On March 25, 2014, the Supreme Court of the United States (the “Supreme Court”) voted unanimously to overturn the Sixth Circuit Court of Appeals (the “Sixth Circuit”) ruling in United States v. Quality Stores, Inc. (“Quality Stores“). As we outlined in a previous alert, in September 2012, the Sixth Circuit ruled in Quality Stores that a type of severance payment called a supplemental unemployment compensation benefit (“SUB”) payment does not constitute “wages” subject to the Federal Insurance Contributions Act (“FICA”) tax under Section 3121 of the Internal Revenue Code (the “Code”).
Generally, an employer must withhold an employee’s estimated federal income tax and the employee’s share of the FICA tax (at a rate of 7.65%) on wages earned by the employee. The employer also pays a corresponding share of the FICA tax on the employee’s wages. In Quality Stores, the Sixth Circuit and, more recently, the Supreme Court considered whether SUB payments (i.e., amounts paid under an employer severance plan to an employee who was involuntarily terminated due to a plant closing, layoff or similar condition) are subject to the FICA tax.
Section 3121 of the Code does not expressly include or exclude SUB payments as “wages” subject to the FICA tax. As such, the Sixth Circuit looked to the treatment of SUB payments under Section 3402 of the Code, which defines “wages” for federal income tax withholding purposes. Section 3402(o) clearly directs employers to withhold federal income taxes from SUB payments “as if” they are wages. The Sixth Circuit read the “as if” language in Section 3402(o) to imply that Congress did not generally consider such payments to be wages. Otherwise, the Sixth Circuit reasoned, subsection (o) would be unnecessary. The Sixth Circuit thus concluded that SUB payments are not subject to FICA taxes. The Sixth Circuit’s decision in Quality Stores was not consistent with an earlier decision of the Federal Circuit Court of Appeals, which created the circuit split that invited the Supreme Court’s recent determination.
The Supreme Court overturned the Sixth Circuit’s decision in Quality Stores. The Supreme Court considered the treatment of severance payments generally for FICA tax purposes and concluded that given the broad definition of “wages” under Section 3121 and the absence of severance payments from its otherwise extensive list of specific exclusions, there was no need to look to Section 3402 for guidance. The Supreme Court rejected the argument that Section 3402(o) should be interpreted to exempt all severance payments from the FICA tax and held that the severance payments at issue were subject to the FICA tax.
Some employers filed for a refund of FICA taxes in reliance on the Sixth Circuit’s decision in Quality Stores. It is unclear whether the IRS will provide formal notice of the denial of such claims based on the Supreme Court’s decision or will simply not respond to the claims.
Please contact a Bass, Berry & Sims attorney if you need further guidance.