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The Wagner Law Group Description 

The Wagner Law Group, A Professional Corporation, is a nationally recognized ERISA & employee benefits, estate planning, employment, labor & human resources practice. 


Established in 1996, The Wagner Law Group has 22 attorneys engaged exclusively in employee benefits, estate planning and employment law. Five of our attorneys are AV rated by Martindale-Hubbell as having very high to preeminent legal abilities and ethical standards. The firm is among the largest ERISA boutiques in the country. Our practice is national in scope, with clients in more than 40 states and several foreign countries.






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The Wagner Law Group


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Tel: (617) 357-5200 

Fax: (617) 357-5250 

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Tel: (415) 625-0002

Fax: (415) 829-4385

315 Montgomery Street

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San Francisco, CA 94104







October 11, 2012 

 State and Federal Law Alert




Severance Payments and FICA 




Contradicting the IRS's position that severance payments are wages, the Sixth Circuit Court of Appeals recently held, in United States of America v. Quality Stores, Inc., that severance payments are "supplemental unemployment compensation benefit" ("SUB") payments and, therefore, not "wages" subject to FICA.


The case involved a claim for refund of FICA payments attributable to severance payments made under an employer's severance pay plans. The Sixth Circuit first ruled that the severance payments met the statutory definition of SUB payments because they were: (1) an amount paid to an employee; (2) pursuant to an employer's plan; (3) because of the employee's involuntary separation from employment; (4) resulting directly from a reduction in force, discontinuance of a plant or operation, or other similar conditions; and (5) included in the employee's gross income.


The Court then looked at the rules for FICA under the Internal Revenue Code. In general, all "wages" are subject to FICA. "Wages," in turn, is defined (with certain exceptions) as "all remuneration for employment...."


However, another section of the Internal Revenue Code says that any payment made to an employee that meets the definition of a SUB payment "shall be treated as if it were a payment of wagesby an employer to an employee" [emphasis added] for income tax withholding purposes. In addition, the Supreme Court has previously ruled that SUB payments fall outside the broad statutory meaning of remuneration for services performed by an employee because, by definition, an employee is not eligible for SUB payments until service to the employer has ended.


The necessary implication, in the Sixth Circuit's view, is that Congress and the Supreme Court did not consider SUB payments to be "wages," but allowed them to be treated as wages only for the limited purpose of facilitating federal income tax withholding. The Sixth Circuit said that "if SUB payments are not true 'wages,' but are only treated as if they were 'wages' for purposes of federal income tax withholding, then SUB payments are also not 'wages' under the nearly identical definition found in the FICA statute." Therefore, the payments are not subject to FICA.


This decision creates a conflict with the Court of Appeals for the Federal Circuit which ruled, in 2008, that these severance payments are subject to FICA taxes. Given the significant amount of money involved, the IRS will most likely request a rehearing, or a review by the Supreme Court. In fact, the Sixth Circuit noted in its conclusion that the statutory issues involved are complex and "the Supreme Court may ultimately provide us with the correct resolution of these difficult issues."


Employers should, therefore, exercise caution before electing not to collect and remit FICA payments for severance pay, but may wish to consider a refund claim for any such FICA taxes paid (both prospectively and retroactively) to preserve their rights, should the Supreme Court agree with the Sixth Circuit.





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This Newsletter is provided for information purposes by The Wagner Law Group to clients and others who may be interested in the subject matter, and may not be relied upon as specific legal advice.  This material is not to be construed as legal advice or legal opinions on specific facts. Under the Rules of the Supreme Judicial Court of Massachusetts, this material may be considered advertising.