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Supreme Court to Decide if FICA Deductions are Required for Severance Payments to Involuntarily Terminated Employees

In United States v Quality Stores Inc., the U.S. Court of Appeals for the Sixth Circuit, which includes Kentucky, held that payments made by Quality Stores to employees who had ended their employment involuntarily constituted supplemental unemployment compensation benefits that were not taxable as wages under the Federal Insurance Contributions Act (FICA). As a result, Quality Stores and employees who had joined the company in the lawsuit were entitled to a refund of more than $1 million paid in FICA taxes.

The U.S. Supreme Court agreed on Oct. 1 to hear the appeal of this case. The question to be addressed by the court is “Whether severance payments made to employees whose employment was involuntarily terminated are taxable under the Federal Insurance Contributions Act, 26 U.S.C. 3101 et seq.

This ruling could have significant impact on how employers pay out severance payments in the future and whether significant refunds may be due if the court affirms the appeal. We will keep you apprised of further developments concerning this case.

  • Partner

    Phil is a partner and former co-chair of the Labor and Employment Department. He represents employers in defending against employment-related claims in both federal and state courts. He represents clients involving covenants not ...



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