Put this in the “boring, but important” category. Last month the 6th Circuit Court of Appeals found that Supplemental Unemployment Benefits (or “SUB”) payments are not considered wages and thus not taxable to the employee or the employer for FICA.
First, a little education. What are SUB payments? When an employer makes a reduction in force they sometimes set up a plan to make severance payments to employees to help them transition after losing their job and reduce the unemployment claims against the employer.
More specifically, Congress has provided that a SUB payment is: (1) an amount paid to an employee; (2) pursuant to an employer’s plan; (3) because of an employee’s involuntary separation from employment, whether temporary or permanent; (4) resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions; and (5) included in the employee’s gross income.
Under the Quality Stores decision by the 6th Circuit, an employer can now offer a SUB plan for 7.65% less than before by escaping the FICA taxes. Unfortunately, however, there is still some risk associated with using a SUB plan. In another case by a different Federal circuit court, the payments were long ago held as taxable despite the very clear language in the tax code to the contrary.
If you are planning a reduction in force in the near future and would like to help minimize your unemployment claims, a SUB plan may be of benefit to you. And, with the new case, hopefully a bit cheaper as well.