Prejudgment Interest Under the Back Pay Act for Refunds of Federal Insurance Contributions Act Overpayments

• Decision Date: 31 May 1994
• Docket Number: 94-16
• Citation: 18 Op. O.L.C. 127
• Court: Opinions of the Office of Legal Counsel of the Department of Justice
• Parties: Prejudgment Interest Under the Back Pay Act for Refunds of Federal Insurance Contributions Act Overpayments

18 Op. O.L.C. 127

Prejudgment Interest Under the Back Pay Act for Refunds of Federal Insurance Contributions Act Overpayments

No. 94-16

United States Department of Justice

May 31, 1994

WALTER DELLINGER Assistant Attorney General Office of Legal Counsel.

Prejudgment Interest Under the Back Pay Act for Refunds of Federal Insurance Contributions Act Overpayments

The Back Pay Act's authorization of prejudgment interest does not apply to the return of a Federal Insurance Contributions Act tax overpayment.

Even if the Back Pay Act did apply to such returns, an agency's specific exemption from liability under the Federal Insurance Contributions Act would override the provisions of the Back Pay Act.

MEMORANDUM OPINION FOR THE ACTING GENERAL COUNSEL DEPARTMENT OF DEFENSE

This memorandum responds to your Office's request for our opinion whether civilian employees of the Department of Defense ("DoD") who receive from the Internal Revenue Service ("IRS") a refund of taxes that were deducted from their pay pursuant to 26 U.S.C. § 3121(a) of the Federal Insurance Contributions Act, 26 U.S.C §§ 3101-3128 ("FICA"), as amended, are entitled to receive prejudgment interest on the refund from DoD pursuant to the Back Pay Act, 5 U.S.C. § 5596, as amended. We conclude that these DoD employees are not entitled to receive additional interest from DoD.

I. BACKGROUND

FICA imposes a tax on the income of every employee, calculated as a percentage of wages, for the support of old-age, survivors disability, and hospital insurance. 26 U.S.C. § 3101. A corresponding payroll tax for the same purpose is imposed on every employer with respect to each employee. Id. §3111. Under FICA, every employer must deduct its employees' share of the FICA tax from their wages "as and when paid." Id. § 3102(a). All sums collected must be paid over to the IRS. Id. § 3102(b). In 1983, FICA taxation was extended to all subsequently hired civilian federal employees. See Social Security Act Amendments of 1983, Pub. L. No. 98-21, § 101(b)(1), 97 Stat. 65, 69 (codified as amended at 26 U.S.C § 3121(b)(5), (6)); S. Rep. No. 98-23, at 5 (1983). Each federal agency is treated as a separate employer for purposes of FICA. See 26 U.S.C. § 3122.

Certain civilian DoD employees receive allowances for living quarters and for temporary lodging costs pursuant to the Overseas Differentials and Allowances Act, 5 U.S.C. § 5923, as amended ("ODAA allowances"). ODAA allowances have [ 128] always been expressly exempted from income tax. See 26 U.S.C. § 912(1)(C); Anderson v. United States, 929 F.2d 648, 649 (Fed. Cir. 1991). Because FICA does not expressly exempt ODAA allowances from taxation, an issue arose as to whether such payments were taxable for that purpose. DoD concluded that they were and, accordingly, deducted appropriate sums from its employees' ODAA allowances and paid those funds over to the IRS. See Anderson v. United States, 16 CI. Ct. 530, 532-33 (1989) At least some of the affected employees filed administrative claims for refunds, which the IRS denied. Id. at 533-34.

The IRS's denial of these claims did not survive judicial scrutiny. In Anderson, a number of DoD employees brought suit against the United States, seeking a refund of the FICA taxes paid on ODAA allowances for the years 1984 through 1987. The Court of Federal Claims granted them summary judgment, holding that ODAA allowances are exempt from FICA taxation. 16 CI. Ct. at 541. The decision was affirmed on appeal. Anderson v. United States, 929 F.2d 648 (Fed. Cir. 1991). The United States did not petition the Supreme Court for a writ of certiorari. As a result of Anderson, certain DoD employees (and other similarly situated federal employees) will receive refunds of the contested FICA taxes ("Anderson employees").

II. ISSUE FOR CONSIDERATION

We have been asked to determine the amount of interest that must be paid on FICA tax refunds to Anderson employees. Absent a waiver of sovereign immunity, the United States and its agencies are not liable for prejudgment interest. See, e.g., Library of Congress v. Shaw, 478 U.S. 310, 310, 314-15 (1986); Loeffler v. Frank, 486 U.S. 549, 554, 556-57 (1988). The Internal Revenue Code ("Code") contains such a waiver with respect to refunds of FICA tax overpayments. See 26 U.S.C. §§ 6413(b), 6611(a). The Office of Personnel Management ("OPM") and DoD agree that the IRS must pay Anderson employees prejudgment interest on their FICA tax refunds pursuant to these provisions.

