Employers May Be Able to Exempt Severance Payments from FICA Tax under Quality Stores

Marvin "Bucky" Swift • May 28, 2014

The Supreme Court recently ruled in U.S. v. Quality Stores that severance paid to employees is considered wages for FICA purposes.  Before the Court’s decision, there was little doubt that employer-provided severance was wages for income tax purposes, but lower court cases were a mixed bag about whether severance was wages for FICA tax purposes.  Indeed, the Sixth Circuit in Quality Stores , held that the severance payments made by Quality Stores were not wages for FICA tax purposes because the payments fell within the statutory exclusion for Supplemental Unemployment Benefit (“SUB”) payments for FICA tax purposes.  The Supreme Court upheld the IRS’ position and disagreed with the Sixth Circuit’s analysis.  As a result of the Supreme Court’s reversal of the Sixth Circuit case, most typical employer-provided severance benefits are likely subject to both income and FICA taxes.

However, there may nevertheless be certain advantages for employers to specifically structure their severance payments as SUB payments, which are exempt from FICA taxes.  For severance payments to qualify as SUB payments, the following conditions must be met:

  • The employee is laid off by the employer either in an involuntary permanent or temporary reduction in force or in a temporary layoff (employees who voluntarily quit or whose employment is terminated for misconduct are not eligible);
  • The severance payments are contingent on the employee being eligible to receive state unemployment insurance benefits; and
  • The severance payments must be paid in installments and cannot be paid as a lump sum.

If the employer can meet the above criteria for paying severance, the payments are exempt from FICA tax (employer and employee portions) and the employer may be able to reap a savings by coordinating the severance payments with state unemployment benefits.  If you have any questions about these issues, please do not hesitate to contact Bucky Swift at (602) 382-6211, or any other member of the Employee Benefits and Executive Compensation Group.

Employee burnout: what it is and how to prevent it

By Mardy Gould • May 24, 2024
Employee burnout has become an epidemic in today’s modern workplace. So much so that the World Health Organization (WHO) officially recognizes it as an “occupational phenomenon.”1 While many used to consider mounting workplace stress an individual employee problem, these days, it’s become an employer’s responsibility to prevent burnout before it hurts productivity and business performance—not to mention your employees’ physical and mental health. Luckily, you can prevent burnout from affecting your workforce in several ways. This article will explore the causes and signs of employee burnout and the steps you can take to create a positive work environment where employees feel safe from toxic stress levels.

Form 720 and PCORI fee FAQs

By Mardy Gould • May 23, 2024
If you're a small business owner, you may have heard of the acronym PCORI and the fees that come with it. But what is PCORI, and how does it apply to your organization? Under the Affordable Care Act (ACA), sponsors of self-insured health plans must pay a fee to fund the federal Patient-Centered Outcomes Research Institute (PCORI). PCORI is an independent organization the ACA created to conduct research to help healthcare consumers make better decisions for their specific needs and outcomes. It also performs research related to clinical effectiveness. Employers offering a self-insured medical reimbursement health plan, such as a health reimbursement arrangement (HRA), must pay this fee by July 31 each year via Form 7201. This fee was initially set to expire in 2019, but Congress extended it through September 30, 20292, due to the Further Consolidated Appropriations Act of 20203.
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