Today the U.S. Supreme Court issued its long-awaited decision in United States v. Quality Stores, Inc., holding that severance payments generally are subject to FICA taxes. However, the Court did not hold that payments under a Supplemental Unemployment Benefit (SUB) Plan are subject to FICA, noting that “the IRS still provides that severance payments tied to the receipt of state unemployment benefits are exempt not only from income tax withholding but also from FICA taxation.”
We have written several times about the Quality Stores case and CSX Corporation v. United States, another case on the same issue. Based on these two cases, many companies filed for a FICA tax refund in recent years, pending the Supreme Court’s final decision. Therefore, the next move seems to belong to the IRS. If I were a betting man, I’d bet that the IRS will quickly adapt its position and revise its prior revenue rulings in a manner that maximizes its ability to collect FICA tax on SUB Plans too.