Sixth Circuit holds teachers' severance pay subject to FICA.

• Author: Appoloni, Donald F.
• Position: Federal Insurance Contributions Act

A school district in Michigan offered an early employee severance plan (ESP) to its most senior teachers who had at least 10 years of service and were at a high step in the pay scale. The ESP participants (Ps) were required to resign, and to agree to a waiver of all claims arising out of employment with the district, including claims under the Michigan Tenure Act. Additionally, Ps agreed to "waive ... all entitlement to future wage and benefit increases, all rights to participate in any district sponsored benefit plans" and agreed not to "apply for reemployment" without the school district's consent. In return, they received the equivalent of their 1999-2000 annual base salary in 60 monthly payments over a five-year period.

Two class actions were brought by Ps and consolidated on this appeal to the Sixth Circuit. One district court granted them summary judgment, holding that the severance payments were not wages within the meaning of FICA; see Tax Trends, "Teacher Severance Pay Not Subject to FICA" TTA, December 2004, p. 781. The other granted summary judgment to the IRS.

Definition of Wages

Sec. 3121(a) defines "wages" as "all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash." Employment is defined in Sec. 3121(b), as "any service, of whatever nature, performed (A) by an employee for the person employing him." Under Regs. Sec. 31.3121 (a)-1 (i), remuneration for employment, unless specifically excepted, "constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them."

As explained in Regs. Sec. 31.3121 (a)-1(c), "[t]he name by which the remuneration for employment is designated is immaterial.... salaries, fees, bonuses, and commissions ... are wages if paid as compensation for employment." In Soc. Sec. Bd. v. Nierotko, 327 US 358 (1946), the Supreme Court held that back pay awarded to wrongfully discharged employees under the National Labor Relations Act constituted wages for purposes of the Social Security Act of 1935. The Sixth Circuit has followed the reasoning of Nierotko and emphasized that the phrase "remuneration for employment," as it appears in Sec. 3121, should be interpreted broadly; see Gerbec, 164 F3d 1015 (6th Cir. 1999).

Eligibility Requirements

In determining whether a payment constitutes wages, courts...