What Changes May Be Coming to Severance Pay

Two weeks ago, the Supreme Court heard a case, United States v. Quality Stores Inc. No. 12-1408, that will ultimately determine whether severance payments to employees who were involuntarily dismissed are taxable under the Federal Insurance Contributions Act tax (“FICA”), which helps pay for Medicare Health Insurance and Social Security retirement pensions. Companies and their employees typically pay FICA taxes.

Specifically, the case concerns a Midwest-based company called, Quality Stores, which served the agricultural, hardware, and related needs of rural consumers, primarily part-time and full-time farmers and ranchers, hobby gardeners, skilled trades persons, and do-it-yourself customers, before having to shutdown all of its 300 stores and file for bankruptcy. Thousands of workers were let go, but fortunately with some severance pay. The company withheld FICA tax from the severance pay and forwarded the withholdings to the government.

In the case before the Supreme Court, the IRS and Quality Stores are arguing over outwardly conflicting language in the tax code related to the relation between severance pay and FICA taxes. It is a hugely ambiguous and unsettled matter because of the confusing language in the tax code. One part of the tax code defines wages as “all remuneration for employment.” The severance payments made by Quality Stores were wages and were taxable for FICA purposes, the Obama administration is arguing, according to court filings.

But in a different section of the code, “supplemental unemployment benefits” are exempted from income taxes. Quality Stores has argued that its severance payments are exempt from FICA taxes according to the “SUB payments” definition.

It is difficult to ascertain how the Supreme Court will arrive at its decision, but no matter what, the decision is expected to greatly affect the net amount of severance payments received by terminated workers. More to come when the decision is issued.

As always, the New York City severance package attorneys of Risman & Risman, P.C. are eager to help and discuss your concerns with you. There is no charge for the consultation. Please feel free to call us at (212) 233-6400 or contact us online.

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