When workers are offered severance agreements by their employers, there are many factors to consider before they accept the package as offered. For example, there may be other claims the employees will be giving up by accepting the agreements. There may be additional benefits the employees deserve that are not included in the employer offered package. Another issue arises as to whether or not severance pay is taxed by the Internal Revenue Service under the terms of the Federal Insurance Contributions Act, better known as FICA.
FICA is funded by both employers and employees. It helps to pay Social Security retirement benefits to beneficiaries as well as Medicare. The Supreme Court will hear oral arguments this week and decide whether or not workers who receive severance pay will have to face FICA withholding on those funds.
The case involves Quality Stores, a company based in the Midwest that declared bankruptcy in 2001. All 300 stores owned by the company closed their doors for business, putting thousands of employees out of work. The company gave its workers severance pay but withheld FICA taxes and forwarded the funds to the government.
The United States Court of Appeals for the 6th Circuit determined that the severance pay to the involuntarily terminated employees were not wages, but supplemental unemployment benefits -- and therefore not subject to FICA taxation. The administration is expect to argue that the code is contradictory and the section that mentions "all remuneration for employment" applies in this situation.
A decision on the issue is expected by the end of June.
Source: Reuters, "Taxes on severance pay? U.S. Supreme Court to hear case," Patrick Temple-West, Jan. 13, 2014