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 come.

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 SUB plans.

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.