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Tax Issue for Faculty Retirement Packages
By Gwendolyn Bradley
Instructors who relinquish tenure as part of early retirement or severance plans must pay Social Security taxes on the payments they receive, a federal appeals court ruled in June. The case focused on the federal government’s efforts to tax payments to K–12 teachers in a public school setting, but this issue is important for college faculty as well. Another appeals court had ruled in 2001 that payments made to tenured North Dakota State University professors as part of an early retirement program should not be considered “wages” under the Federal Insurance Contributions Act (FICA), although similar payments to administrators were. In the 2001 case, the court said that faculty have “a recognized property interest in their tenure”; thus, the payments were made in exchange for the relinquishment of a property interest rather than being compensation subject to FICA taxation. Because of the differing rulings of two federal courts, some observers believe that the question will ultimately be decided by the U.S. Supreme Court.
“The AAUP closely monitors these issues,” says Mary L. Heen, AAUP general counsel and a professor of law at the University of Richmond. “The government’s argument that tenure buyout payments should be taxed as wages raises fundamental issues about the nature of tenure as well as bottom-line dollars-andcents concerns for faculty at colleges and universities with early retirement incentive programs.”
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