Sixth Circuit Ruling Creates a Circuit Split on Whether Payments of Supplemental Unemployment Benefits Made Pursuant to a Downsizing Constitute “Wages” for Purposes of FICA


Today the Sixth Circuit Court of Appeals issued an important decision related to the treatment of certain severance payments for purposes of the Federal Insurance Contributions Act (“FICA”).

FICA imposes a tax on employees and employers based on a certain percentages of “wages,” as that term is defined for purposes of FICA, and requires employers to withhold the employees’ portion of the tax from their wages.1 The Internal Revenue Code (the “Code”) also requires employers to withhold income taxes from “wages,” as defined for that purpose.2 The definitions of “wages” for purposes of FICA and withholding are almost identical.3

Taxpayers and the Internal Revenue Service (the “IRS”) have litigated whether so-called “supplemental unemployment compensation benefits” payments (“SUB payments”) are “wages” subject to FICA tax. SUB payments are defined as “amounts which are paid to an employee pursuant to a plan to which the employer is a party, because of an 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 . . . .”4 The Code provides that SUB payments “be treated as if [they] were a payment of wages” (emphasis added) and thus are subject to employer withholding for income tax.5 No mention is made of SUB payments in FICA. Taxpayers have contended that the “as if” language implies that SUB payments would not otherwise be “wages” for income tax withholding purposes and, therefore, not subject to FICA tax.

The IRS has taken the position that most payments resembling SUB payments constitute “wages” for FICA purposes.6 In particular, according to the IRS, payments that meet the definition of SUB payments but that are made in lump sum constitute “wages” for FICA purposes because the SUB payments are not linked to the receipt of state unemployment compensation.7

In 2008, the Federal Circuit agreed with the IRS’ position, in CSX Corp. v. United States, reversing the Court of Federal Claims which had accepted the taxpayer’s argument.8 Today, the Court of Appeals for the Sixth Circuit held in United States v. Quality Stores that, based on the statutory language and the relevant legislative history, amounts that meet the definition of SUB payments do not constitute “wages” for purposes of FICA and thus are not subject to FICA tax.9

Clients who have withheld FICA tax from SUB payments should consider whether to file protective claims with the IRS.