Severance Pay not taxable under FICA

[Golden Rocket]

Just heard about this. Anyone know about this? Reference 6th Circuit Court of Appeals with Quality Stores.
Read about it Kiplingers Tax letter.

[Gary2]

Plenty has been written about it. I suggest starting by reading the decision.

Do you have a specific question?

[Snaggletooth]

Unemployment Coupling

A question about the language of "unemployment coupling." I conclude that the introduction of unemployment benefits is prima facie evidence that the termination was involuntary on the part of the employee. There is no indication that severance pay under "voluntary" terminations is exempt from FICA. If the employer protests the award of unemployment benefits this apparently means there is some question as to the "involuntary" nature of the termination.

It is possible, however, that a terminated employee can get a new job and not apply for unemployment benefits. It would appear that does not change the "involuntary" nature, but there is no "unemployment coupling" for such an employee. Don't know whether the court decision means such an employee's severance is FICA taxable or not, but if it is, that would seem to be an anomaly requiring further correction.

I haven't necessarily phrased the above in an interrogatory voice, but that is the essence of my question.

[S T]

Keep in mind this issue is probably not resolved - it is 6th Circuit which includes your State of Tennessee - is only binding on the States under its appeallate jurisdiction - but if you look further into either an employee/employer refund - "not all severance payments" will be considered.

This issue might be further appealed at the US Supreme court.

Requirements for refund. Not every severance payment will be considered a supplemental unemployment benefit (SUB) payment. In order to qualify, the following conditions must be met:

•The employer had a plan in place that provided for severance payments.
•The employee's separation from service was involuntary (but it need not have been permanent).
•The involuntary separation was due to a downsizing or the closing of a plant or operation.
•The payments were included in the employee's gross income.

There seems to be also a requirement that as an employer or employee a "protective refund claim needs to be filed to protect the rights.

Seems this could be a long term issue --- as it further develops.

Thanks for bringing forward for attention - I will be watching for some of my payroll clients.

Sandy

[Snaggletooth]

Unclear

Thanks Sandy. At last report, the IRS has not decided whether to acquiesence, and an appeal to the Supreme Court may be in the works. I am not expecting them to give up, especially since this was only in the sixth district. The ninth district Court, for example, has a history of upholding big government and taxes associated with it.

Currently, the statute of limitation goes back to 2009. If IRS delays this by appealing, will the statute of limitations move ahead? If so, it might appear to be good strategy to file for a refund pending the outcome.

Another round of questions that are unclear for what I've read:
1) If exempt for FICA, is it also exempt from Medicare?
2) Do the recipients actually have to DRAW unemployment, or do they merely have to be eligible?
3) One of my clients has an unusual situation - the payment of the severance is within the Statute,
but the EVENT of the layoff is OUTSIDE the Statute.