1. They would be able to receive severance pay if the county fired them within the first three years after      Continue Reading...

The Supreme Court released its decision today in the Quality Stores case, confirming that severance payments are subject to FICA taxes. 

The payments at issue in the case were fairly typical. A significant reduction-in-force occurred. The employer had two severance plans in place. Officers and managers received between 6 and 18 months of severance payments. Rank-and-file employees received one week of severance pay for each year of service. Payments were reported on W-2s, and taxes were withheld, but the employer later had a change of heart and sued the IRS for a refund of the FICA taxes. Lower courts were sympathetic to the employer's arguments, but the Supreme Court was not persuaded. The decision was unanimous, with one justice not participating.

I don't think the decision itself was a big surprise. Severance payments have generally been viewed as an extension of wage payments and, therefore, subject to the same tax treatment as wages. But if the court had reached a different conclusion, that certainly would have been big news. 

The court's opinion is here.

A year-end deadline for correcting certain impermissible payment language in employment, severance, or similar agreements is fast approaching.

As background, Code Section 409A - which governs most arrangements providing for future payments of taxable compensation - generally requires that deferred amounts be paid at fixed or identifiable times (e.g., termination of employment or a specified date) and that the covered individual (e.g., employee) not have the right to designate the calendar year in which payment will be made. These rules apply to most severance-pay and similar arrangements that provide for payments in the event of a specified loss of employment (e.g., a termination without cause).

It is common for severance-pay and similar arrangements to condition an employee's right to payment on the employee providing a release of claims. But this can create an issue under Section 409A, depending on how the payment language is written. The IRS takes the position that the payment language must not provide any opportunity for the employee to control or manipulate the calendar year in which payment will be made.

As an example, assume an agreement provides for a right to payment at any time within 90 days after termination of employment, once the employee has delivered a release of claims. If the employee terminates employment on November 1, the employee can effectively choose which calendar year in which to receive payment (the year of termination or the next year) by deciding when to deliver the release. In comparison, if the agreement says payment will be made on the 90th day      Continue Reading...