The Wages of Not Working: FICA Liability for Severance Payments in Associated Electric Cooperative, Inc. v. United States
Jeremy L. Hirsh
In Associated Electric Cooperative v. United States, the Federal Circuit held that payments arising under a voluntary severance agreement were wages for employment tax purposes. In affirming the decision of the Court of Federal Claims, the court found “[t]he payments were designed to replace wages until the employees found other employment.” In addition, the court held the payments arose out of the employer-employee relationship and were therefore within the statutory definition of wages in section 3121.Part I of this note reviews the Code provisions defining wages for FICA purposes and summarizes the facts of Associated II. Part II explains the decision of the Court of Federal Claims. Part III describes the taxpayer’s arguments on appeal and discusses the opinion of the Federal Circuit. Lastly, Part IV analyzes the opinion of the Federal Circuit and considers the tax planning implications of Associated II.