Potential refund of payroll taxes on severance pay.

• Author: Ochsenschlager, Thomas P.

Employers who paid payroll taxes on terminated employees' severance pay may be entitled to a refund. In CSX Corp., Inc., 52 Fed. Cl.208 (2002), the Court of Federal Claims approved the refund of Railroad Retirement Tax Act (RRTA) taxes and FICA collected on amounts paid to employees under reduction-in-force programs.

The court addressed whether CSX'S payments fell outside the definition of "wages" for FICA purposes and the definition of "compensation" for RRTA purposes. It considered three types of severance payments, made to:

1. Laid-off employees;

2. Employees on stand-by (i.e., reduced hours); and

3. Employees who voluntarily participated in an early-retirement or early-out program.

The court determined whether these payments fit within the definition of "supplemental unemployment compensation benefits" (SUCBs) as used in Sec. 3402(o). If the payments fit, they were not subject to FICA taxation, nor to income tax withholding. Sec. 3402(o)(2 (A) defines SUCBs as:

[A]mounts which are paid to an employee, pursuant to a plan to which the employer is a party, because of an employee's involuntary separation from employment [referring to a discontinuance in the performance of service by the employee for the employer] (whether or not such separation is temporary), resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions, but only to the extent such benefits are includible in the employee's gross...