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[Webinar] Focusing on FICA: A Deep Dive into the Potential Refund of FICA Taxes Paid on Severance

2014-02-27 11:00:00

We had such an overwhelming response to our last webinar on the opportunity around a potential refund of FICA taxes remitted on severance pay, we’ve decided to host another session dedicated to the topic! Some estimates place the overall value of FICA taxes remitted on certain types of severance pay that could be refunded to employers as high as $1 billion. According to Worker Adjustment and Retraining Notification (WARN) Act Compliance data published by U.S. Department of Labor, more than 175,000 employees were impacted by plant closings and mass layoffs in 2010 alone. The opportunity to reserve the right for a potential refund of Social Security and Medicare taxes remitted by employers on certain types of severance pay in 2010 closes on April 15, 2014 so make sure you don’t let this learning opportunity pass you by. We’ll be dedicating plenty of time for live Q&A with our speakers during this session.


  • Kerstin Nemec, VP of Business Incentives, ADP
  • Evan Migdail, Partner, Partner, DLA Piper
  • Jeffrey Camloh, Tax Manager, ADP

This webinar is eligible for 1 RCH or 1 CPE credit.



Kerstin Nemec
Vice President of Business Incentives for ADP’s
dded Value Services division

Kerstin Nemec is Vice President of Business Incentives for ADP’s Added Value Services division and is responsible for overseeing tax credit teams across the country, as well as the National Tax Benefit Exchange and Economic Development Services teams. She is also responsible for leading Fortune 500 client engagements and negotiating economic incentive packages on behalf of those clients. Kerstin brings a strong, comprehensive background in traditional multi-state tax compliance, technical research and consulting to ADP with more than 12 years of experience in the Big 4 public accounting environment working in several related areas of state and local taxation specifically – including negotiating economic development incentives, property tax, tax credit compliance delivery and real estate services.

Evan Migdail
Partner, DLA Piper

Evan Migdail represents corporations, associations, tax-exempt organizations, and governments before Congress, the Administration, and federal agencies with a concentration on tax, trade, government ethics, and matters affecting international law and commerce. In private practice for almost 20 years, Mr. Migdail previously served as an assistant to a United States senator, assistant legislative director for a national trade association, and as an attorney/advisor to an independent federal government agency. Mr. Migdail’s experience in tax law is both in the legislative area and in substantive representation of clients in controversies before the Internal Revenue Service, and at the highest policymaking levels at the Department of the Treasury.

Jeffrey Camloh
Tax Manager, ADP

Jeffrey Camloh is a Tax Manager in the Tax Credits group for ADP’s Added Value Services division, specifically specializing in helping to identify and secure federal and state tax credits for Fortune 50 clients.  Prior to joining ADP, Jeff spent over ten years in the Big Four accounting firm environment, including PricewaterhouseCoopers and Arthur Andersen, in both federal and state and local tax consulting, research, and compliance areas.

Tax Credits and Incentives Can Help Lower Your Effective Tax Rate

Learn more about how you could leverage available tax credits and incentives with help from ADP, or watch the overview video below.

Kira Lakin:                           Hi, everyone and welcome to today’s webinar, focusing on FICA, a deep dive into the potential refund of FICA taxes paid on severance.  My name is Kira Lee Lakin, Director of Marketing at ADP.  First, let’s review just a few housekeeping items.  This is one of a number of complimentary webinars that ADP offers to tax, finance, and HR professionals during the year.  So today’s webinar will last for 60 minute, ending at 2 p.m. Eastern Time.  I’d also like to mention that today’s session is being recorded and you are currently in a listen only mode.  If you’d like to download a PDF of today’s slide, please go to the upper left hand corner of your screen and click on file.  Then from the drop-down, select transfer.  Select the file and click on the download button.  If you have any problems downloading the presentation, just send a message into the chat window for assistance.


Today’s webinar is eligible for CPE or RCH credits for those who qualify and certificates will be mailed to you via email within 30 days of today’s broadcast.  During today’s presentation, we will ask for your feedback via a few phone questions, which will appear on the right hand side of your screen once the poll has been opened.  Please click on the radio button that corresponds to your answer to place your vote.  We know there are a lot of questions around FICA taxes and that is on severance pay, so we’ve reserved a generous amount of time at the end of today’s presentation for Q&A.  If you’d like to ask a question at any time, please type your question into the Q&A panel located in the lower right hand corner of your screen and then click on the send button to send the question into your queue.  We’ll definitely be doing our best to get to all questions before the end of the program.


We’ll also have a brief survey at the conclusion and please remember that to qualify for credit, each participant must be logged in on their own workstation, answer all polling questions, and complete the survey.  Finally, once again, if during today’s webinar you experience any issues, please just enter a comment into the Q&A panel and our producer will respond.


So first off, if everyone could just let us know whether they will be applying for credit, that will help us make sure you get a certificate to give you credit for attending today.  Keep in mind that if you do change your mind for any reason after the webinar today, just let us know by email or give us a call and we’ll be happy to get that all sorted out for you.  Great.  Okay.  So just a little bit about ADP.  Before we dive into our presentation, I just wanted to share a few key facts.  We have over 600,000 clients worldwide and we pay one out of every six employees in the U.S., which is just over 33 million.  We’re also one of only four AAA rated U.S. companies by S&P and Moody’s.


