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Sunday, June 11, 2006


Both public and private employers at times offer early retirement bonuses/payoffs to their employees to trim the number of employees. FICA taxes are taxes imposed on "wages" to fund Social Security and Medicare benefits. The 6th Circuit Court of Appeals recently determined that early retirement payments made to tenured teachers in Michigan public schools were "wages" and thus subject to FICA taxes.

The teachers argued that the payments were made in exchange for tenure rights, and thus were not paid in exchange for services and not subject to FICA taxes. The Court, however, was persuaded by the following quote from CSX Corp. Inc. v. United States, 52 Fed. Cl. 208 (Ct. Fed. Cl. 2002) holding that:

[R]ights to vacation pay, sick pay, layoff pay, and seniority -- constituted part of the employee's total compensation package and, hence, constituted wages. Therefore, when these job-related benefits are relinquished in favor of a lump-sum payment, the transaction simply amounts to a redemption, paid in cash, of wage amounts previously paid in kind. Because a separation payment is simply an exchange of equivalent values, what were wages at the start remain wages at the end.

By then equating tenure as merely "seniority" they had no problem treating the payments as wages subject to FICA. The Court was comfortable equating tenure rights as wages (and not some other type of asset the payment for which would not be wages) because they were earned through service to the employer, and further were not contracted for at the time of employment. This was enough for the Court to distinguish the case of North Dakota State Univ. v. United States, 255 F.3d 599 (8th Cir. 2001) where the 8th Circuit Court held that similar payments to tenured college professors were NOT subject to FICA taxes. Was there really enough of a distinction between the tenure here and the tenure in North Dakota to justify a different tax result? Maybe not, but the Court seemed to think so.

Appoloni v. U.S., 97 AFTR 2d 2006-XXXX (CA6 06/07/2006)

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