Failure of Employers to Follow Terms of Supplemental Unemployment Benefit Plan Caused Payments to Be Subject to FICA

Sometimes taxpayers may adopt a plan on paper that would create tax savings, but then turn a blind eye with regard to actual compliance with the plan.  That was the issue in the email advice discussed below

Despite the fact that a SUB Trust plan summary description indicated that benefits it would pay would be limited to those who qualified for state unemployment benefits, the failure of the employers submitting lists of employees to be paid under the plan to confirm the employees had received stated unemployment meant the payments were not treated as FICA-exempt supplementation unemployment benefits (Chief Counsel Email 201639015).

In this case a multiple employer plan had been established which was funded via a trust to pay benefits to certain employees who worked less than a specified number of hours in the prior month.  As a condition of receiving such benefits, the plan provided that an employee must qualify for state unemployment benefits.

However, in operation the employers simply submitted a list of employees who worked less than the stated number of hours in the prior month.  No attempt was made to confirm that the employees actually qualified for state unemployment benefits.

The email summarized the law in this area as follows:

Law: Section 3121(a) and Treasury Regulation section 31.3121(a)­1(b) provide that, for purposes of the FICA tax, all remuneration for employment is wages, unless a specific exception applies. The IRS created an administrative exception for certain payments that are designed to supplement state unemployment compensation and that are actually tied to the receipt of state unemployment benefits. This limited exception is explained in Revenue Ruling 56­249; Revenue Ruling 90­72 adds clarification regarding lump sum payments.

While a plan operated in accordance with the stated terms would likely have qualified for exemption from FICA, the failure of employers to follow the terms of the plan eliminated the tax benefit.

As the email holds:

Conclusion: We agree with your conclusion that these "short­week benefits" are not excluded from wages for purposes of FICA tax because they do not satisfy the requirements set forth in Rev. Rul. 56­249 and Rev. Rul. 90­72. Your conclusion is also consistent with PLRs 200322012 and 9734035, which stated that Automatic Short Week Benefits are wages for FICA and FUTA purposes, unless the benefits are made to individuals who otherwise qualify for excludable Regular Benefits (i.e., if the Automatic Short Week Benefits immediately precede or follow a week in which an employee receives Regular Benefits).