Court Holds Severance is Not Subject to FICA - Refunds Possible

A recent decision in a Michigan federal district court could open the door for employers to recoup thousands of dollars in FICA taxes paid on behalf of laid-off workers as part of severance packages.

Barnes Dennig encourages all clients who experienced downsizing from 2006-2009 to file for a protective claim of a FICA refund-- particularly those who paid severance packages in 2006, as the statute of limitations for recouping 2006 FICA taxes expires April 15, 2010.

We do not expect the Internal Revenue Service to act on any refund claims in the immediate future, but by filing for a FICA refund today, employers will be in position to collect if the Michigan court decision is upheld on appeal.

In United States v. Quality Stores, Inc., the U.S. District Court of Appeals for the Western District of Michigan ruled that severance payments were social benefits rather than wages, as long as employment was involuntarily terminated due to downsizing. As such, the payments were not subject to Social Security and Medicare taxes. (They remain subject to income taxes.)

The ruling contradicts a decision by another court in a similar case. Two years ago, the U.S. Court of Appeals for the Federal Circuit ruled that severance pay was subject to FICA taxes in CSX Corporation v. United States.

The Quality Stores case is expected to eventually reach the U.S. Court of Appeals for the Sixth District, which covers Michigan, Ohio, Kentucky and Tennessee. If the recent ruling is upheld there, the case would set a precedent that covers all employers within the Sixth District, creating a clear opportunity for local companies to recoup taxes paid to downsized workers, with interest.

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