So with that, I’d like to go ahead and introduce our speakers today.  Today’s webinar is hosted by Kerstin Nemec, Vice President of Business Incentives here at ADP.  Kerstin is responsible for overseeing tax credit payments across the country, as well as the national tax benefit exchange and economic development services team.  She’s joined by Jeffrey Campbell, Tax Manager at ADP, as well as Evan Migdail, Partner at DLA Piper.  So Kerstin, I’ll now turn it over to you.


Kerstin Nemec:                    All right.  Thank you, Kira.  Thank you, everybody, for joining us today, taking an hour out of your day to spend some time with us.  We’re going to spend this hour talking about the Quality Stores versus the United States case that’s before the Supreme Court right now and what that means to companies in regards to a refund of FICA taxes.  We’re also going to be discussing some of the upcoming deadlines, primarily April 15, and why that’s a very important date to get a protective claim in.


So to start, I’m going to ask Even Migdail to give a little bit of history of why we are where we are today and what the issues are surrounding the quality stores case.  Evan is a partner with DLA Piper in Washington, DC.  Just a little bit more information about Evan.  He’s been in private practice for over 20 years and prior to private practice, he was an assistant to a U.S. senator and a legislative aide for a national trade association.  And Evan specializes in tax and legislative issues and is just a wealth of knowledge on this issue.  So Evan, you want to walk us through what’s happening with Quality Stores and what the issues are?


Evan Migdail:                      Yes, sure, good afternoon.  As I’m a partner here in the Washington, DC office of DLA Piper and going to take a few minutes and talk to you about the context in which this issue came up to the Supreme Court and where it stands right now.  If we could go to the next slide, which discusses specifically what the issue is.  And in summary, the issue is whether and when severance payments or supplementary unemployment benefit payments, which are known as subpayments, constitute wages for purposes of the Federal Insurance Contributions Act.  As I will explain, the case now before the Supreme Court is going to be decided on an issue of what the statute the Congress wrote meant and what Congress intended in determining what wages are for FICA purposes.


The context in which the case came to the Supreme Court is a company called Quality Stores that entered bankruptcy proceedings, offered its employees separation compensation agreements based on a number of factors; the employee’s position, length of service, current salary.  As is common, because this is traditionally what employers have done, FICA was paid over to the IRS on these payments and then Quality Stores determined within about a year that it should not have paid it over, that these were not subject to FICA, these severance payments, and therefore sought a refund claim from the IRS.


So that’s how this came up and let’s go to the next slide for a moment.  The next slide talks about the history of the litigation, and if anything, it probably tells you why it takes such a very long time to get from a dispute with the IRS to the United States Supreme Court and not many tax cases actually do get to the Supreme Court, but this one has.  Just going through it briefly, the time period during which the occurrences happened, the bankruptcy proceedings and the payment of the severance payments occurred in 2001.  Quality Stores, a year later, filed for a refund from the IRA.  There are statutory time periods for the IRS to respond a refund claim.  In this case, they didn’t.


So the statutory time period ran and that gave Quality Stores the legal right to go into court.  It went into first the Bankruptcy Court for the Western District of Michigan, which ruled in their favor.  The IRS appealed that to the federal district court.  The federal district court also ruled in Quality Stores’ favor.  The IRS appealed that to the Sixth Circuit Court of Appeals.  The Sixth Circuit Court of Appeals then also ruled in Quality Stores favor and the United States then asked for a rehearing of the case with all the judges in the Sixth Circuit, which is their prerogative and Quality Stores prevailed there as well.  And so the IRS took them to the United States Supreme Court.


The Supreme Court granted the petition to review.  It does not always have to, but in this case, as I’ll mention in the next slide, there is a conflicting case in the federal circuit, the CSX case.  And normally, the court does grant review of those cases because it would like to have the law to be uniform in the federal court.  So it granted certiorari last October and then just last month the Supreme Court held oral arguments on the case.  And what happens now, just as a matter of court practice, Friday after the oral arguments, the judges, the nine justices meet.  They vote on how they think the case should come out and then they assign their law clerks to write the decision and then they take as long as they need to take to get the decisions issued.  So right now, there are probably a number of law clerks up on Capitol Hill working on drafts of what this decision will ultimately be.


So that’s how the case got where it’s got and now let’s move to the next slide and talk a little bit about what the arguments are in the case.  Basically, as I said earlier, it is a question of determining what the statute means and which statute applies to define what wages are for FICA purposes.  The Quality Stores argument is that Congress intended to use an income tax statute, which would clearly say that subpayments are not wages for this purpose and because of that, they are saying that CSX misapplied what Congress intended and used a FICA statute instead to define what wages are.  It’s a very complex statutory argument.  The CSX court relied on some administrative rulings that the IRS had issued on this subject that tended to go the other way.  But Quality Stores has argued and in this, they certainly are correct.  Administrative rulings by the IRS do not have the ultimate force of law.  They can be and often are overruled by the federal courts.  And so Quality Stores is arguing that their statutory argument is the correct one and the IRS, whatever IRS positions may have taken to the contrary are not the law and the court should not regard.


