Employers who withheld taxes on severance pay granted to certain terminated employees may be entitled to refunds. In CSX Corp., 52 Fed. Cl. 208 (2002), the Court of Federal Claims approved the refund of Railroad Retirement Tax Act (RRTA) taxes and Federal Insurance Contributions Act (FICA) taxes collected on amounts paid to certain employees under reduction-in-force programs. CPAs should read the decision to determine whether to file for refunds.
From 1984 to 1990, CSX terminated about 20,000 employees through job layoffs, cuts in work hours and pay rates, and workers' electing permanent separations from employment. Affected employees became entitled to a specific payment from the employer, as established either by government regulatory rulings or by superseding collective bargaining provisions. CSX paid its snare of FICA and RRTA taxes and withheld and remitted the employees' share.
Later seeking a refund of those taxes, CSX argued that its payments to employees fell outside the definition of wages for FICA purposes and the definition of compensation for RRTA purposes. Rather, CSX contended that its payments fell within the definition of supplemental unemployment compensation benefits (SUCBs) as used in IRC section 3402(o). Such payments are not subject to FICA taxation or to income tax withholding.
IRC section 3402(o)(2)(A) defines SUCBs as payments to an employee, pursuant to a plan to which the employer is a party, because of an employee's involuntary separation from employment (whether or not temporary), resulting directly from a reduction in force, the discontinuance of a plant or operation or other similar conditions, but...