Possible Refund Opportunities for FICA Taxes Paid on Certain Termination
By Stuart Anolik, Craig A. Etter and
Timothy J. Jessell, GT Tysons Corner
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On April 1, 2002 the Federal Claims Court issued a decision in CSX
Corporation, Inc., et.al. v. The United States, holding that payments
made pursuant to a company’s reduction in force to employees that have been
involuntarily terminated constitute supplemental unemployment compensation
and thus are not "wages" for purposes of FICA. The IRS has 60 days from
the date of the judgment to decide whether it will appeal this decision.
|"...payments made pursuant to
a company’s reduction in force to employees that have been involuntarily
terminated constitute supplemental unemployment compensation and
thus are not "wages" for purposes of FICA."
The Opportunity. Companies that have engaged in substantial employee
terminations over the past couple of years should consider the impact of
the CSX decision, especially if the company is running up against
the limitations period to obtain a refund1.
These companies may consider filing a "protective" claim for refund of FICA
taxes paid on qualifying termination payments.
To fit within the CSX case parameters, a company’s payments to
terminated employees must:
- be pursuant to a plan for a reduction in force; and
- paid to employees who have been involuntarily separated from employment.
The CSX case does not cite any specific definitions of what constitutes
a "plan" or a "reduction in force." Also, as will be discussed below, the
case makes it clear that payments to employees who have been terminated
but are required to continue to provide service to the employer to obtain
payments are "wages" and thus subject to FICA withholding tax.
The Case. CSX implemented major reductions in workforce through
the following categories of actions:
- Category 1- job layoffs;
- Category 2- reductions in hours of work and rates of pay; and
- Category 3- permanent separations from employment.
CSX paid the employer’s share of employment tax and withheld and remitted
the employee’s share on the termination payments. Following those payments,
CSX filed timely claims for refund on their own behalf and on behalf of
The Holding. The Federal Claims Court held that certain of the CSX
termination payments constituted supplemental unemployment compensation
under section 3402(o) of the Code2.
Supplemental unemployment compensation benefits are defined as:
[A]mounts which are paid to an employee, pursuant to a plan to
which the employer is a party, because of an employee’s involuntary separation
from employment (whether or not such separation is temporary), resulting
directly from a reduction in force, the discontinuance of a plant
or operation, or other similar conditions, but only to the extent such benefits
are includible in the employee’s gross income.
The Court held that "the fundamental definition of wages under FICA and
income tax withholding statutes are to be understood as identical." Thus,
the income tax withholding definition of "wages" was used to determine whether
the termination payments at issue constituted "wages" for FICA purposes.
Applying the definition of supplemental unemployment compensation to
the three categories of payments made by CSX, the Court held:
- Category 1 employees-laid off. Since these employees were no longer
performing any services for the employer, such employees had undergone
a "separation from employment" within the meaning of § 3402(o) and thus
the supplemental unemployment compensation were not "wages" for FICA purposes.
- Category 2 employees-reductions in hours of work and rates of pay.
Since these employees were subject to recall on an as-needed basis and
remained on the railroad’s active service payroll and were guaranteed
a certain minimum compensation per pay period adjusted by amounts paid
for work actually performed, while they may have been underemployed, they
were not unemployed. Accordingly, there was no "separation from employment"
within the meaning of § 3402(o)(2) and thus these payments were "wages"
for FICA purposes.
- Category 3 employees-permanent separation from employment. These employees
were offered the option of terminating their employment relationship with
the company (and simultaneously relinquishing all rights and benefits)
in exchange for a separation payment. There were two sub-groups.
- An employee who elects a separation payment in lieu of layoff benefits
has permanently relinquished his or her status as an employee after
having been involuntarily separated from employment. Thus, termination
payments constituted supplemental unemployment compensation and were
not "wages" for FICA purposes.
- An employee who elects separation in lieu of remaining in their
existing positions (including those employees who elect separation in
lieu of standby), have not been involuntarily separated. Thus,
payments to these employees were "wages" for FICA purposes.
1 Section 6511 of the Internal Revenue Code of 1986, as amended,
(the "Code") provides a claim for refund on overpayment of FICA taxes must
be filed within 3 years from the date the return was filed or 2 years from
the time the tax was paid, whichever is later.
2 Section 3402 (o) is part of the income tax withholding provisions
of the Code.
© 2002 Greenberg Traurig
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