So that’s where we are in terms of the posture of the case.  In terms of the key arguments in the case, and as I mentioned earlier, the next step is for the Supreme Court to issue a ruling.  And we’ll get into the timing of that for the moment, but we are currently in the Supreme Court term and they will normally issue rulings between now and probably the end of June potentially.  And you never know when any particular ruling is going to come down.


Kerstin Nemec:                    All right.  Thank you, Evan.  Jeff, did you have anything to add before we go to the polling question?  Okay, I guess not.  So who said taxes couldn’t be exciting.  So let’s see if you all were paying attention.  Polling question number one.  And remember, for those of you that want CPE credits, it’s important that you answer these questions.  We’re not going to be grading you to see if you answer them correctly, but you do need to try to give them your best shot.  So polling question number one.  What is the core issue behind the United States versus Quality Stores case?  Is it A, whether businesses should have to pay FICA taxes on severance wages they pay to employees only if they are filing for bankruptcy?  Is it B, if FICA taxes need to be remitted on severance pay retroactively if they were not remitted at the time of the employee termination?  Or C, whether and when severance payments or supplementary unemployment benefits payments constitute wages for purposes of FICA?  So I’ll give you all a few seconds of silence to think about that.


And so while people are answering this, just to give you an idea of the magnitude of what’s going on, like Evan said, it’s very rare that you’ll see a payroll tax case go to the Supreme Court.  So that in itself is kind of exciting and he stated part of the reason is that there’s another court case out there that had a varying conclusion.  So now, there’s not uniformity in the law throughout the country.  The other thing that’s swirling around about this is just the magnitude of it and the amount of potential refunds at stake.  There’s been estimates out there that over a billion dollars in refunds could be at stake should the Supreme Court come down and rule that FICA payments or subpayments should be — constitute wages for purposes of FICA.  So big issue dollar wise


All right, you want to close the polls?  So the correct answer on that was the answer C, it’s whether severance payments are constituted to be wages subject to FICA taxes.  So now, you guys are all probably anxiously waiting, well, what does all this mean and what are the potential outcomes?  So we’ve asked Jeff Campbell to join us today.  He’s been with ADP for a few years now.  He’s been in the tax industry for over 15 years, specializing in both federal and state taxes, spent some time at the big four.  And at ADP, he is one of our leaders that is overseeing the protective claims and the FICA severance issue.  He also attended the Supreme Court hearing in January.  So he has firsthand experience of the arguments that were presented and how the proceedings are moving along.


So Jeff, do you want to walk us through the potential legal rulings and outcomes of this case?


Jeffrey Campbell:               Absolutely.  And thank you, and good afternoon, everyone.  Before I get into some of the legal outcomes, I am going to add on to both some comments, Kerstin, that you made, as well as that Evan made.  And those are with respect to what’s kind of unique about this case.  And in the case of the facts related to Quality Stores, we’ve all heard of severance pay and I think a lot of the feedback we’ve gotten is that people don’t understand whether or not the severance that they may have paid in their company is the same type that’s being discussed in the Quality Stores agreement.  And with respect to Quality Stores, they actually had two different forms of separation pay or supplemental unemployment benefits.


And one was in more pure or historical vein of what supplemental unemployment benefits were supposed to mean, which was exactly supplemental to state unemployment compensation.  And by that, they were paid over time on a weekly or biweekly basis.  However, Quality Stores also had an additional plan that was in a lump sum payment.  And that isn’t traditionally what would be known as a subpayment.  But in Quality Stores case, they had taken the position that it was.  And that is part of this case.  And as you can see, as Evan Mentioned, Quality Stores had prevailed at the various court levels, which their refund claim consisted of FICA tax on both plans.


So I think that’s key in that it’s a little bit unique in that Quality Stores’ plans were both the kind that was paid over time as well as the kind that was paid in one lump sum.  And how that relates to the potential outcomes, of course everyone wants to know when the Supreme Court rules, how this may affect my company.  And as you can see by the graphic on the presentation, we sort of put it into five different categories of possible outcomes for purposes of this discussion.  And as some may know, the Supreme Court could basically find a technicality that they didn’t like that was done at the lower level and send it back to the Sixth Circuit for some additional review with specific instructions.  So that’s always a possibility.


They could also flat out reverse the Sixth Circuit ruling, rule in favor of the IRS, and then say no, Quality Stores is incorrect and these types of payments are indeed subject to FICA.  The next two categories of possible outcomes that we have are essentially should the Supreme Court rule in favor of Quality Stores and basically uphold the Sixth Circuit Court of Appeals ruling.  The Supreme Court may, they could broadly say yes, we agree with the Sixth Circuit Court of Appeals.  Quality Stores’ payments were not subject to FICA and leave it at that.  Or, they could narrow it down and say, we agree, but there’s restrictions.  And so many people, in the event of a favorable outcome for Quality Stores, we’ll still have to wait and see what specific guidance the Supreme Court rules on and provides to us, so that we can see whether or not certain types of severance payments were subject to FICA or whether or not there is a refund opportunity out there for tax paid on those.