The Back Pay Act, however, also expressly permits prejudgment interest on an award of "back pay, " as defined by that Act. See 5 U.S.C. § 5596(b); Brown v. Secretary of the Army, 918 F.2d 214, 216-18 (D.C. Cir. 1990), cert, denied, 502 U.S. 810 (1991). OPM believes that Anderson employees are entitled to receive interest on their refunds under the Back Pay Act. See Letter for Albert V. Conte, Director, Defense Finance and Accounting Service, Department of Defense, from Constance Berry Newman, Director, Office of Personnel Management at 1 (Apr. 27, 1992) ("Newman Letter"); Letter for Philip M. Hitch, Deputy General Counsel (Fiscal), Department of Defense, from Arthur Troilo III, General Counsel, Office of Personnel Management at 3-4 (Nov. 30, 1992) ("Troilo Letter"). Accordingly, OPM instructed federal agencies that: "Because IRS computes interest in a manner [ 129] that would result in a smaller interest payment to employees, agencies must compute interest due employees under the back pay law (5 U.S.C. 5596)." Attachment to Memorandum for Directors of Personnel from Claudia Cooley, Associate Director for Personnel Systems and Oversight at 3 (Dec. 3, 1991). OPM further instructed that each agency must add to the IRS's interest payment an amount sufficient to make the total equal to the larger amount of interest prescribed under the Back Pay Act. Newman Letter at 1-2. OPM suggests that agencies failing to make this payment could be held liable for the additional amount. Troilo Letter at 3, 4. DoD's position is that it has no legal obligation to pay any additional interest.^[1]

III. LEGAL ANALYSIS

We conclude that the Back Pay Act's authorization of prejudgment interest does not apply to the return of a FICA tax overpayment. The Back Pay Act was not intended to remedy this type of injury. Indeed, as discussed below, FICA contains a provision that exempts employers from liability in these circumstances. Consequently, there is no legal basis for OPM's instruction to agencies to pay additional interest computed under the Back Pay Act.

A. THE REQUIREMENTS FOR APPLICATION OF THE BACK PAY ACT ARE NOT MET

The Back Pay Act provides:

An employee of an agency who, on the basis of a timely appeal or an administrative determination ... is found by appropriate authority under applicable law, rule, regulation, or collective bargaining agreement, to have been affected by an unjustified or unwarranted personnel action which has resulted in the withdrawal or reduction of all or part of the pay, allowances, or differentials of the employee-

... is entitled, on correction of the personnel action, to receive for the period for which the personnel action was in effect- [ 130] ... an amount equal to all or any part of the pay, allowances, or differentials, as applicable which the employee normally would have earned or received during the period if the personnel action had not occurred, less any amounts earned by the employee through other employment during that period.

5 U.S.C. § 5596(b).

In general, the Back Pay Act grants a cause of action to an employee who has lost pay as a result of a wrongful personnel action. Its purpose is to permit such an employee to recover money damages sufficient to make the employee whole. United States v. Testan, 424 U.S. 392, 407 (1976): Wells v. FAA, 755 F.2d 804, 807 (11th Cir. 1985). The need for the Act arises "by the fact that, absent specific command of statute or authorized regulation, an appointed employee subjected to unwarranted personnel action does not have a cause of action against the United States." United States v. Hopkins, 427 U.S. 123, 128 (1976). The Supreme Court repeatedly has adhered to a narrow construction of the Back Pay Act, finding that it authorizes money damages only in the '"carefully limited circumstances'" expressly set forth in the statute. United States v. Mitchell, 463 U.S. 206, 217 (1983) (quoting United States v. Testan, 424 U.S. at 404).

OPM maintains that the Back Pay Act applies concurrently with the provisions of the Code as a remedy for an agency's erroneous deduction of too much FICA tax from its employees' earnings. OPM has not, however, cited (nor have we found) any reported decision applying the Back Pay Act in such circumstances. In light of the Supreme Court's strict construction of the Back Pay Act, the absence of authority suggests that OPM's novel application should be approached with skepticism.

OPM, moreover, has not demonstrated that the specific requirements of a Back Pay Act action have been met. The first requirement is that an employee must have been subject to an "unjustified or unwarranted personnel action." The legislative history of the Back Pay Act discusses the types of personnel actions falling within its purview:

H.R. 1647 does not prescribe the specific types of personnel actions covered. Separations, suspensions, and demotions constitute the great bulk of cases in which employees lose pay or allowances, but other unwarranted or unjustified actions affecting pay or allowances could occur in the course of reassignments and change from full-time to part-time work. If such actions are found to be unwarranted or unjustified, employees would be entitled to backpay benefits when the actions are corrected. [ 131] S. Rep.

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