Severance Payments are Wages Subject to FICA Taxes

On March 24, 2014, the U.S. Supreme Court held in United States v. Quality Stores, Inc., 572 U.S. ____ (2014), No. 12-1408, that severance payments made to employees terminated in connection with a company’s Chapter 11 bankruptcy plan are taxable wages under the Federal Insurance Contributions Act (FICA). The ruling resolves a split among federal circuits and affects all employers who provide severance pay.

Quality Stores filed a Chapter 11 bankruptcy petition and terminated thousands of employees, who received severance payments based on title, length of service, and willingness to continue working for a specified period of time in the company’s post-bankruptcy operation. The company first reported the severance payments as wages, paying the employer’s portion of FICA taxes and withholding the employee’s share. Later, Quality Stores applied for a refund. The Internal Revenue Service did not respond, so the company initiated a proceeding in bankruptcy court on behalf of itself and the affected employees. The bankruptcy court granted summary judgment in the company’s favor, held that the payments did not constitute taxable wages, and ordered the refund. The U.S. District Court for the Western District of Michigan and the Sixth Circuit Court of Appeals affirmed. The U.S. Supreme Court granted review.

Quality Stores argued that severance payment to employees who are laid off are not “wages” subject to FICA taxes. The United States maintained that such payments fell within Congress’s broad definition of “wages” under FICA, which includes “all remuneration for employment.” According to the government, severance payments must meet certain criteria in the IRS Rulings to be exempt from taxation for FICA purposes. The company asserted that the severance payments were actually “supplemental unemployment compensation benefits” (“SUBs”) and, therefore, not taxable. The IRS countered that precedents made it clear that payments made after the employment relationship ends are wages under the act’s expansive definition.

The U.S. Supreme Court reversed the Sixth Circuit in a unanimous decision delivered by Justice Kennedy, with Justice Kagan abstaining. The Court did agree with Quality Stores that severance payments were SUBs. However, noting that the Internal Revenue Code chapter governing income tax withholding does not limit the meaning of “wages” for FICA purposes, the Court decided that all SUBs were wages and therefore taxable. The Court examined the history of the statute and concluded that Congress had sought to eliminate a conflict in taxation of unemployment benefits among the states by amending the statute to treat all SUBs, including severance payments, “as if” they were wages subject to withholding. Therefore, it became irrelevant as to whether the severance payments were tied to the receipt of state unemployment benefits.

Kembra Sexton Taylor





Kembra Sexton Taylor, a partner located in the firm’s Frankfort office, practices in the areas of labor and employment, personnel, administrative, regulatory, appellate, and insurance defense law. She has extensive experience in representing clients regarding wage and hour, OSHA, state personnel, and other regulatory matters. She can be reached at or (502) 223-1200.

This article is intended as a summary of federal and state law and does not constitute legal advice.

Supreme Court Will Hear Quality Stores Case

On October 1, 2013, the Supreme Court of the United States agreed to hear United States v. Quality Stores, Inc. The case has been previously discussed on our blog. In 2001, Quality Stores entered bankruptcy and closed all of it doors to nearly three-hundred stores. The store challenged a requirement to pay FICA (Federal Insurance Contribution Act) taxes on the severance that it had paid its workers. FICA taxes help finance federal retirement and health care benefits.

The Sixth Circuit held that severance paid to employees on account of an involuntary reduction in force (i.e., bankruptcy) is not subject to FICA taxes because such payments are categorized as supplemental unemployment benefits, which are not taxable. Thus, under the Court of Appeals decision, both Quality Stores and former employees who took part in the suit could claim a refund.

Court papers filed in the case reveal that there are more than 2,400 pending administrative refund claims raising the same issue. The Supreme Court’s decision will obviously affect many employers; if it upholds the Appeals Court’s decision, employers who were previously taxed will be eligible for a refund.

The Court’s term starts on October 7 and ends in June 2014, so it may be a while before the decision is made. We will keep you updated.