And the last one we have is somewhat unique and that is because Justice Elena Kagan actually had served as the IRS Solicitor General on this issue.  And so there was clearly a conflict and she had to recuse herself.  So there were only actually eight justices that were present for this and only eight will rule.  And there’s always the chance that it will be a four-four ruling.  In the event of a four-four ruling, that basically means that Sixth Circuit Court of Appeal would stand, but it’s likely that the IRS would only accept that in the Sixth Circuit states, which is Michigan, Ohio, Kentucky, and Tennessee.  So there’s always that possibility.  It’s just to be aware of that.


The good news is for taxpayers that are hoping for a potential ruling is that it would take essentially a five-three ruling to overturn the Sixth Circuit Court of Appeals outcome.  Can you go onto the next slide?


That brings us to a polling question.


Kerstin Nemec:                    All right.  So again, remember you need to answer the polling questions if you want CPE credit.  So this one is a little bit easier.  Do you plan to file a protective claim for FICA taxes paid on severance?  So A, I have already filed a protective claim.  B, yes, I plan to do so.  C, no, I don’t plan to file a protective claim, or D, I’m not sure.  So and basically what this is, is you have to file a protective claim in order to protect your rights for a refund.  And again, back when we’re talking about the significance of what this means to companies in the United States, if you just look at what was filed with the Warren Act, which is the act that requires companies to file their information with the United States government if they’re having massive layoffs.  In 2010 alone, there was 180,000 people laid off.  And if you look at that, and that was not nearly as bad as what happened in 2008 and 2009 during the recession.  And if we should get a favorable ruling, it will affect FICA payments made from 2009 to potentially to the time of the ruling.  So again, a lot at stake right here.


So all right, I think we can close the polling question and move on.


Jeffrey Campbell:               So another item that many people are interested in discussing is the timing of what needs to be done and when it needs to be done.  And we have developed a service that has intended to help people, guide people through that process.  Now, you may have heard us use the term protective claim in various contexts.  And there’s sometimes confusion as to what that is.  So a protective claim is essentially a placeholder, if you will, with the IRS, in that it’s not an actual claim.  It’s not necessarily complete, but it’s used in the — when the issue that is being tested is not yet resolved.


So in the case of Quality Stores and whether or not certain types of supplemental unemployment benefits are subject to FICA tax, it’s not clear.  The Supreme Court has not ruled.  So basically the treatment of those types.  Of payments is uncertain.  Yet, the statute of limitation continues to roll on and we recommend that folks that may have an interest in pursuing a refund protect that interest.  And to do so, you would file a protective claim.


So as far as the timing of when that’s necessary, you have to look to — you have to kind of go through the math on the statute of limitations.  And you’ll hear us talking about 2010, the tax year 2010 a lot on this call.  And that’s because that’s the tax year that is next up for expiration under the statute of limitations.  And the 2010 tax year statute of limitations will expire on April 15 of this year, April 15, 2014.


And so to get there, essentially as most of you know, payroll taxes are paid on a quarterly basis.  But for administrative ease, the IRS essentially says that these are deemed to have been paid on the April 15 in the year following the year to which they apply.  So what does that mean?  2010 payroll taxes are deemed to have been filed on April 15 of 2011.  Since the statute of limitations for any refund or any adjustments is three years then April 15, 2011 plus three years takes us to April 15, 2014.  So that is the date by which any protective claims would need to be submitted, essentially to hold your place in line while we wait for the U.S. Supreme Court to rule.


Now, as Evan mentioned, the Supreme Court heard oral arguments on this issue in January.  They’ve met.  So and also as he mentioned, their clerks are probably writing the opinions on the issue.  But we don’t know when that ruling will come out.  And should it not, even if it were to come out in the next few weeks, a protective claim would still be required because we’d still be waiting on the IRS for some guidance on this.  So to make sure that we don’t lose the opportunity, we recommend that folks that may have a refund opportunity file a protective claim no later than April 15, 2014.  And essentially, if they don’t and then the Supreme Court rules favorably and if your company thinks that maybe there was a refund opportunity, if you had not filed a protective claim, you wouldn’t have the opportunity to go back and file a refund claim.


So that’s why we strongly encourage people to take action basically to minimize their risk and make sure that they are protected for what may happen after April 15.  So go to the next slide.  So one of the exercises that we would recommend that tax payers do is to take a look at their tax year 2010 and determine whether or not they had a reduction in workforce, plant closing, some of that nature that resulted in laying employees off and which severance was paid to those employees.  So if so, if that was done in 2010 then this might be an opportunity that is relevant.  And as we mentioned previously, you do have three years from the date, and in this case, that date was April 15, 2011 to get in your protective claim.


So a protective claim is not a — there are no special forms that are designed specifically for a protective claim.  It is — the protective claim concept is not statutory.  So rather, it’s administrative.  And so what we do to have a valid protective claim filed on behalf of taxpayers is essentially a form 941X, which is the same form as you would file if you were to amend your 941.  And in that, essentially refers to the Quality Stores issue and that we’re essentially filing this on a protective basis.  We also recommend that that is accompanied by form 8275, which is basically a form that you would submit with the IRS whenever you’re taking a position that is inconsistent with IRS guidance, in the sense the IRS clearly does not agree that these are not FICA taxable transactions then this would be one of those cases that the IRS does not think that this is a non-taxable transaction.  So we’d recommend 8275 be included.  We’d also have a cover letter that essentially summarizes the intent of this claim.


