New Case Revives Hopes for Refunds
By Walter A. Pickhardt
The United States Supreme Court has granted certiorari to review the Sixth Circuit's decision in Quality Stores, which held that severance payments in connection with a reduction in force (RIF) are exempt from Social Security (FICA) taxes. United States v. Quality Stores, Inc., 693 F.3d 605 (6th Cir. 2012). Employers who have made similar payments should file refund claims as a protective measure in the event the Supreme Court upholds the Sixth Circuit's decision
As we have previously discussed in our September 2012 and March 2010 legal updates, there is a split of authority on whether some types of severance pay are exempt from Social Security taxation. In 2002, the Court of Federal Claims held that an exemption existed if the requirements in section 3402(o) of the Internal Revenue Code were met: (1) an amount was paid to an employee; (2) pursuant to an employer's plan; (3) because of an employee's involuntary separation from employment, whether temporary or permanent; (4) resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions; and (5) the amount was included in the employee's gross income. CSX Corporation v. United States, 52 Fed. Cl. 208 (2002).