On January 14, 2014, the Supreme Court of the United States heard oral arguments in United States v. Quality Stores, Inc., a case on appeal from the U.S. Court of Appeals for the Sixth Circuit. The issue at stake is whether certain severance payments made to employees following an involuntary separation, which are not linked to state unemployment benefits, are “wages” subject to Federal Insurance Contributions Act (FICA) tax.
In Quality Stores, 693 F.3d 605 (6th Cir 2012), the Sixth Circuit held that certain “supplementary unemployment benefit” payments (SUB payments) made to employees following an involuntary separation are not wages subject to FICA tax, even though they were not based on state unemployment benefits and were paid in a lump sum. This decision was in conflict with a prior decision by the U.S. Court of Appeals for the Federal Circuit, CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), which held that SUB payments, such as those made by Quality Stores, are wages under FICA.
Generally, SUB payments may be included or excluded from FICA wages depending on various factors. The Internal Revenue Service (IRS) has ruled that certain SUB payments are not FICA wages, but only if they meet specific conditions, including payments must not be made as a lump sum and must be specifically designed to supplement state unemployment benefits that the individual is qualified to receive. The Sixth Circuit ruling would expand the class of SUB payments excluded from FICA tax to include payments which were not linked to state unemployment benefits and were paid in a lump sum.
The Supreme Court is expected to issue its ruling sometime this year, possibly this summer. The IRS has estimated that it could owe more than $1 billion in FICA tax refund claims to individuals and employers if the Quality Stores decision is upheld.
FICA Refund Claims
If the Supreme Court ultimately decides that an expanded class of severance payments should not be subject to FICA tax, employers may receive a refund for FICA taxes previously paid. A protective claim can be filed on Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.
As we have previously discussed, we recommend that employers who have made severance payments due to reductions in force, plant shutdowns or similar conditions of involuntary severance, consider filing protective FICA tax refund claims. In general, the statute of limitations for tax refund claims is three years from the April 15 following the year for which the tax was paid. As a result, April 15, 2014, is the due date for taxpayers to file a refund claim with respect to the 2010 calendar year.
A protective claim can be relatively simple to do. It is not necessary to include exact calculations or employee consents for the refund filing. This information and the required employee consents can be provided later through a supplemental filing. We recommend that all employers with significant amounts in question file protective claims, but particularly those who made severance payments to employees located in the Sixth Circuit (Kentucky, Michigan, Ohio and Tennessee).
In addition, employers may have a separate deadline for situations in which the IRS has issued a notice of claim disallowance for FICA refund claims. In such cases, an employer must either: (i) bring suit to contest the disallowance within two years after the issuance of the notice or (ii) obtain an extension of the time to file such a suit with the IRS. This process can be initiated by filing IRS Form 907, Agreement to Extend the Time to Bring Suit. However, because the IRS is not required to grant an extension requested pursuant to an employer filing Form 907, employers may also wish to file suit.