Go to the next slide.  So as has been mentioned, ADP has created for this purpose a protective claim service.  And through that service, we offer what I’ll call a two part protective FICA refund offering.  The first would be to assist companies getting in their 2010 tax year protective claim.  So and as you can see on the slide, we have set up a website, a portal that allows companies to get more information and sign up.  Also, we also have representatives that can take calls and help you get set up to file a protective claim.  So part of the service would be to actually file the claim.  We’d also make sure we’re on top of communication with the IRS so that we’re able to track the claim.  We also would be evaluating the opportunity based on payroll data and severance payments.  Of course, closely following the Supreme Court litigation and making sure that anyone involved is aware of any important events.  And we also would be assisting with the actual final refund calculation in the event of a favorable ruling in the Quality Stores case by the Supreme Court.


And lastly, and this is an important point, we offer assistance with what we call an employee outreach program.  And what that means is whenever you’re dealing with a FICA tax, which many of you know is an employer/employee shared tax, the IRS prohibits a company from going after for refund, the employer share only.  And so they’ve put in some rules that makes sure that the employees’ piece of that  is protected.  And what they require is that any company seeking a refund of FICA tax make a reasonable effort to contact the employees and obtain their consent to also include the employee share in their refund claim.  Now, that doesn’t mean that you have to actually obtain consent.  What it does mean is you have to attempt to obtain the consent.  And we have a process to help companies reach out to employees that may have been affected, track the communication, and be able to document that for this purpose.


Go onto the next slide.  So we’re at a polling — Kerstin or Evan, if you have anything to offer, any comments on all of that?


Kerstin Nemec:                    No.


Evan Migdail:                      No, I’m good.


Kerstin Nemec:                    All right.  Great.  Let’s go to polling question number three and this is our last polling question for CPE credit.  Why do employers need to take action by April 15, 2014 to reserve their right to a refund of FICA taxes remitted on severance?  Is it A, the Supreme Court is expected to make a decision on U.S. versus Quality Stores on that day, B, the three year statute of limitations for seeking refunds will expire for taxes reported on 2010 quarterly form 941, employment tax filings.  Is it C, both A and B.  Or D, neither A nor B.  So this one might take you all a minute to think about it.


So while you all are answering this question, I’ll bring up one of the questions that someone had submitted in the Q&A box.  And the question was that, do we need to do anything prior to 2010?  Does anything prior to 2010 not apply due to the statute of limitations?  And yes and no.  So what’s happening right now is you need to file a protective claim for any severance paid in 2010.  Now, there is a possibility if the Supreme Court rules to where employers can get a refund that it could go back as far as 2009 when the original Quality Stores case was heard.


That being said, if you all did not file a protective claim last year for your 2009 severance payments, you would not be able to get that back.  So really, the one thing that you need to remember right now is that if you all paid any severance in 2010, you need to get these forms in by April 15 in order to protect your rights for a refund for 2010 taxes.


So can we wrap up the poll?  And the correct answer from the poll would be B, the three-year statute of limitations for seeking refunds will expire on 2010 forms.  So that’s why 2010 is so important, but just to remind you all that depending on how the Supreme Court rules, it could affect payments all the way back to 2009.


Jeffrey Campbell:               Right, and if I may add to that, there is one rare exception to that, and that would be if your company is open under statute due to having executed a waiver with the IRS, perhaps usually because of a payroll tax audit, you could find that 2009 is still open.  But for the vast majority that won’t be the case.  But if that affects you and 2009 is still open because you’ve executed a waiver, extending that period then there’s still an opportunity to get in a protective claim for the 2009 year.


And related to that, also, Evan, we do get many people asking, well, what about 2011, 2012, 2013, et cetera.  And the reason we’re focusing on 2010, as we’ve said, is because that’s the year that is up against an expiring statute of limitations.  There’s still time to — for 2011, 2012, and 2013.  And the reason a protective claim would not be necessary for those years is because it is fully expected or anticipated that the Supreme Court will rule on this case, as Evan mentioned, no later than June most likely.  And that would still give — that essentially would eliminate the need for a protective claim for 2011, 2012, and 2013 because you’re not up against the statute of limitations time constraint.


However, it is important to know that should the Quality Stores case rule in favor of Quality Stores then 2011, 2013, and 2013 are still years that will be of great interest for actual refund claims.  And so it’s just important to know when we say protective claim versus an actual refund claim.  And ADP will be assisting on that should that occur as well.  So 2011, 2012, and 2013 still matter.  They just are not relevant for a protective claim.


Evan Migdail:                      And this is Evan.  Let me add one thing.  IRS has told us that in the event that the Quality Stores case prevails and there is any kind of a ruling from the taxpayer, they probably will create a process to file for refunds.  So there will be a process that will be set up once the Supreme Court renders its judgment.  And I would emphasis if you fail to file a protective claim in the statutory time period for filing a claim ends, the only way to reopen the year is through an act of Congress, which is very unlikely to happen.  So I would urge you to file protective claims because that’s the only way that remains to make sure that if there is a refund opportunity, you can take advantage of it.



