Sometime this summer, the Supreme Court is expected to issue its ruling in U.S. v. Quality Stores.  In this case, the Supreme Court reviewed the Sixth Circuit’s holding that supplemental unemployment compensation benefits (“SUB payments”) relating to severance payments are not subject to FICA taxes. U.S. v. Quality Stores, 693 F.3d 605 (6th Cir. 2012).  The Sixth Circuit decision resurrects a long-disputed issue regarding the applicability of FICA to severance pay. The Obama administration claims an affirmation by the Supreme Court of the Sixth Circuit decision could affect $1 billion in tax refund claims.[1]

The Supreme Court is not expected to reach its decision in this case until after the April 15, 2014 deadline to file a claim for refund for any FICA tax paid on severance pay in 2010.  Thus, employers should file protective claims for refund by that deadline to preserve their right to a refund should the Supreme Court agree with the Sixth Circuit.  Additionally, in the event the Supreme Court affirms the lower court’s decision, employers should review their employment tax returns for 2011, 2012, and 2013 to determine if a claim for refund is necessary for subsequent years.


This case involves the issue of whether or not severance pay should be subject to FICA tax.  FICA taxes are imposed on employee wages to fund the Social Security and Medicare programs.  Both the employer and the employee pay part of the tax.  “Wages” for FICA purposes are defined as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than case…” I.R.C. § 3121(a). 

In October of 2001, an involuntary Chapter 11 bankruptcy petition was filed against Quality Stores, Inc.  Thereafter, Quality Stores’ affiliated companies commenced voluntary Chapter 11 bankruptcy cases.  Under the confirmed First Amended Joint Plan of Reorganization, Quality Stores ultimately closed its stores and distribution centers and terminated the employment of all its employees.  Quality Stores made severance payments to those employees whose employment was involuntarily terminated pursuant to two separate plans.  The Bankruptcy Court found that payments made to the employees on involuntary employment termination constituted supplemental unemployment compensation benefits (“SUB payments”) and were NOT taxable as “wages” under FICA. The Sixth Circuit Court of Appeals affirmed the Bankruptcy Court’s decision that the severance payments, pursuant to the two separate plans qualified as SUB payments, are not taxable wages under FICA. As the Sixth Circuit explained, the FICA statute does not expressly include or exclude SUB payments, nor do the Treasury regulations promulgated under FICA. Consequently, the Sixth Circuit looked at the withholding statutes which expressly provide that a SUB payment shall be treated as if it were a payment of wages by an employer. The Sixth Circuit found that by demanding SUB Payments be treated as wages, this implied Congress did not consider SUB payments to be “wages” otherwise.  Therefore, the Sixth Circuit held that since SUB payments are not “wages” they are not subject to FICA tax.


In light of the Sixth Circuit’s decision and pending Supreme Court decision, employers that have made SUB payments on which they paid FICA taxes should file a protective refund claim for open years to preserve their right to a refund.  As the deadline for filing a protective refund claim for the 2010 tax period is April 15, 2014, employers should work with a tax professional to ensure that a protective refund claim is properly completed and filed with the IRS.