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Employers Be Forewarned and Forearmed: Recent IRS Announcements Require Action on ERTC Claims

Asserting that many employers have improperly claimed Employee Retention Tax Credit (ERTC) refunds, the Internal Revenue Service (IRS) released two new announcements that address ERTC claims. Following these new IRS announcements, most employers should consult their legal and tax advisors and consider filing protective refund claims to preserve their employment and income tax positions and to defend against potential IRS penalties and interest.

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SUB-Pay Plans: An Alternative to Severance Programs

SUB-Pay Plans: An Alternative to Severance Programs

While the coronavirus pandemic wreaks havoc on the economy and jobs, employers consider disaster-related employee benefit structures, such as easily administered qualified disaster assistance relief programs and the financially attractive severance alternative known as “supplemental unemployment benefit plans” or “SUB-pay plans.” Compared to the typical severance program, restructuring a temporary or permanent layoff program as a SUB-pay plan can yield financial and tax savings exceeding 30% of an employer’s typical severance costs while also providing FICA tax savings to employees of 7.65%.

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Supplemental Benefit Planning for Tax-Exempt Employers

Tax-exempt employers face a matrix of tax and disclosure issues in designing an appropriate supplement retirement program. This resource intends to examine the income tax, payroll tax and Form 990 reporting aspects of the major plans currently available to tax-exempt employers, and review those major plans from the reference point of several major design considerations.

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View From McDermott: Conduct Regular Reviews to Ensure Compliance with FICA Tax Withholding Rules

Sponsors of nonqualified deferred compensation plans should pay close attention to the special tax withholding rules under the Federal Insurance Contributions Act (FICA) to avoid paying interest and penalties, and potentially being sued by plan participants. FICA tax on nonqualified deferred compensation must be withheld when compensation vests, not later when actually paid out. Failure to withhold FICA tax at the time of vesting will cause the compensation plus any earnings to be subject to FICA tax later as it is distributed to the participant, potentially resulting in higher overall FICA taxes for both the employer and the participant. As shown by the case of Davidson v. Henkel, employees may even successfully sue the employer for causing them to receive lower benefits due to the higher tax burden created by a failure to follow the correct withholding rules.

This article explores the common FICA and Additional Medicare Tax withholding errors and the potential remedies that may be available to employers who fail to timely withhold FICA and/or Additional Medicare Tax on nonqualified deferred compensation.

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Deadline Looms for Quality Stores FICA Refund Claims for Severance Payments

The Supreme Court of the United States recently heard arguments in its review of the U.S. Court of Appeals for the Sixth Circuit’s Quality Stores decision.  At issue in Quality Stores is whether certain severance payments made to employees following an involuntary separation, but which are not linked to state unemployment benefits, are “wages” subject to Federal Insurance Contributions Act (FICA) tax.  While the Supreme Court is reviewing the Quality Stores decision, there is an impending April 15, 2014, deadline for employers to file a protective refund claim for 2010 employment taxes for FICA taxes paid on severance payments.

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Employers Can Obtain Refund for Excess FICA Tax Paid as Result of Increased Excludable Limit for Transit Benefits

by Maureen O’Brien and Ruth Wimer

On January 11, 2013, the Internal Revenue Service published Notice 2013-8 providing a special administrative procedure for employers with respect to 2012 transit pass benefits. The American Taxpayer Relief Act retroactively increased the monthly transit benefit exclusion under Section 132(f)(2)(A) of the Internal Revenue Code for commuter highway vehicles or transit passes from $125 per participating employee to $240 per participating employee for the 2012 calendar year (the monthly transit benefit exclusion for parking remains at $240). The notice addresses employers’ questions regarding the retroactive application of the increased exclusion, which can result in both decreased FICA and federal income tax liability. Employers acting promptly, in many cases by January 31, may have less administrative burden in obtaining a benefit for themselves and their employees with respect to the retroactive increase for employer-provided transit benefits.

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April 15th Deadline for Filing FICA Refunds for Severance Pay

by Robin Greenhouse, Andrew Liazos and Ruth Wimer

Severance pay due to an involuntary separation from employment resulting from a reduction in force, plant shutdown or similar condition may be exempt from FICA taxes.  As we reported in September 2012, the U.S. Court of Appeals for the Sixth Circuit found in Quality Stores that severance pay is not required to be tied to continued eligibility for unemployment benefits in order to be exempt from FICA.  (Click here for more details regarding the Quality Stores decision.)  Shortly after this decision the Internal Revenue Service (IRS) requested that the Sixth Circuit reconsider its decision in an en banc review (i.e., a hearing before all judges on the circuit court).  Earlier this month, the Sixth Circuit denied this request.

The Quality Stores decision creates a clear split with the U.S. Court of Appeals for the Federal Circuit.  In light of the Sixth Circuit’s denial, the IRS will likely file a writ of certiorari with the Supreme Court of the United States seeking a reversal of the Quality Stores decision.  For now, the IRS is refusing refund claims outside of the Sixth Circuit and taking no action with respect to refund claims within the Federal Circuit (states within the Sixth Circuit are Kentucky, Ohio, Michigan and Tennessee).  For now, employers should continue withholding FICA taxes on severance pay that is not tied to unemployment benefits.

Employers that have made severance payments due to reductions in force, plant shutdowns or similar conditions should consider filing protective FICA tax refund claims.  Only a limited period of time is available to file.  In general, the statute of limitations for tax refund claims is three years.  As a result, April 15, 2013, is the due date for taxpayers for filing a refund claim with respect to the 2009 calendar year.  A refund claim cannot be filed with respect to severance payments made before 2009.

Filing a protective claim is relatively simple to do.  It is not necessary that the protective claim include exact calculations and employee consents for the refund filing.  This information and the required employee consents can be provided at a later time in a supplemental filing.  It is recommended that all employers file protective claims, particularly with respect to severance payments made to employees located in the Sixth Circuit.

If a FICA tax refund has been filed and the IRS has issued a notice of claim disallowance, the taxpayer must either (i) bring suit to contest the disallowance within two years after the issuance of this notice or (ii) obtain an extension of the time to file such a suit with the IRS—this process can be initiated by filing IRS Form 907, Agreement to Extend the Time to Bring Suit.

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