FICA Tax Treatment of Severance Pay

In United States v. Quality Stores, Inc., 2010 U.S. Dist. LEXIS 15825 (W.D. Mich. Feb. 23, 2010), a case where the employer sought a refund of $1,000,125 in Federal Insurance Contributions Act (FICA) taxes paid with regard to severance payment to former employees, Judge Janet T. Neff held that payments made to employees in a reduction-in-force were not “wages” for FICA purposes. The parties had stipulated that the payments were made on account of the employees’ involuntary separation from employment.

A conflicting ruling was issued in 2008 by the Federal Circuit in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), which reversed 52 Fed. Cl. 208 (Fed. Cl. 2002).

There are a series of revenue rulings from 1957 to 1990 in the matter, summarized in CSX Corp., 518 F.3d at 1334-40.

The Sixth Circuit will now determine whether it agrees with Judge Neff or the Federal Circuit. If the former, there will be a circuit split, and maybe resolution by the Supreme Court.

Employers should request refunds in the interim, and employees' counsel should condition severance agreements on requests for refunds.