If your business has made severance payments to laid-off workers over the past several years, you’re not alone.  When you made those severance payments, you likely paid in the normal employers’ share of Social Security and Medicare taxes (and withheld the appropriate amounts from your former employees).  But, is that the right answer? Two different federal appeals courts have somewhat differing views on the issue and it’s now possible that the U.S. Supreme Court will need to resolve this difference.

Potential for Successful Claims
Recently, the U.S. Court of Appeals for the Sixth Circuit determined that Quality Stores, Inc. was entitled to a refund of more than $1 million in taxes paid under the Federal Insurance Contributions Act (FICA), for payments to employees who were involuntarily terminated.  Quality Stores took the position that these payments were not made for services rendered, but, instead, should qualify as supplemental unemployment compensation benefits (SUB payments).  This decision was favorable but contrary to an earlier court decision.

If you’ve made severance payments to employees whose employment was involuntarily terminated as a result of a workforce reduction or closing of a plant or operation, you may be eligible for a refund.  For severance payments made during 2009, however, the statute of limitations for making refund claims expires on April 15, 2013.  An organization might consider the filing of a protective refund claim if the amount of the potential refund justifies the effort.  In determining the amount involved, you may want to consider filing on behalf of the employees for their portion.

Weigh Your Options and Seek Advice
Due to the conflict in the courts, the IRS will most likely, initially, reject your protective refund claim.  From that date, you have two years to either file your own suit in court, or, ideally, agree with the IRS to extend the time to bring suit.

As the steps involved in this process are somewhat time consuming, businesses with smaller potential refunds may choose not to file for a refund.

If you are facing a decision on this issue, don’t hesitate to contact your DGC team member or reach out to Steve Minson at sminson@dgccpa.com or call 781-937-5300.