Tuesday, April 15, 2014

On March 25, 2014, the United States Supreme Court issued its unanimous (8-0) decision in U.S.  v Quality Stores, 572 U.S. ____ (2014).  In its opinion authored by Justice Kennedy, the Court held that the severance payments at issue constituted taxable wages for FICA purposes.  The severance payments in question were made to employees in connection with an involuntary termination, were varied based on job seniority and time served, and were not linked to the receipt of state unemployment benefits.  In so holding, the Supreme Court reversed the decision of the Sixth Circuit Court of Appeals and resolved a split in the courts.  See CSX Corp. v. United States, 518 F. 3d 1328 (Fed. Cir.  2008).

The Court reasoned that severance payments of the type described fit plainly within the definition of “wages” under Section 3121 of the Internal Revenue Code, which defines “wages” for FICA tax purposes broadly as “all remuneration for employment”  and defines employment as “any service, of whatever nature, performed by an employee for the person employing him.” According to the Court, common sense dictates that severance payments are remuneration that is received by employees in consideration for employment because severance payments are made only to employees.  In addition, the Court noted that  the fact that severance payments often vary according to the function and seniority of a particular employee was a further indication that the payments are made to reward employees for their service.

The Supreme Court considered the arguments made by the taxpayer under Code section 3402(o) but found them to be erroneous and concluded that Code section 3402(o), which relates to income tax withholding, does not narrow the term “wages” under FICA to exempt all severance payments.  The Court noted that the taxpayer’s position would result in severance payments not being subject to FICA taxation while they would be deemed wages for purposes of income tax withholding.  The Court concluded that such a result would be inconsistent with the broad principle set forth by the Supreme Court in Rowan Cos., Inc. v. United States, 452 U.S. 247 (1981) that simplicity of administration and consistency of statutory interpretation instruct that the meaning of “wages” should be in general the same for income-tax withholding and for FICA calculations.

The Court noted in its decision that the IRS still provides, in Rev. Rul. 90-72, that supplemental unemployment benefit (“SUB”) payments tied to the receipt of state unemployment benefits are exempt from income tax withholding and from FICA taxation.  Because the severance payments at issue in Quality Stores were not linked to state unemployment benefits, the Court expressly declined to reach the question of whether the IRS’ current exemption is consistent with the broad definition of wages under FICA.

As a result of the Supreme Court’s decision, the IRS will not need to refund an estimated $1 billion in FICA taxes previously paid in connection with severance payments.  Protective claims that have been filed by taxpayers will be denied.  Going forward, employers must continue to treat severance payments as “wages” subject to FICA taxes unless they are linked to state unemployment compensation and otherwise qualify for the SUB pay exemption recognized by the IRS under Rev. Rul. 90-72.

See our prior blog posts for additional information regarding this case.


Tuesday, April 8, 2014

Recently, the IRS released a Chief Counsel Advice Memo describing the interaction of the health FSA carryover feature we previously discussed and HSAs.  This memo addresses some of the important questions left open by prior guidance.  However, readers should know […]

Monday, April 7, 2014

The very day after we posted about the IRS’s delay in issuing guidance on the application of the Windsor decision (and guidance previously provided by the IRS under Rev. Rul. 2013-17) to qualified retirement plans the IRS issued Notice 2014-19 […]

Saturday, April 5, 2014
Written by and in: General

Here are the answers from our three National Employee Benefits Day crossword puzzles!  We hope you enjoyed them.

Friday, April 4, 2014
Written by and in: General

This is the third in our series of three crossword puzzles in honor of National Employee Benefits Day on Wednesday!  Go here and here to see the first two posts in this series. Reminder: Answers for all three puzzles will be […]

Thursday, April 3, 2014
Written by and in: General

This is the second in our series of three crossword puzzles in honor of yesterday’s National Employee Benefits Day! Go here to see the first post in that series. Reminder: Answers for all three puzzles will be posted on Saturday so […]

Thursday, April 3, 2014

Update (4/11): See our post here on the recently released guidance. The employee benefits community continues to wait with baited breath on IRS guidance regarding the amendments necessary to qualified retirement plans in the wake of last Summer’s Windsor decision […]

Wednesday, April 2, 2014
Written by and in: General

In honor of National Employee Benefits Day, we’re taking a break from guidance updates and commentary and providing a little fun.  Over the next few days, we will be posting some crossword puzzles focused on the fascinating and complex world […]

Wednesday, April 2, 2014
Written by in: General

Today we recognize the important work that Human Resource professionals, plan administrators, trustees and fiduciaries, as well as professional advisors do on behalf of the nation’s workers and employers. Beyond the apparent role of protecting workers, benefit professionals also help […]

Monday, March 31, 2014

Earlier this month, the Department of Labor published a proposed amendment to its February 2012 final regulations regarding the disclosures concerning services and fees that service providers must furnish to plan fiduciaries to permit the fiduciaries to determine that the […]