A District Court in Eastern Michigan recently rejected a motion to dismiss a participant’s benefit claim, holding that an employer legally could be liable to a participant in a nonqualified deferred compensation plan when the employer did not properly withhold FICA tax in the manner most advantageous to the participant. As a best practice, plan administrators should scrutinize any participant communications or claim responses because they can open the door to estoppel claims under ERISA.
Earlier this morning, in the case of U.S. v. Windsor, the Supreme Court of the United States found Section 3 of the Defense of Marriage Act (DOMA) to be unconstitutional. In a 5-4 decision authored by Justice Kennedy, the Court ruled that Section 3 of DOMA deprived same-sex couples of the equal protection guarantee of the Fifth Amendment of the U.S. Constitution. Note that the Windsor decision only applies to Section 3 of DOMA (which previously prohibited same-sex couples from enjoying any benefit under federal law). The decision does not apply to another key provision of DOMA that allows one state to refuse to recognize same-sex marriages performed in another state.
In the separate Hollingsworth v. Perry case challenging California’s Proposition 8 (which prohibited same-sex marriages), the Court ruled that it lacked jurisdiction to rule on the constitutionality of Proposition 8. This ruling has the effect of reinstating the original opinion of the United States District Court for the Northern District of California which found Proposition 8 unconstitutional under California law and prohibited the enforcement of Proposition 8 statewide. As a result, same-sex marriages will resume in California relatively shortly (perhaps in as soon as a month). As widely expected, the Court did not declare a constitutional right to marry in all states.
The U.S. Court of Appeals for the Second Circuit’s holding in Kirkendall v. Halliburton, Inc. reaffirms that a benefit plan’s claims procedures must be drafted clearly and in language to be understood by a reasonable participant. If participants are permitted to avoid a plan’s administrative claims process, there are significant impacts on a plan’s defense of a lawsuit, including application of a de novo standard of review to a benefit determination rather than the deferential arbitrary and capricious standard.
The Illinois Senate voted Thursday, February 14, 2013, in favor of a bill to legalize same-sex marriage. The bill now goes before the Illinois House of Representatives (the House), where greater opposition is expected. Governor Pat Quinn has indicated he will sign the bill if it is passed by the House. If enacted, same-sex marriage would become legal in Illinois 30 days after it is enacted. Illinois would be the 10th state to legalize same-sex marriage. Same-sex marriage is already legal in Connecticut, Iowa, Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont, Washington and the District of Columbia. In addition, California recognizes same-sex marriages performed between June 17-November 4, 2008. If same-sex marriage is legalized in Illinois, employers will need to consider whether their benefit plans and procedures need to be updated to address benefit eligibility of same-sex spouses.
Severance pay due to an involuntary separation from employment resulting from a reduction in force, plant shutdown or similar condition may be exempt from FICA taxes. As we reported in September 2012, the U.S. Court of Appeals for the Sixth Circuit found in Quality Stores that severance pay is not required to be tied to continued eligibility for unemployment benefits in order to be exempt from FICA. (Click here for more details regarding the Quality Stores decision.) Shortly after this decision the Internal Revenue Service (IRS) requested that the Sixth Circuit reconsider its decision in an en banc review (i.e., a hearing before all judges on the circuit court). Earlier this month, the Sixth Circuit denied this request.
The Quality Stores decision creates a clear split with the U.S. Court of Appeals for the Federal Circuit. In light of the Sixth Circuit’s denial, the IRS will likely file a writ of certiorari with the Supreme Court of the United States seeking a reversal of the Quality Stores decision. For now, the IRS is refusing refund claims outside of the Sixth Circuit and taking no action with respect to refund claims within the Federal Circuit (states within the Sixth Circuit are Kentucky, Ohio, Michigan and Tennessee). For now, employers should continue withholding FICA taxes on severance pay that is not tied to unemployment benefits.
Employers that have made severance payments due to reductions in force, plant shutdowns or similar conditions should consider filing protective FICA tax refund claims. Only a limited period of time is available to file. In general, the statute of limitations for tax refund claims is three years. As a result, April 15, 2013, is the due date for taxpayers for filing a refund claim with respect to the 2009 calendar year. A refund claim cannot be filed with respect to severance payments made before 2009.
Filing a protective claim is relatively simple to do. It is not necessary that the protective claim include exact calculations and employee consents for the refund filing. This information and the required employee consents can be provided at a later time in a supplemental filing. It is recommended that all employers file protective claims, particularly with respect to severance payments made to employees located in the Sixth Circuit.
If a FICA tax refund has been filed and the IRS has issued a notice of claim disallowance, the taxpayer must either (i) bring suit to contest the disallowance within two years after the issuance of this notice or (ii) obtain an extension of the time to file such a suit with the IRS—this process can be initiated by filing IRS Form 907, Agreement to Extend the Time to Bring Suit.
Voters in Maine, Maryland and Washington approved the legalization of same-sex marriage in their states. In addition, voters in Minnesota rejected a state constitutional amendment to define marriage as an opposite-sex union. The outcome of these referendums adds complexity to the options and obligations of employers in providing benefits for employees’ same-sex spouses and partners.
Voter referendums on same-sex marriage will be on the November ballots in four states: Maryland, Washington, Maine and Minnesota. The outcome of these referendums may complicate the options and obligations of employers in providing benefits for employees’ same-sex spouses and partners.
The U.S. Court of Appeals for the Sixth Circuit recently held that certain dismissal payments were Supplemental Unemployment Compensation Benefits (SUB) exempt from FICA taxes—a clear split with the U.S. Court of Appeals for the Federal Circuit’s decision in line with an Internal Revenue Service (IRS) Revenue Ruling that significantly narrowed the criteria for determining whether certain separation payments qualify as SUB pay. For employers that have made significant reductions in force payments in open years, the Quality Stores decision could lead to significant refunds of FICA tax.
A recent federal district court decision defeats a long-standing assumption that a foreign corporate parent would not be subject to personal jurisdiction for a suit seeking payment of pension liabilities merely by acquiring a U.S. subsidiary.
The PBGC announced that it may lessen ERISA Section 4062(e) enforcement for employers in strong or moderately strong financial condition. However, the PBGC will continue to enforce its prior Proposed Rule on ERISA Section 4062(e) liability.
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