Is FICA Required On Severance Pay?
In a landmark decision, the U.S. Court of Appeals has concluded
that severance paid to an involuntarily displaced workforce is
considered taxable wages under FICA, effectively reversing the
lower Court of Federal Claims' ruling.
In CSX Corporation v. United States, the CSX Corporation argued
successfully that severance payments made as a result of an involuntary
reduction in workforce should receive the same tax treatment
as Supplemental Unemployment Benefit (SUB) payments, which are
not considered "wages" as defined by FICA. The Court
of Federal Claims' initial ruling prompted many companies to
file protective refund claims in an effort to recoup Social Security
and Medicare taxes (FICA) previously paid.
According to John Lihzis, President of Total Management
Solutions, Inc. (TMS), one of the largest companies specializing in the
design and administration of SUB Plans, "Companies filed
for over five billion dollars in protective refund claims with
no guarantee that CSX would prevail. Had they implemented a SUB
Plan instead, both the former employees and the companies would
have realized a guaranteed tax savings by excluding FICA taxes
from SUB payments.
SUB Plans have been used for over 50 years and have gained in
popularity significantly in America over the last ten years.
By providing tax and cash flow incentives to companies and former
employees, SUB Plans are changing mainstream corporate culture.
With this landmark decision and affirmation from the Federal
Appeals Court, this will most certainly continue for years to
Is a SUB Plan right for your company? If you anticipate a reduction
in workforce, whether seasonal, short-term or permanent, our
strategic partner TMS can help you evaluate your options. TMS
has saved companies millions of dollars by establishing and administering
If you would like to learn more about SUB Plans, contact Stew
Bailenson at sbailenson@LTtax.com or 815-308-7633. You can also
visit the TMS website at www.subpay.com.