Payroll giant ADP is offering a new Protective Claims Service for employers to preserve their right to a refund of FICA taxes they remitted for certain types of severance pay, pending a final decision in a case that the Supreme Court heard this week.
The Supreme Court heard the case, known as United States v. Quality Stores, Inc., on Tuesday, but a decision may not be handed down until June. The outcome of the case could determine whether employers are eligible for a refund of the FICA taxes they remitted on certain types of severance pay made in tax year 2010 until the present. Businesses that believe they may be eligible for a refund of 2010 FICA taxes—assuming a ruling by the court determines that they are entitled to one—must file a protective claim with the IRS no later than April 15, 2014, due to the statute of limitations.
ADP’s Protective Claims Service, which it is offering in conjunction with an outside tax practitioner, includes filing of a tax year 2010 protective claim on IRS Form 941-X, along with tracking of the claim and the IRS’s responses. ADP said it would follow the progress of the ongoing Supreme Court litigation, and third-party tax practitioner assistance will be available with the final refund calculation for all applicable tax years from 2010 to the present. ADP will also provide assistance with doing outreach to qualified employees.
“The United States vs. Quality Stores case decision could mean the refund of Social Security and Medicare taxes paid by employers on severance pay, which could potentially add up to a substantial sum for some businesses,” said ADP vice president of business incentives Kerstin Nemec in a statement. “While the deadline for filing protective claims for a refund on taxes paid on severance pay in 2010 is April 15 of this year, we encourage businesses to file earlier than that to allow for IRS processing times. And for those employers who need assistance in preserving their right to a potential refund, ADP, in conjunction with our third-party tax practitioner, has put tools in place to help them file a protection claim for any refund that may be due.”
Litigation around the issue of FICA taxes on severance pay began in 2001 when Quality Stores, Inc. declared bankruptcy and then filed a claim for a $1 million refund with the IRS in 2002. The case has now made its way to the U.S. Supreme Court, which began hearing oral arguments on Jan. 14, 2014. The case centers on the question of whether severance pay made as part of an employee’s involuntary separation is subject to FICA taxes. If the court holds that the severance pay is not subject to FICA taxation, employers and employees may be eligible for a refund of taxes they have previously paid.
Due to the IRS statute of limitations, only taxes paid in 2010 and later are still subject to consideration for refunds. Protective claims on 2010 taxes must be received no later than April 15, 2014. Because there may or may not be a Supreme Court decision by that time, employers may want to file a protective claim as soon as possible to preserve their right to a refund should the decision allow.
Some estimates place the overall value of FICA taxes on severance pay that could be refunded to employers at as high as $1 billion. According to compliance data on the Worker Adjustment and Retraining Notification (WARN) Act published by U.S. Department of Labor, more than 175,000 employees were affected by plant closings and mass layoffs in 2010 alone.
Among the top five states affected were California, New York, Pennsylvania, Florida and Illinois. The industries that felt the greatest impact were health care, transportation, banking and retail.
Employers who believe they may be eligible for a refund of FICA taxes can contact ADP at (855) 472-5556 to learn more about the company’s protective claim filing service. ADP is also holding a webinar on the topic on Tuesday, Jan. 21 at 1 pm ET. More information and a registration form are available online.