A recent Michigan district court decision (United States v. Quality Stores) suggests Quality Stores, Inc. may be entitled to IRS refunds for FICA taxes paid on severance.
Good news for employers who suffered huge severance payouts and related taxes during the recent recession? Not quite. Employers should realize that this decision will most likely be appealed to higher courts as the separation benefits paid by Quality Stores were not paid under a SUB Plan, a structure required by the IRS to achieve FICA tax exemptions on separation benefit payments.
Employers seeking FICA tax exemptions on severance payments must pay these benefits through a SUB Plan. The probability of the IRS refunding billions of tax dollars paid on non-SUB Plan severance awards is slim to none. Jumping the gun to file FICA tax recovery claims will bring about far less favorable results than a risk management initiative such as adoption of a SUB Plan. Foreseeable savings plan for the future vs. spending to recover past mistakes? An easy decision to make in that court.
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