IRS Wins One at Supreme Court: Severance Pay is Subject to FICA Tax
I blogged about the Quality Stores decision which at the district court and court of appeals levels held that certain severance payments were not subject to FICA (Social Security) taxes. The IRS had challenged the employer in that case and had lost in both lower courts.
At the Supreme Court level, the IRS won. The Court held that severance payments to employees laid off in connection with an employer’s bankruptcy are subject to FICA taxes. Those employers who had filed protective refund claims based on the lower court decisions will not be receiving any refunds. The Supreme Court decision even throws into question the validity of the FICA tax exemption the IRS has allowed for severance plans tied to state unemployment compensation programs (so-called “Supplemental Unemployment Benefits” or “SUB” plans). Those plans appear typically in the union context and supplement payments under state unemployment compensation programs. We shall see whether the IRS withdraws the Revenue Rulings supporting the FICA exemption for those SUB plans.
Contact Benefits Notes for more information.