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Supreme Court Holds Severance Payments Are Generally Subject to FICA; SUB Payments Are Not

Alfred B. Fowler
Kutak Rock LLP - Omaha Office

Peter C. Langdon
Kutak Rock LLP - Denver Office

Juliana Reno
John E. Schembari
Michelle M. Ueding
Kutak Rock LLP - Omaha Office

April 4, 2014

Previously published on March 25, 2014

Yesterday, the U.S. Supreme Court issued its decision in United States v. Quality Stores Inc., holding that severance payments generally are subject to Federal Insurance Contributions Act (FICA) taxes, but payments under Supplemental Unemployment Compensation Benefit Plans are not. Based on this case, more than $1 billion in FICA tax refund claims filed by U.S. employers will not be paid by the IRS.

In this case, a now-defunct agricultural specialty retailer, Quality Stores, requested a refund of over $1 million in FICA taxes it paid to the IRS on severance payments the company made to 3,100 former employees. The Court unanimously rejected Quality Stores’ refund request, holding that severance payments are generally “wages” for purposes of FICA taxation. However, the Court also acknowledged that certain types of severance payments—those that are tied to the receipt of state unemployment benefits, or SUB payments—are exempt from FICA taxes. Because the severance payments paid by Quality Stores were not linked to the receipt of state unemployment benefits, they were not exempt from FICA taxation.

This holding has broad implications for employers that provide severance payments to their employees and how those severance payments should be structured.


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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