Ben Riddle








Benjamin L. Riddle  is an associate in the Louisville, Kentucky office. Mr. Riddle is a member of the firm’s Litigation team, where he focuses his practice on employment law, commercial disputes and personal injury matters. Mr. Riddle can be reached at (502) 327-5400, ext. 305 or

This article is intended as a summary of newly enacted federal and state law and does not constitute legal advice.

Employers’ deadline to file protective claim for 2009 FICA taxes is April 15, 2013

On September 7, 2012, the Sixth Circuit of Appeals (which encompasses Michigan, Kentucky, Ohio and Tennessee) held in United States v. Quality Stores, Inc. that severance payments to former employees pursuant to an involuntary reduction in work force are not taxable “wages” for purposes of Medicare and Social Security withholding under the Federal Insurance Contributions Act (“FICA”).[1] This affirmed the earlier decision by the Western District Court of Michigan. [2]

Quality Stores was a retailer for farmers and gardeners. In 2001, Quality Stores was forced to close its distribution centers and stores due to its filing bankruptcy. The company offered two different severance plans to employees. Under both plans, each employee received severance pay in accord with his/her years worked and status.

This severance pay was classified by Quality Stores as gross income for tax purposes. Thus, the payments appeared on W-2 forms as “wages.” In addition, Quality Stores withheld federal income tax, paid the employer FICA tax, and withheld the employees’ share of FICA tax. Quality Stores then remitted the FICA taxes. Though it believed severance pay was considered “wages” for withholding purposes, Quality Stores disagreed with the IRS as to whether the severance payments constituted “wages” under FICA – Quality Stores believed it should be considered supplemental unemployment compensation benefits (“SUB pay”) for FICA purposes.

This is not the first time such an issue has been presented to the Court. The Federal Circuit reached the opposite decision in 2008—concluding that SUB pay should be treated as “wages” for FICA purposes.[3] The split in the federal circuits signals that continuing litigation is likely. The U.S. Court of Appeals for the Sixth Circuit denied the government’s petition for rehearing en banc in Quality Stores on January 4, 2013. The government has until April 4, 2013 to file for certiorari in the Supreme Court. If the government seeks Supreme Court review, it may be months before the Supreme Court accepts or denies to hear the case, and the issuance of a final resolution could take years. According to the IRS, there are billions of dollars at stake on this issue.

What does this mean for you as an employer? Quality Stores presents an opportunity for employers in Sixth Circuit states to file FICA tax refund claims for the open years for FICA taxes paid and withheld on SUB pay.  Affected employers should act now to protect themselves from the statute of limitations by filing refund claims for all open years. The deadline for filing a protective claim with respect to FICA taxes paid in 2009 is April 15, 2013. Unless the Supreme Court reverses the ruling in Quality Stores, the IRS will be required to start processing refunds for the 6th Circuit taxpayers.

[1] 693 F.3d 605 (6th Cir. 2012)

[2] 424 B.R. 237 (W.D. Mich. 2010)

[3] CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008)

Brittany Koch








Brittany Blackburn Koch, Esq., is an associate attorney practicing in the Lexington office of McBrayer, McGinnis, Leslie & Kirkland, PLLC. She is a native of Pikeville, Kentucky, and a graduate of Centre College and the University of Kentucky College of Law. Ms. Koch’s practice focuses primarily on family law, employment law, criminal law and civil litigation. Ms. Koch has served in numerous public service roles, including representation for Fayette County Bar Association Domestic Violence Pro Bono Advocacy Program. She is actively involved in various organizations and committees, including the Board of Directors for Court Appointed Special Advocates (CASA), Young Professional Committee of Lexington Public Library Foundation, Fayette County and Kentucky Bar Associations, and Centre College Alumni Association.

She may be reached at or at (859) 231-8780, ext. 300

This article is intended as a summary of  federal law and does not constitute legal advice.