Recent cases and rulings.

• Author: Beavers, James

EMPLOYMENT TAXES

Early Retirement Payments to Former Tenured Faculty Members Are Subject to FICA

In an appeal from a district court, the Third Circuit held that payments under several early retirement plans made by a university to former tenured faculty members were compensation for services subject to the FICA tax.

Background

Between 1982 and 1999, the University of Pittsburgh (the university) offered five successive early retirement plans (the plans) to tenured faculty members and administrators, as well as to nontenured librarians whose contracts provided an "expectation of continued employment." Payments under all five plans were made monthly and were based on an employee's salary at the time of retirement and his or her length of service to the university. To participate, employees were required to execute an irrevocable contract for participation, and employees who held tenure were required to relinquish their tenure rights.

Under university policy, tenure constitutes recognition by the university that a person so identified is qualified by achievements and contributions to knowledge to be ranked among the most worthy of the faculty members engaged in scholarly endeavors: research, teaching, professional training, or creative intellectual activities of other kinds. A nontenured faculty member can serve without tenure at the university for a maximum of seven years. After seven years, a faculty member can be terminated for failing to meet the requirements for tenure or can be granted tenure at the discretion of the university.

The university paid over $2 million in FICA taxes on payments under the plans between 1996 and 2001. In 2001, the university filed claims with the IRS for itself and on behalf of the plan participants for refunds of the total amount of the university's FICA tax payments since 1996.

The IRS denied the refund request, and the university filed a refund suit in district court (University of Pittsburgh, W.D. Pa., 11/21/2005 ).The parties filed cross-motions for summary judgment. The district court granted the university summary judgment for plan payments to tenured employees, holding that those payments were "made in exchange for the relinquishment of contractual and constitutionally-protected tenure rights rather than as remuneration for services to the University" and were not subject to FICA. However, it granted the government summary judgment for the plan payments to nontenured librarians, holding that those...