Jeffrey Campbell:               Great.  So we can go to the next slide.  So just wanted to discuss a few common questions, if you will, that people seem to have about this issue.  So the first would be, how do I know if I will ultimately receive a refund and is it worth filing a protective claim?  So to answer how do I know, quite frankly, you don’t and that is it’s fully contingent on the ruling from the Supreme Court.  So since you don’t know and if you’re able to determine that there is a sizable potential refund because of, perhaps, sizable severance payments that were made for 2010, then I would argue that it is worth filing a protective claim.


So the next question, what happens if I do not a file a 2010 protective claim in time?  Well, basically what Evan just said.  It would take an act of Congress to reopen that tax year.  What is meant by the term qualified employee?  Many people ask, how do I know if an employee is eligible or the FICA paid on an employee is eligible?  Essentially, it also will depend upon the ruling.  And by that, I mean if the Supreme Court has any specific guidance on what types of supplemental unemployment benefits are eligible.  So that end, any employee receiving such supplemental unemployment benefits would be a qualified employee for this purpose.


Am I allowed to file a claim for just the employer share of FICA taxes paid?  The IRS is very clear on this and the answer is no.  Well, I shouldn’t say that.  You can file a claim for just the employee share, but that’s only if you’ve already made an outreach attempt for the employees and didn’t get any consensus back.  In that case, your refund claim would only be your share.  But you’d still need to go through the exercise of at least attempting to get consent of the employee share.


If I’m unable to contact a qualified employee or if they refuse to grant their consent, can I still file for the employee share of FICA refund?  The answer to that is no.  You would only be able to still go after the employer’s share but without consent from an employee, or if they — or if you’re unable to reach them you’re not able to go after their share on their behalf.  They, however, may do that on their own behalf.


And that’s all I have.


Kerstin Nemec:                    Okay, great.  Well, we have a lot of questions, Evan and Jeff.  So let’s start going through some of those and see if we can help some of these people out.  So there were a lot of questions surrounding what does this apply to?  Does this apply only to reduction in workforce or plant closures?  Could this apply to other — to severance paid for other regions, like one-offs or if somebody was let for performance and paid severance, or is this just isolated to plant closures and reductions in workforce?


Jeffrey Campbell:               All we can kind of speak to, and again, and this is without guidance yet from the Supreme Court, is essentially what qualifies as supplemental unemployment benefits.  And typically, to be supplemental unemployment benefit it needs to either needs to be a plan.  It needs to be based on items such as length of service, current salary, or position within the company, and it needs to be voluntary — I mean, sorry, involuntary.  Meaning, for example, an employee buyout plan.  That is not involuntary.  That’s voluntary.  So something like that would not typically fall into as a supplemental unemployment benefit.


But that currently is really the only framework we have to work with as far as what would qualify.  And so those are the things I would point to as guidelines as to whether or not your plan potentially qualifies.


Kerstin Nemec:                    Right, and one thing too that we have been talking to companies about.  If you’re uncertain, and there is a lot of uncertainty right now.  We don’t know the ultimate outcome, is to file a protective claim anyway.  It’s, in the grand scheme of things, it doesn’t require that much effort on the front end to get these forms in.  There was a question that somebody had, when we turn in these forms do we have to go employee, by employee, by employee at this point in time, and no, you don’t.  So it’s not that large of an effort to get a protective claim filed.  So if I was sitting in your shoes, where were you responsible for this in your company, I would file a claim just to protect yourself.  And worst-case scenario, if it doesn’t apply to the type of severance you paid, it took a few hours of your time.


And then if it did, if it ultimately ends up applying to your circumstances then at least you’ve protected yourself and you could go after a refund.


Evan Migdail:                      Let me add, there is no downside to filing a protective claim.  You are asking for a refund of money.  So it’s not that you’re holding the government’s money and they’re upset about that or they’re going to charge you interest.  You’re asking for some of your money back.  So it’s a very ministerial act and you put yourself at no risk by filing a protective claim.


Kerstin Nemec:                    Okay.  Great.  Thank you, Evan.  Here’s another question.  Evan, maybe you can take this one.  If our corporate office is in California but we paid severance to employees in Tennessee, will we have a potential claim for those severance payments paid in Tennessee even though we were headquartered in California?


Evan Migdail:                      Well, yes.  I mean I think you have to look at how you’re structured.  But if your one company and these are your employees, you may be broken down by business units or you may have a subsidiary.  But if they’re your employees then yes, you would have an issue and should protect your claims.


Kerstin Nemec:                    Okay.  Great.  All right.  Next question is do you recommend filing protective claims for all years right now, meaning 2010, 2011, 2012, 2013?


Jeffrey Campbell:               I would say that filing a protective claim for anything other than 2010 is unnecessary, mainly because you will not be up against a statute of limitations even for 2011 until next April 15.  And you’ll have far more information in the next few months to make that decision than you do now.  And so that 2010 is what I would recommend as the year for protective claims.


Kerstin Nemec:                    Okay, great.  All right, here’s one from someone who filed a protective claim in 2009.  I filed a 2009 protective claim, which the IRS denied.  If the Supreme Court ruling comes back that FICA is not subject or that severance is not subject to FICA, what would be the next step to take to obtain this refund?


Jeffrey Campbell:               Evan, do you want to take that?


