For regular railroad employers, there are three types of creditable compensation which must be reported to the Railroad Retirement Board (RRB): Tier I, Tier II, and Railroad Unemployment Insurance Act compensation. For sickness payors, only Tier I compensation must be reported because, under the Railroad Retirement Act (RRA), sick pay is creditable only for the purpose of computing the Tier I portion of a railroad retirement annuity.

Tier II compensation is comparable to a private pension. The benefit financing, earnings credit, and annuity benefit formula are based on employment solely in the railroad industry. Railroad Unemployment Insurance Act compensation is based upon the employee's taxable earnings to a monthly limit.

Tier I Compensation

Tier I compensation is subject to annual maximums. The Tier I compensation maximum is also known as the Tier I earnings base.

Tier I compensation is creditable up to the amount of the annual Tier I maximum. Amounts paid over the Tier I maximum are not creditable as Tier I compensation and thus are not reported to the RRB. For example, the 1995 Tier I earnings maximum is $61,200.00. If an employee receives $24,000.00 creditable sick pay in 1995, the entire amount of sickness payments is creditable Tier I compensation. On the other hand, if an employee is paid $65,000.00 in creditable sick pay in 1995 the amount in excess of $61,200.00 is not creditable Tier I compensation.

Generally, sickness payments made in a year would not exceed the Tier I annual maximum amount, but combined sickness payments and other Tier I compensation may exceed the maximum. To prevent crediting and taxing sickness payments in excess of the maximum, the sickness payor should obtain information about the amount of creditable Tier I compensation paid by the rail employer. See Chapter 4.

Notification of Compensation Maximums

The Tier I maximum is established by the Social Security Administration and published in the Federal Register. On or about October 15 of each year, the RRB sends all employers, including sick pay employers, a circular letter which provides information about the tax rates and earnings maximums for the following year. Again, sickness payors need only the Tier I maximum earnings base and Tier I tax rate. Other third party sick pay payors who are not employers under the RRA should contact the railroad employer for whom they are paying benefits to obtain the earnings base and tax rate.