Advertisement

April 23, 2014

Action Required to Preserve FICA Refund Claim on Severance Pay

In the case of United States v. Quality Stores, Case No. 10-1563 (6th Cir. Sept. 7, 2012), the Court of Appeals for the Sixth Circuit held that severance pay is not subject to FICA taxes, creating a split among the circuits on this issue. The United States requested a rehearing en banc, which has been denied. The United States will likely file a petition for certiorari to the Supreme Court. If the Supreme Court upholds the Sixth Circuit's decision, employers will be able to obtain refunds for FICA taxes paid on severance payments.

Given this legal landscape, employers that have paid a substantial amount of severance in recent years should consider filing a protective claim with the IRS for a refund of FICA taxes paid. Such a filing will extend the period of time for which FICA contributions on severance could be recovered, should the Supreme Court eventually rule against the IRS. (Employers in the Sixth Circuit - Michigan, Ohio, Kentucky and Tennessee - are in an even better position, as they may be able to obtain a refund if the Supreme Court simply declines to hear the Quality Stores case.) The deadline for filing a protective claim for severance paid in 2009 is April 15, 2013. For severance paid in 2010, the deadline for filing a protective claim is April 15, 2014.

For many years the IRS has generally treated severance pay as "wages" subject to FICA. Payments to terminated employees are treated as "supplemental unemployment benefits"-rather than wages subject to FICA-only if the severance payments were coordinated with the receipt of state unemployment insurance benefits and complied with other rules articulated by the IRS. (See, e.g., IRS Revenue Rulings 56-249, 58-128 and 90-72.) The IRS's position was affirmed in 2008 by the U.S. Court of Appeals for the Federal Circuit in CSX Corp. v. United States, 518 F.3d 1328, 1344 (Fed. Cir. 2008). However, in the recent Quality Stores decision, the Sixth Circuit disagreed with the IRS's and the Federal Circuit's interpretation of the relevant statutory provisions and created a split in the circuits.

The filing of a protective claim for a refund involves the taxpayer's filing a set of amended Form 941 quarterly returns using Form 941-X for those quarters that are still considered open and requesting a refund, in this case, based upon the Quality Storesdecision. The amended Forms 941 would be filed with a cover letter and Form 8275, which discloses that the amended returns and associated refund requests are contrary to published IRS guidance, in this case Revenue Rulings 56-249 and 90-72, but supported by the Sixth Circuit's decision.

The IRS will likely disallow the refund request based upon the Revenue Rulings cited above. Ordinarily a lawsuit to recover the refund would need to be filed within two years of the date of the notice of disallowance. However, the IRS may agree to extend that two-year limitations period through the use of Form 907, which the IRS often does when the circuit courts are split on the issue.

The extension of the limitations period leaves open the possibility of recovering the FICA taxes paid for the years for which the protective claim was filed, as well as for any subsequent tax years (provided they are still open). As noted above, for FICA tax purposes, 2009 and subsequent years are still open, and the last date for filing a protective claim for a refund for amounts paid in 2009 is April 15, 2013. 

© 2014 Vedder Price

About the Author

Thomas G. Hancuch, Vedder Price Law Firm, Labor Employment Attorney
Shareholder

Thomas G. Hancuch is a shareholder at Vedder Price where he represents employers in all aspects of employee benefits, labor and employment law. His practice focuses on employee benefit plan design and administration, benefit claims and litigation; employee relations and benefits aspects of mergers; acquisitions; workforce reductions and outsourcing; leaves of absence and accommodation of employees with disabilities; employment discrimination; harassment and retaliation claims; employee leasing and worker classification; executive compensation; wage and hour laws; employee discipline and...

312-609-7824

About the Author

Kelly A. Starr, Vedder Price Law Firm, Labor Employment Attorney
Shareholder

Kelly A. Starr is a shareholder at Vedder Price and has practiced employee benefits and executive compensation law since joining the firm in 1995.  She counsels a variety of employers on all aspects of employee benefits law, including the design, tax qualification, legal compliance, correction, interpretation, communication and termination of broad-based employee benefit plans.  She also negotiates and structures executive employment agreements and executive compensation and benefit arrangements, including incentive compensation, deferred compensation, severance agreements and...

312-609-7768

Boost: AJAX core statistics

Legal Disclaimer

You are responsible for reading, understanding and agreeing to the National Law Review's (NLR’s) and the National Law Forum LLC's  Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on www.NatLawReview.com are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.  

Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is www.NatLawReview.com  intended to be  a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional.  NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. 

Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.

The National Law Review - National Law Forum LLC 4700 Gilbert Ave. Suite 47 #230 Western Springs, IL 60558  Telephone  (708) 357-3317 If you would ike to contact us via email please click here.