Evan Migdail:                      Yes.  I think we probably would need to have a little more information.  When a claim is denied, you then have a period of time to go into court and normally, it’s I think two years to go into the U.S. District Court.  So we have to know whether that time period is still open.  If it is, then, and this is really a litigation procedural question, if the time period is still open then you probably would file in U.S. District Court either a motion to compel the government to pay the refund.  Or maybe if there was still time, you could back to the IRS and basically say the year remains open and the Supreme Court has ruled in my favor so let’s work it out.


But you have to look at your specific circumstance.  If IRS denied it then you would have had a period of time filing the administrative action to go into court, and the question is when that happened and whether that’s still an open period.


Jeffrey Campbell:               Right, and if I can add to that, ADP offered this service also for the 2009 tax year, and in many cases, clients that were outside of the Sixth Circuit did receive denials.  And for now, and again these were filed by April 15 of last year.  So the year period there’s still another year plus to go on that.  And so in those cases, our expectation, and as you mentioned, Evan, if ruling is favorable the IRS would probably come out with a procedure for this.  And part of that procedure may or may not also cover previously denied claims, but yet are still within that two-year period for action.


And so right now, kind of the recommendation is to sit tight and wait for the ruling between taking your next action.


Kerstin Nemec:                    Okay, great.  Thank you.  Jeff, I know this issue has come up before and we’ve had this question several times in past webinars and meetings.  If severance was paid in only one quarter of 2010, does a 941X need to be filed for only that quarter or for every quarter?


Jeffrey Campbell:               Only the quarter in which the payment was made.  So in that case it would only — you’d only need to do one 941X.


Kerstin Nemec:                    Right, unless the payment was spread out over two quarters.


Jeffrey Campbell:               Correct.


But every quarter that you made a payment, it needs to be filed.


Jeffrey Campbell:               Right, and what we had found typically for many companies is maybe they had a reduction over time and so it was kind of trickled throughout the year, or several years.  And so, in those cases, all four quarters were required.  Or we had just larger companies that knew that they did it, didn’t know when, just to covered themselves filed all four quarters.


Kerstin Nemec:                    Okay.  Great.  Okay.  Here’s a little bit of clarification.  This question came up several times today.  Is there any employer liability or responsibility to those employees who received severance if we don’t file a protective claim?  Evan, maybe you could address that one?


Evan Migdail:                      It’s an interesting question.  I never thought of that before.


Kerstin Nemec:                    Yes, it’s kind of a loaded question so sorry to spring that on you, but —


Evan Migdail:                      If you could read it again, let me just — is there a liability if you don’t file a protective claim?


Kerstin Nemec:                    Correct.  So basically, the question is around what’s the company’s responsibility to a terminated employee?  The company doesn’t want to — maybe they didn’t pay enough in severance and it might not be worth some of the effort involved with the amount of refund.  What’s their responsibility or liability to this terminated employee if they do not want to file a protective claim?


Evan Migdail:                      This is just a guess because as a lawyer, I would want to research it.  But my guess is there probably isn’t.  The current law is mixed as to whether it is or isn’t — whether FICA should be paid on severance payments.  So I assume if you didn’t and the employee was upset, you could argue that the law was unclear.  So it wasn’t clear what I needed to do to protect your interest.  I do think it is ultimately in the economic interest of the company and of your employees to file.  And I think it’s the right thing to do because the possibility does exist that you could get a refund.  But I’m not sure you’d be liable if you didn’t.  But I think from an economic standpoint, it makes great sense to pursue this.


Jeffrey Campbell:               Right, and I would just add that’s probably a matter of employment law rather than tax law, certainly, and also it may vary from state to state.  And lastly, the argument, as Evan alluded to, is that you followed the rules that were in place at the time and I would think that there would not be — to that end you’d probably be held harmless.


Kerstin Nemec:                    Okay.  All right.  Here’s — can you repeat your response to whether an employer can file a refund claim for only the employee’s share or employer share?  Jeff, do you want to take that one?


Jeffrey Campbell:               Sure.  So the statutes related to FICA require that an employer may not pursue a refund without taking — for their share only, without first taking certain steps.  Those steps require a reasonable effort to contact the employee and essentially advise them of what they intend to do, and obtain their consent to include the employee share.  There is no requirement that consent be obtained, simply that a reasonable effort has been made to contact them and obtain that consent.


So that is why an employer can simply not say, hey, I overpaid FICA.  I’m going to do a refund claim for my share.  There are certain steps that must occur first and those steps include an attempt to contact employees.  So you could have an example where your refund claim does only represent the employer’s share but that would simply only be because you weren’t able to contact any employees.


Kerstin Nemec:                    All right.  Thank you.  There’s a question, is ADP going to update us once the ruling is finalized?  And I’m not sure if this coming from a client or a non-client so I’ll answer this two different ways.  If a company is signed up as a FICA protective claim client, they are put into our database where you’re getting regular updates on any activities with the court case and what you need to be doing next.  So as soon as we have some sort of idea of the ruling or even if something happens prior to the ruling, an update will be sent out right away and we always have the FICA protective claim hotline that you can call into with any questions as well.


As far as larger update, more in a public setting, with a webinar or on our ADP blog, yes, we’ll be doing that as well.  So we will provide the information on what the ruling was.  We’ll probably be working with Evan and our other tax preparer to give an assessment of what exactly it means.  And then as soon as the IRS comes out with guidance on instructions on what employers needs to do, we will get that information out to everyone as well.


