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Early Retirement Incentives For Tenured Faculty Waives Fica Tax Payment

Tenured faculty at a state university recently won exemption from FICA (social security) tax for early retirement cash incentives they received.

Incentive payments varied from one faculty member to another. They were negotiated, with the final amount turning on the faculty member’s past performance, current pay, and negotiating skills, among other things. In exchange for these cash incentives, the faculty member surrendered tenure rights, waived claims under the Age Discrimination in Employment Act, and promised not to seek employment in another public college or university in the state.

The IRS has long insisted that payments for surrendering seniority rights are wages subject to FICA withholding tax. But the Tax Court said that tenure isn’t like seniority. Seniority rights come about through the passage of time. Tenure is earned, and is viewed as a contract right. A faculty member with tenure can be terminated only for substantial neglect of duty (or, in this state institution, for loss of legislative appropriation). Review processes in place insure due process of law before termination.

The IRS concedes that payments for canceling an employment contract are exempt from FICA taxes. These payments to surrender tenure are like payments to cancel an employment contract, the court said, and are likewise exempt from FICA taxes.

For further information, contact Louis P. Stanasolovich, CFP™ at (412) 635-9210 or mailto:legend@legend-financial.com

North Dakota State University, 87 AFTR2d Par. 2001-1036




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