Employers frequently make severance payments to executives, managers, and other employees who are involuntarily terminated. Quite often, these payments are treated as employee “wages” by the employers and Federal Insurance Contributions Act (“FICA”) taxes are withheld. However, in U.S. v. Quality Stores, Inc., 693 F. 3d 605 (6th Cir. 2012), the Sixth Circuit affirmed two lower court rulings that payments made by an employer to its employees who were involuntarily terminated, in that case due to business cessation, “constituted supplemental unemployment compensation benefits (SUB payments) that are not taxable as wages under FICA.” Id. at 608. This decision created a split in the federal circuits as the U.S. Court of Appeals for the Federal Circuit had previously decided that various payments made to employees separating from an employer were “wages” for purposes of FICA. See CSX Corp. v. U.S., 518 F.3d 1328 (Fed. Cir. 2008).

On October 1, 2013, the United States Supreme Court granted the federal government’s Petition for writ of certiorari to the Sixth Circuit in U.S. v. Quality Stores, Inc., _ S.Ct. _, 2013 WL 2370291 (U.S.). The Supreme Court’s decision in this case should be followed closely by employers because if the Court were to affirm the Sixth Circuit’s ruling, employers’ treatment of severance payments may need to change going forward. Moreover, employers who have made FICA payments with respect to severance pay may be entitled to refunds.

Note: Generally, a protective refund claim must be filed within three years from the time the original tax return was filed. In the case of severance payments made in 2010, that three year period will end in 2014.