Court Holds Severance Payments Not Subject To FICA Taxes; Refund Claims Should Be Filed Soon

In its recent decision, the United States Court of Appeals for the Sixth Circuit in U.S. v. Quality Stores, Inc., No. 10-1563 (6th Cir., 9/7/2012) held that certain severance payments made to former employees were not subject to tax under the Federal Insurance Contributions Act. For employees that have been laid off, and businesses that have reduced their workforce in recent years, the Quality Stores decision could result in significant employment tax refunds depending on the number of individuals affected and periods of time involved in each situation.

Prior to its bankruptcy petition Quality Stores closed numerous stores and distribution centers and consequently terminated approximately 75 corporate employees. These employees received severance payments that were paid incrementally in accordance with the company’s normal payroll period. After Quality Stores went through bankruptcy, all other remaining stores and distribution centers were also closed and all remaining employees were terminated and additional severance payments were made, although all post petition severance payments were paid in a lump sum.  

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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