There was a question on how much does ADP charge to file a protective claim and can we do this if we were not an ADP client in 2010?  So yes, we’re filing protective claims and providing the back end employee outreach for both ADP clients, payroll clients, and non-clients.  And the fees that we’re charging, and again this is on our website, which you all will be given that, is $200 per quarter to file a protective claim.  We have all the standardized forms that need to be sent and it can be done fairly quickly.  And then — so that’s $200 per SEIN per quarter.  And then on the back end for the employee outreach, that price varies depending on the magnitude and the number of employees that could potentially be impacted.  But it’s been averaging around $200 per employee that would need to be contacted and worked with.


Okay.  Let’s see.  Go through —


Jeffrey Campbell:               If I can add to that because I’ve gotten some feedback on that question as well is signing up for a protective claim service does not obligate you to the back end kind of fee structure.  So the only real commitment from a protective — from using ADP’s protective claim service for protective claims is the $200 per quarter fee.  And that’s the extent of the actual commitment.  And of course, a decision as far as whether or not to proceed with us can be made later.


Kerstin Nemec:                    Okay.  Here’s a question.  What reasons are there that an employee would refuse consent and what action must an employee take if they receive — if they would be eligible to receive a FICA refund?


Jeffrey Campbell:               Essentially, make sure I understand the question as I heard it.  So if an employee refuses consent was the question, Kerstin?


Kerstin Nemec:                    Yes.


Jeffrey Campbell:               Okay.  That still would not — that still allows you to go after the employer share, just not the employee share.  And as far as what can the employee do, the employee could always — one thing that will happen with respect to any affected employees is that their FICA wages will change as a result of any refund claim.  So if we go after — if the company goes after the employer share of the FICA, that employee will still have to get a Form W-2C, which essentially is an amended Form W-2.  And on that, W-2 will be the only item that will change will be FICA wages.  If the employee chose to, they could then take that W-2 and make a claim for their own FICA refund.  That’s of course their prerogative and that’s not something that is — I don’t recommend that anyone get into individual tax advice on this, but the employee does have options.


Kerstin Nemec:                    Okay.  Great.  And I think we’ll take one last question, but in the meantime, Martin, can you put it on the next slide?  So we’re getting quite a bit of questions on can we have — where do we get a copy of the presentation or where can I get more information.  So you can download this presentation.  Kira will tell you a little bit more after this to just remind you how to do it.  And in the presentation, you’ll also see on this slide you’ll have the 800 number that you could call if you have questions.  There’s also our email address.  And if you go the website link on there, on this page it has all the FAQs.  It outlines our services.  It outlines our fees and a lot of what we’re talking about today, a lot of these questions are answered in the FAQ and that may help a lot of you tremendously.  So I’ll do one easy question and maybe one that’s a little bit more difficult.


Again, we had questions on what are the Sixth Circuit states and it might not be all of these states.  It might be just certain districts within these states, but Kentucky, Michigan, Ohio, Tennessee.  Did I miss any of them, Jeff?


Jeffrey Campbell:               No, those are the four within the Sixth Circuit.


Kerstin Nemec:                    Yes, and again, it doesn’t matter if you’re headquartered in one state or if you’re in the Sixth Circuit or not in the Sixth Circuit.  This could potentially affect the — impact the entire United States.  Like Evan had mentioned earlier that this — the lack of uniformity right now is the main cause of concern and why this went to the Supreme Court in the first place.


Jeffrey Campbell:               Right, if I may add, before it went to the Supreme Court, this was a Sixth Circuit question, meaning I could understand where someone would be concerned whether or not it affected them.  But now that it’s at the Supreme Court, it essentially makes the whole all of circuits, the entire United States kind of fair game, if you will, with respect to this issue.


Kerstin Nemec:                    All right.  And last question and then we’ll turn it over to Kira.  Will we have to issue W-2s then to all employees that were affected?


Jeffrey Campbell:               Yes, yes, and as part of our service, that is included in the service with the, with the back end where we would amend the 941s on behalf of clients and that would also include forms W-2C.


Kerstin Nemec:                    All right.  Well, thank you everyone.  I’m going to hand it back over to Kira.  Kira?


Kira Lakin:                           Thanks, Kerstin, and thanks Jeff and Evan.  That was a very informative presentation and this is just such an incredible opportunity that I’m glad we’ve been able to share a little bit more detail.  So if we could move to the next slide, as Kerstin mentioned, for those of you who would like to go back and relisten to this presentation today, we do archive all of our past webinars on our blog, and that’s  So within the next few days, you will be able to watch a recording of today’s presentation.  You’ll also be able to download the slides that we went through today from that link.  Today, you can actually still download them if you go to your file menu, go down to transfer, and then select the field that you want to download.  So you can do that now, but if for some reason down the line you want to check that, you will find all of that on our blog.  And you can also expect to see updates on various developments.  So any rulings that come out and so forth, you can definitely check back with us there.


If you want to move to the next slide, we do really appreciate everyone’s feedback.  So please let us know how we can make these programs even more helpful for you.  There is a survey that will pop up for you after the end of the next slide here, and if you can just respond to that.  It is very, very helpful to us to know what we can do to make these more valuable to you.


So with that, thank you for joining us and have a great day.


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