ERIC Urges Supreme Court to Confirm that FICA Taxes Do Not Apply to Supplemental Unemployment Benefits

December 17, 2013

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ERIC News Release

For Immediate Release:  December 17, 2013

Washington, D.C. – The ERISA Industry Committee (ERIC) on December 13 filed with the U.S. Supreme Court an amicus brief in the United States v. Quality Stores case, urging the Court to uphold an appeals court ruling that supplemental unemployment benefits (“SUB payments”), such as severance pay, termination benefits, or plant shutdown benefits, are not subject to FICA taxes.  The IRS (U.S. government) appealed the decision.  

ERIC’s brief was prepared by Covington & Burling LLP. 

The Sixth Circuit determined and the ERIC amicus brief argues that SUB payments in general are not considered wages for FICA tax purposes as long as such payments meet the statutory definition (although they are subject to income tax and income tax withholding).  ERIC emphasizes that this is based on a clear and consistent reading of the relevant income and FICA tax provisions in the Internal Revenue Code.   

“By looking to the statutory definition of ‘supplemental unemployment compensation benefits’ [in the Internal Revenue Code] to determine the type of employer-provided unemployment benefits that are excluded from the definition of wages for purposes of FICA taxes, the Sixth Circuit has provided a clear, uniform rule that treats all similarly situated employers and employees throughout the country the same and does not turn on the vagaries of state law,” ERIC argues in the brief.  

The brief further points out that a prior Supreme Court opinion in Rowan Cos., Inc. v. United States supports the ERIC position that is consistent with the Sixth Circuit ruling.  

The IRS and the U.S. concur that some SUB payments are not subject to FICA, but only if an affected individual is eligible for a state’s unemployment benefits.  ERIC argues that such a rule, however, would treat similarly situated individuals differently for federal tax purposes based upon differences in state law -- a result unlikely to have been intended by Congress.   

“[A] rule that makes the classification of employer-provided unemployment benefits for FICA purposes turn on eligibility for state unemployment benefits, as the government contends, requires employers to consider the unemployment benefit requirements of up to fifty states (as well as the District of Columbia and Puerto Rico) in order to determine the FICA tax treatment for employees,” the brief argues.     

ERIC further emphasizes that, if one were to accept the government’s argument, similarly situated recipients of SUB payments from the same company could face different federal tax liability depending on the recipients’ state of residence.

The brief concludes by noting that the government’s position creates a cumbersome system in which the federal status of SUB payments depends on variances in state policies and subjects individual SUB payment recipients to inconsistent treatment and undue hardship, contrary to the original purposes of SUB payments. 

“Notwithstanding the unusually large and broad-based stakes in this tax dispute, it is vitally important for the Supreme Court to uphold the Sixth Circuit ruling in order to provide consistent, uniform administration in the tax treatment of SUB payments.  Otherwise it would be nearly impossible for employers to comply with such a fractured system, and it would only harm the very individuals that these SUB payments are intended to help,” ERIC President Scott Macey said.  

The brief can be accessed by clicking on the link below. 

ERIC Amicus Brief in United States v. Quality Stores