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Instructors who give up tenure as part of early retirement or severance plans must pay Social Security taxes on the payments they receive, a divided federal appeals court ruled last week. Although the court’s ruling came in a case involving public school teachers, it conflicts with another appeals court’s 2001 decision in a case involving professors at North Dakota State University, which may lead the U.S. Supreme Court to resolve the issue nationally.
The issue is noteworthy because it involves an interpretation of whether the rights that professors and teachers get through “tenure” are just another form of wage, or something more.
The courts’ generally prevailing on that question until now has been the 2001 decision by the U.S. Court of Appeals for the Eighth Circuit in North Dakota State University v. United States. In that case, the court declared that payments made to tenured professors who participated in an early retirement program should not be considered “wages” under FICA, but that similar payments to administrators were.
While “the administrators were at-will employees,” the Eighth Circuit argued, the faculty has “a recognized property interest in their tenure.” It added: “The payments to tenured faculty were made in exchange for the relinquishment of a property or contract interest rather than for compensation and as such were not subject to FICA taxation.”
But in their ruling last week, two of the three judges on a panel of the U.S. Court of Appeals for the Sixth Circuit interpreted federal law differently. In weighing two cases in which the federal government had sought to tax payments that Michigan school districts made to teachers in exchange for “the relinquishment of those teachers’ statutorily granted tenure rights,” the panel majority determined that the payments were clearly “wages” and that the government properly withheld the taxes.
The majority, which included Judges Cornelia G. Kennedy and Deborah L. Cook, concluded that the fact that instructors qualified for payments under the early retirement program based on their years of service indicated the payments were for services performed rather than for the relinquishment of tenure rights. That and other factors led the court to rule that the “tenure rights at issue were earned through service to the employer…. [W]e see no reason to differentiate tenure rights from any other right an employee earns through service to any employer.”
Judge Richard Allen Griffin, who dissented, said he saw no reason for the court to break with the precedent set in the North Dakota State case, and noted that a federal district court in Pennsylvania, in a case involving the University of Pittsburgh, had “recently held that early retirement incentive payments made to tenured faculty and administrators at the University of Pittsburgh were not subject to FICA taxes.”
Bertrand M. Harding, a tax lawyer who specializes in higher education issues, said in an e-mail that the Sixth Circuit ruling would “apply to anyone who has tenure at a college or university (or any other type of institution that grants similar rights) where the person receives an early retirement/severance payment and tries to say that the payment is not subject to FICA tax because it is a nonwage payment in return for the release of the tenure rights.”
Such a split between two federal courts is often a trigger that leads the U.S. Supreme Court to decide to hear a case, Harding noted.
