I blogged here and here about Quality Stores, a case in which the Sixth Circuit Court of Appeals held that severance pay is not subject to FICA (Social Security) taxes if certain requirements are met: The severance payments must be made pursuant to a plan, on account of an involuntary termination, and the result of a reduction in force (RIF), plant closing or similar event. The Sixth Circuit decision conflicts with the views of the IRS, whose position is that severance pay is subject to FICA taxes, and at least one other court, which upheld the IRS’s position.
Not all severance payments meet the criteria under Quality Stores for the FICA exemption. However, employers who have paid (and withheld) FICA taxes from severance payments that meet the criteria may wish to file a protective claim for a refund of those taxes. Generally speaking, the statute of limitations to seek a refund of FICA taxes on severance payments made in 2010 is April 15, 2014. The Supreme Court is likely to issue its decision by June of 2014. The statute of limitations for 2011 and later years is not likely to expire before the Supreme Court reaches its decision.
Employers who have paid significant FICA taxes on severance amounts over the last few years will want to follow this case and file refund claims if the Court upholds the Sixth Circuit decision. Employers with enough at stake in 2010 FICA taxes may wish to file a protective refund claim before that statute of limitations expires on April 15, 2014.