One of the many losers in United Airlines’ 2002 bankruptcy was a retiring pilot whose $290,000 in non-qualified pension benefits became fully vested in 2004.  Under the special timing rule for FICA, whereby income becomes subject to the tax in the later of the year in which the income is earned or the year in which the income is non-forfeitable, the entire amount became subject to FICA withholding in that year.

Unfortunately for the taxpayer, the amount that he was due under the pension plan was reduced to $63,000 in the bankruptcy process.  The taxpayer petitioned the Court of Federal Claims for a refund for FICA withholding on the $227,000 that was discharged, but the court ruled against him.

The court rejected the taxpayer’s arguments that only “income” can be subject to FICA, drawing distinction between income and “wages.”  The court similarly rejected the taxpayer’s argument that the value of the pension benefits should have been reduced in light of the reasonable possibility that they would be devalued during the bankruptcy process that was ongoing at the time they became vested.


See Robert Warwick, “FICA Tax Imposed on Compensation That Will Never Be Received,” JDSupra Business Advisor (June 6, 2014).

Posted by Conan Yuzna, Associate Editor, Wealth Strategies Journal.