Enter to open, tab to navigate, enter to select
IRS Addresses Employment Tax Refunds for Severance Payments After Quality Stores
Practical Law Legal Update 4-600-0346 (Approx. 5 pages)
IRS Addresses Employment Tax Refunds for Severance Payments After Quality Stores
by Practical Law Employee Benefits & Executive Compensation
| Published on 11 Feb 2015 • USA (National/Federal) |
In Announcement 2015-08, the IRS provided guidance addressing how the Supreme Court's decision in US v. Quality Stores, Inc., 572 U.S. 141 (2014), applies to claims for refunds of employment taxes paid with respect to severance payments.
On February 10, 2015, the IRS issued Announcement 2015-8, which addresses how the Supreme Court's Quality Stores decision applies to employment tax refund claims involving severance payments (572 U.S. 141 (2014)). In Quality Stores, the Supreme Court:
- Unanimously held that severance payments are wages subject to Federal Insurance Contributions Act (FICA) tax (see Legal Updates, Supreme Court Holds That Severance Payments Are Subject to FICA and Article, Supplemental Unemployment Benefit (SUB) Plans).
- Reversed a Sixth Circuit decision holding that the payments were not wages for FICA purposes.
IRS Exemption for SUB Plan Payments Remains in Effect
In Quality Stores, the Supreme Court noted the IRS' continued recognition in Revenue Ruling 90-72 of an administrative exception under which severance payments tied to the receipt of state unemployment benefits (that is, supplemental unemployment benefit (SUB) payments) are exempt from income and employment tax withholding.
The exception in Revenue Ruling 90-72 applies to a SUB plan with the following features:
- Benefits are paid only to unemployed former employees who are laid off by the employer.
- Eligibility for benefits requires an employee to meet certain conditions after terminating employment.
- Benefits may not be paid in a lump sum.
- Benefits are paid by trustees of independent trusts.
- The amount of weekly benefits payable is based on:
- state unemployment benefits;
- other compensation permitted under state law; and
- the amount of weekly pay after withholding taxes and contributions.
- The length of time during which benefits are paid depends on the amount of trust assets and the employee's seniority.
- The right to benefits does not accrue until a set period after the employee's termination of employment.
- Employees do not have any rights to benefits until they are eligible to receive benefits.
- Benefits are not attributable to an employee's performance of particular services.
Revenue Ruling 90-72 was not directly at issue in Quality Stores because the severance payments in that case were not linked to state unemployment benefits. The Supreme Court appeared to question whether the IRS' exemption for SUB plans was consistent with the broad FICA definition of wages. In Announcement 2015-8, however, the IRS expressly re-affirmed the administrative exemption for SUB plan payments (notwithstanding Quality Stores), stating that Revenue Ruling 90-72 "continues to be in effect."
Three IRS Procedures in Light of Quality Stores
The IRS notes in Announcement 2015-8 that, before Quality Stores, it received claims for refunds of FICA, Federal Unemployment Tax Act (FUTA) and Railroad Retirement Tax Act (RRTA) taxes regarding severance payments from more than 3,000 individuals. In response, the IRS:
- Disallowed refund claims, and related appeals, from taxpayers located outside the Sixth Circuit.
- Suspended action on refund claims by taxpayers within the Sixth Circuit pending the Quality Stores decision.
In light of Quality Stores, Announcement 2015-8 includes three rules addressing how the IRS will handle refund claims on severance payments and related issues.
Refund Claims Regarding Severance Payments That Do Not Satisfy Revenue Ruling 90-72
The IRS will disallow claims for refunds of FICA, FUTA and RRTA taxes that do not satisfy the limited exemption under Revenue Ruling 90-72 (see IRS Exemption for SUB Plan Payments Remains in Effect). This rule governs all refund claims that were suspended subject to resolution of Quality Stores, and claims filed by taxpayers in the Sixth Circuit.
Appeal Requests For Disallowed FICA, FUTA or RRTA Refund Claims
The IRS will not take additional action regarding appeal requests that were suspended pending Quality Stores. The refund claims that were the subject of these appeal requests were fully disallowed.
Appeal Requests on Other Issues
The third rule pertains to appeals regarding refund claims that either:
- Included an additional or different basis for the claim for refund, for example, a refund claim of FICA tax paid on certain fringe benefits (see Fringe Benefits Toolkit).
- Concerned payments that satisfied the exemption requirements of Revenue Ruling 90-72 (see IRS Exemption for SUB Plan Payments Remains in Effect).
Announcement 2015-8 includes IRS contact information that taxpayers should use to obtain information about how to proceed with appeal requests in these situations. The IRS noted that it will not take additional action on appeal requests if a taxpayer does not contact the IRS.
Practical Impact
In Quality Stores, the Supreme Court expressly declined to address whether the IRS' exemption under Revenue Ruling 90-72 for severance payments tied to the receipt of state unemployment benefits was consistent with the broad definition of wages for FICA purposes. The IRS responds directly to that question in Announcement 2015-8, stating its view that the exemption remains in effect. The guidance does not otherwise describe the process that will apply for taxpayers who believe they have satisfied the exemption requirements of Revenue Ruling 90-72.