APA to Weigh In on Supreme Court Review of Severance PaymentsBy Curtis Tatum, Esq.
On October 1, the U.S. Supreme Court agreed to hear an appeal of a decision reached by the Sixth Circuit Court of Appeals in U.S. v. Quality Stores, Inc. No. 12-1408 (U.S. Sup. Ct., 10-1-13).
The issue before the Supreme Court will be whether severance payments made to involuntarily terminated employees are subject to FICA taxes. The APA has a long history of involvement with this issue, including the filing of an amicus brief with the Sixth Circuit Court of Appeals. The APA anticipates filing a similar brief with the Supreme Court.
Local Chapter, APA Involvement
At an October 31 meeting of the Washington Metro Area Chapter of the APA, Mary Hevener, a partner with Morgan, Lewis & Bockius LLP, and tax counsel to the APA; and Patrick Rehfield, an associate with Morgan Lewis & Bockius LLP, addressed several issues employers may want to consider in light of the Quality Stores litigation, including:
- Understanding when and how to file a claim
- Monitoring previously filed claims
- Continuing to withhold FICA taxes from any new severance payments
Hevener noted that she has filed claims on behalf of her clients since 1992, while some other lawyers have been filing since 1988.
"Years ago, refunds didn't matter so much because employees often earned more than the wage base limit before they got any severance," Hevener said. In 1994, Medicare began applying to all wages, and "now everyone has skin in the game," she said. "Look at our economic history," she said, which is a line of peaks and valleys. "In every dip, people have been laid off and companies have paid severance."
For employers that have not regularly filed claims, the years from 2010 through 2012 are still open. Importantly, the experts noted that employers should file their claims quickly because of the potential that new IRS regulations or legislation may effectively preclude new claims from going forward.
Hevener indicated that, because of the continuing litigation, "thousands of refund claims will also be frozen (although approximately 1% are inadvertently paid), but companies should keep filing claims and taking steps to ensure extensions of the deadline for filing suit after claim denial," she said.
How to File Refund Claim
Rehfield discussed the mechanics of filing a refund claim and the different types of information an employer should be ready to provide in support of the claim, including:
- The Reduction in Force plan (or the Summary Plan Description with an explanation of the layoff program)
- An estimate of the number of people affected and the reasons for the layoffs
- A best estimate of the amount of severance payments, and the FICA taxes over-collected
- The original Form 941 (and any amended or corrected forms) for the quarters during which the severance pay occurred
- The IRS district in which claimant(s)' files the Forms 941
Rehfield noted that the Form 941 should be corrected through a Form 941-X for each quarter in which the FICA taxes were withheld on severance payments.
Rehfield also noted that employers are required to obtain written consent from their affected employees prior to filing a refund claim. However, he stated that a refund claim may be filed without this consent. If the claim is approved, the employer will need to obtain the employees' consent prior to any refund payment by the IRS.
Once a claim has been filed, it is important to monitor its status and to respond in a timely manner if the IRS denies the claim.
Employers should "carefully monitor IRS denials of outstanding claims, and apply for extension of the deadline for filing suit in court (two years after claim denial) by obtaining a Form 907 signed by the IRS and keeping the extended court-filing deadline continually pushed out," Rehfield stated.
However, he also offered some hope to employers that may not have tracked the status of their claims. There are a number of reasons the IRS might deny a claim, but Rehfield concluded that the situations where all the denial claims are met are "very rare."
"In applying this statutory deadline," Rehfield said, "many courts, and even the IRS FSAs and CCAs, have concluded that the claim denial does not effectively start the two-year deadline unless the claim is formally denied and sent by registered or certified mail."Steps Employers Can Take Now
During their presentation, Hevener and Rehfield noted two steps that employers can take regarding future severance payments made prior to the Supreme Court's upcoming decision in Quality Stores:
- Employers could seek the necessary consent to file for a FICA refund at the time the employee is terminated, thereby saving the considerable time and effort in locating former employees.
- Employers should continue to withhold FICA taxes from severance payments, thereby avoiding any liability for not withholding the taxes if the Supreme Court overturns the Sixth Circuit's Quality Stores decision.
"Definitely consider filing for refunds," Rehfield told the group of payroll professionals. "Take a look back at recent years and see if you went through a downsize."