United States District Court, S.D. West Virginia, Huntington Division
MEMORANDUM OPINION AND ORDER
C. CHAMBERS, UNITED STATES DISTRICT JUDGE
before the Court is Plaintiff Noel Jordan’s Motion to
Enforce Settlement and Defendants’ Motion to Strike
Portions of Plaintiff’s Supplemental Reply Brief. ECF
Nos. 24, 35. For the following reasons, the Court
DENIES both motions.
motions arise from a settlement of an action to collect
disability benefits under various sections of the Employee
Retirement Income Security Act of 1974 (ERISA). According to
Plaintiff, the parties engaged in arm’s-length
negotiations and agreed upon a lump-sum payment to Plaintiff.
However, when Plaintiff received a draft of the settlement
agreement, counsel noticed that one of the terms of the
settlement provided that the lump-sum payment would be
reduced by any applicable tax withholdings. Plaintiff’s
counsel asserts the parties never considered nor discussed a
reduction in the lump-sum payment for tax withholdings.
Unable to resolve the issue, Plaintiff filed the current
motion requesting the Court order payment of the entire lump
sum without any deductions.
reviewing the initial briefing, the Court directed the
parties to submit supplemental briefing. Specifically, the
Court asked the parties to address the impact 26 U.S.C.
§ 105(a) has on this case, together with any other
statutes and case law applicable to the nature and type of
disability payments sought by Plaintiff in the Complaint. As
that briefing is now complete, the Court rules as follows.
Response and Supplemental Response to Plaintiff’s
motion, Defendants AT&T Integrated Disability Service
Center Disability Plan and Sedgwick Claims Management Services
Inc. assert that the agreed upon settlement payment
represents replacement wages for short and long-term
disability benefits sought by Plaintiff in the Complaint. As
such, Defendants argue they are legally required to treat the
settlement payment as wages and deduct
withholdings.See Hemelt v. U.S., 122 F.3d 204,
209 (4th Cir. 1997) (holding that an ERISA settlement based
on allegations that the plaintiffs were discharged so the
employer could avoid pension liability is a settlement
“designed to approximate, recovery for lost wages and
other economic harms” and, therefore, is taxable).
case, Plaintiff claimed he was unable to work and brought
this action seeking disability benefit payments. The Summary
Plan Description (the Plan) provides, in relevant part, that
a claimant may receive “ongoing income if [the
claimant] become[s] Disabled due to an illness or injury and
[is] unable to work.” Summ. Plan Description,
Ex. A, at 6, ECF No. 1-1. The Plan then states that
short-term disability benefits are to be calculated as a
percentage of the claimant’s pay “based on [the
claimant’s] Term of Employment[.]”
Id. In light of this language and
Plaintiff’s underlying claim in his Complaint to
collect these benefits, the Court finds the settlement
clearly qualifies as replacement wages for tax purposes. In
fact, Defendants maintain that, during the time period prior
to this litigation that Plaintiff was approved for short-term
disability benefits, taxes were withheld from the benefits he
received. Moreover, although it appears the parties did not
specifically discuss tax withholdings during their settlement
negotiations, the Court finds it is of no consequence to
Defendants’ legal obligation to withhold those taxes.
Defendants are required to make those withholdings despite
any misunderstanding of the character of the settlement by
Plaintiff. See Hemelt, 122 F.3d at 208 (stating
“the possibility that the parties . . . misapprehended
the limited nature of ERISA remedies does not alter [the
Fourth Circuit’s] characterization of the awards”
as taxable); Haile v. Combined Ins. Co., No.
1:99CV139, 2000 WL 1448596, at *1-2 (W.D. N.C. Apr. 11, 2000)
(finding the defendant was obliged to withhold taxes from a
backpay award under Title VII even though the settlement
agreement was silent on the issue).
the Court finds that 26 U.S.C. §§ 105, 3401, and
3402 of the Internal Revenue Code further support the
Court’s conclusion that Defendants must withhold taxes
from the settlement in this case. Section 105(a) specifically
Amounts attributable to employer
contributions.--Except as otherwise provided in this
section, amounts received by an employee through accident or
health insurance for personal injuries or sickness shall be
included in gross income to the extent such amounts (1) are
attributable to contributions by the employer which were not
includible in the gross income of the employee, or (2) are
paid by the employer.
26 U.S.C. § 105. Section 3401 broadly defines
“wages” as “all remuneration . . . for
services performed by an employee and his employer, including
the cash value of all remuneration (including benefits) paid
in any medium other than cash[.]” 26 U.S.C. §
3401, in part. Section 3402(a)(1) then mandates that
“every employer making payment of wages shall deduct
and withhold upon such wages a tax determined in accordance
with tables or computational procedures prescribed by the
Secretary.” 26 U.S.C. § 3402(a), in part. In this
case, Defendants submitted a Declaration by Jeremy Siegel,
Associate Director of Benefits with AT&T Services, Inc.
Decl. of Jeremy Siegel, at ¶2, ECF No.
33-1. In his Declaration, Mr. Siegel stated that “[n]o
portion of the proposed STD benefit payment contemplated by
the settlement agreement at issue was previously reported to
the employee or the IRS as gross income to the
employee” as required. Id. at
¶4. In light of these statutory requirements
and the fact the payment clearly represents replacement
wages, the Court FINDS Defendants are
required to withhold taxes.
for the foregoing reasons, the Court DENIES
Plaintiff’s Motion to Enforce Settlement and his
request therein for the Court to direct Defendants to pay the
full amount of the lump-sum payment without any withholdings.
ECF No. 24. Although Plaintiff further complains that the
lump-sum payment includes his attorney’s fees and costs
and those amounts should not be taxed, Defendants agreed in
their initial Response brief that the “settlement
payment should be treated as wages, except for the portion
that can reasonably be attributed to attorney’s
fees[.]” Resp. in Opp’n. to Pl.’s Mot.
to Enforce Settlement, at 3, ECF No. 28. Therefore, as
the parties ultimately agree on that particular issue, the
Court DENIES Defendants’ Motion to
Strike Portions of Plaintiff’s Supplemental Reply Brief
in which the matter is raised. ECF No. 35.
Court DIRECTS the Clerk to send a copy of
this Order to counsel of record and any unrepresented
Defendants state that AT&T is
incorrectly identified as “AT&T Integrated
Disability Service Center Disability Plan.” The correct
title is AT&T ...