Under a new court decision, employers in Ohio may be eligible to claim a refund of FICA taxes paid on severance payments made to laid off employees. On September 7, 2012 in In re Quality Stores, Inc. the 6th Circuit Court of Appeals (with jurisdiction over Ohio) ruled against longstanding Internal Revenue rulings and also created a conflict with another appeals court ruling when it held that certain types of severance payments are not subject to FICA tax. In general the court ruled that FICA tax is inapplicable where there is a severance payment made in connection with involuntary layoffs resulting from a reduction in force or closure of a facility.

Specifically the court held that “supplemental unemployment benefits” payments with all of the following characteristics are not “wages” for FICA tax purposes (although they are “wages” for income tax purposes:

  • An amount paid to an employee;
  • Pursuant to an employer’s plan;
  • Because of a temporary or permanent separation from service;
  • Resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions.

The IRS will likely ask the court to reconsider its opinion and if it refuses (which is expected) may well ask for Supreme Court review. However the decision is thoughtful and detailed and could very well stand. Therefore, it would be prudent to get refund claims filed as soon as possible to protect the statute of limitations.