FICA Tax - Protective Refund Opportunity

Action Step: 

Employers that have paid severance in connection with involuntary workforce reductions since 2010 should consider filing protective tax refund claims. Protective claims for calendar year 2010 must be filed no later than April 15, 2014 to protect any refund opportunities for the tax year.


Potential refund of FICA taxes paid with respect to Severance -- employers and employees who paid or received severance payments in the last 3 years should be aware that the Internal Revenue Service has lost a case in the Sixth Circuit (United States v. Quality ores, Inc). On September 7, 2012, the Sixth Circuit held that severance paid to employees for involuntary reduction in force is not subject to FICA taxes. This created a split among the circuit courts and led to the contested issue of what definition of “wages” should be used for purposes of FICA withholding.

To qualify for the potential refund, the severance payment must meet the following requirements:

  • The amount was paid to an employee;
  • The payment was pursuant to the employer’s plan;
  • The payment made was due to an employee’s temporary or permanent involuntary separation from employment;,
  • The separation results directly from a reduction in force, discontinuance of a plant or similar conditions and\
  • The payment was included in the employee’s gross income.

While no definition of the term “reduction in force” is provided in the Internal Revenue Code or Income Tax Regulations, permanent elimination of a position would appear to qualify as a “reduction in force.”

Components of a protective refund claim:   

Form 941-X  Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund
Form 8275  Disclosure Statement
Cover Letter  Form 941-X and Form 8275 must be submitted with a cover letter explaining the facts and circumstances that resulted in the protective refund claim filing

Current Status: 

On Tuesday, January 14, 2014, the U.S. Supreme Court heard oral arguments to decide the split among the circuit courts.  Since it is not likely that the Supreme Court will render its decision until after the April 15, 2014 deadline, employers should continue to withhold and remit FICA taxes on involuntary severance payments that are not provided pursuant to a traditional supplemental unemployment benefit plan. Employers should also act now and file protective refund claims for calendar year 2010 FICA withholdings.

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