New Case Revives Hopes For Refunds Of FICA Tax On RIF Severance Pay

Eight years ago, the Court of Federal Claims held that held that some types of severance pay were exempt from Social Security taxation under the Federal Insurance Contributions Act (FICA). The exemption applied if the requirements in section 3402(o) of the Internal Revenue Code were met: (i) the employer had a plan; (ii) the plan covered involuntary separation; and (iii) there was a reduction in force, plant closing, or other event resulting in severance payments. CSX Corporation v. United States, 52 Fed. Cl. 208 (2002).

The court's decision was contrary to prior IRS guidance that recognized a FICA exclusion only if the payments were designed to supplement state unemployment benefits—generally meaning that the payments were made in installments and were conditioned on the individual's ongoing eligibility for state unemployment benefits. Following the CSX decision, many employers filed protective refund claims, only to be disappointed in 2008 when the decision was overturned by the Federal Circuit. CSX Corporation v. United States, 518 F.3d 1328 (Fed. Cir. 2008).

A court in Michigan has now considered the same issue and has entered a decision upholding the taxpayer's position that severance plan payments made in connection with an involuntary reduction in force were not "wages" under FICA. United States v. Quality Stores, Inc., 2010 U.S. Dist. LEXIS 15825 (W.D. Mich. Feb. 23, 2010). The court explicitly rejected the Federal Circuit's CSX holding and awarded refunds of FICA tax.

Employers who have made involuntary termination severance payments pursuant to a plan should consider filing protective refund claims. Time is of the essence for refunds of FICA taxes paid...