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BREAKING NEWS Regarding Supplemental Unemployment Benefit Severance Plans


On March 25, 2014, the United States Supreme Court published its opinion on the United States v. Quality Stores, Inc. case we discussed in our December 2013 NewsFlash. As discussed in December, the issue was whether severance payments that were not tied to receipt of unemployment benefits were subject to FICA and FUTA taxes. The Sixth Circuit Court of Appeals had affirmed the lower Court’s ruling that severance pay did not need to meet the DOL’s more stringent definition of Supplemental Unemployment Benefit Pay (or SUB-Pay) in order to be exempt from FICA and FUTA taxes and the Supreme Court elected to hear the case.

The Supreme Court overruled the Sixth Circuit clarifying that severance pay is subject to FICA and FUTA unless it is SUB-Pay as defined by the more stringent DOL opinions. Although this decision eliminates a potential windfall for employers who hoped general severance paid to employees would be exempt from FICA, it clarifies that SUB-Pay plans are still a viable alternative for employers if structured properly. Employers who would like to reduce their severance costs and avoid FICA and FUTA taxes should strongly consider adoption of a SUB-Pay plan.

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