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CCH® UNEMPLOYMENT INSURANCE — 9/30/16

IRS Chief Counsel issues determination regarding supplemental unemployment benefits

The IRS Chief Counsel has provided, through emailed advice, that short-week benefits paid to workers who work less than 36 hours in a week or who could not work due to weather were not excludable from wages subject to FICA/FUTA tax as supplemental unemployment benefits. Ultimately, the payments did not fall within the exclusion carve-out in Rev. Rul. 90-72.

In Rev. Rul. 90-72, the IRS held that supplemental unemployment benefits must be linked to the receipt of state unemployment compensation and must not be received as a lump sum payment in order to be excludable from wages.

Payments that arise after separation from employment fall within three categories: (1) dismissal payments subject to income tax, FICA tax, and FUTA tax withholding; (2) supplemental unemployment benefits payments subject only to income tax withholding; or (3) nonwage payments made to purchase contract rights. Supplemental unemployment benefits payments are used by employers to provide private unemployment payments to employees in order to supplement state unemployment benefits for the unemployment period. In general, payments from supplemental unemployment compensation benefit plans may be exempt from FICA tax. The Supreme Court held in United States v. Quality Stores, Inc., that payments that are not linked to unemployment benefits payments are taxable wages for FICA purposes.

The Chief Counsel received an inquiry regarding supplemental unemployment benefits. Under applicable state law, an applicant for state unemployment compensation benefits had to be "unemployed, able, available for, and actively seeking suitable full-time work" in order to qualify for state unemployment compensation benefits. In general, an individual who receives short-week benefits does not qualify for state unemployment compensation. Accordingly, such benefits were not linked to the receipt of state unemployment compensation. As short-week benefit payments do not satisfy the narrow exception set forth in Rev. Rul. 90-72, the Chief Counsel advised that such payments are not excluded from wages for purposes of FICA tax.

The Chief Counsel also noted that this conclusion is in line with LLRs 200322012 and 9734035. These letter rulings 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. Individuals qualify for excludable regular benefits if the automatic short-week benefits immediately precede or follow a week in which an employee receives regular benefits (CCA 201634023, 8/9/2016).