan to which the employer is a party, because of employee’s involuntary separation from employment (whether or not such separation is temporary), resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar condition. . . .” 26 U.S.C. 3402(o)(2)(A).
The issue in Quality Stores involved whether SUB payments are wages for FICA purposes under the Internal Revenue Code (the “Code” ). The FICA provisions of the Code do not specifically mention or even make reference to SUB payments. But another portion of the Code says that for purposes of income tax, SUB payments are taxed as if they were a payment of wages. 26 U.S.C. 3402(o)(1). The taxpayers argued, and the Sixth Circuit agreed, that the “as if” language is critical. Without the “as if” language, the SUB payments would not be considered wages for income tax purposes. Similarly, because there is no “as if” language in the FICA portion of the Code, they should not be considered wages for FICA purposes. The Sixth Circuit ordered a refund of the FICA payments to the employer and the former employee.
This decision creates a split of authority on this issue because in a prior case (CSX Corp. v. U.S., 518 F.3d 1328 (Fed. Cir. 2008)), the Federal Circuit agreed with the IRS that SUB payments are wages for FICA purposes unless they are linked to the receipt of state unemployment compensation.
Based on the recent Quality Stores decision, employers who have withheld FICA tax on SUB payments should consider whether to file refund claims. It is uncertain whether the application of the Quality Stores decision will be expanded beyond SUB payments to all severance payments, but attorneys representing former employees are already beginning to make such claims.