Why is there a referral "Tier II compensation appears to be under-reported" when
there is no reporting instruction that Tier I and Tier II compensation must be
equal?
The Railroad Retirement Board does various reasonableness checks on the reported
service and compensation data to help insure the accuracy of our records. For
example, there is a check that the sum of the reported service months equals the
reported service month total. Similarly, if Tier II compensation is less than
the Tier II maximum, then Tier II should equal Tier I compensation. There is an
exception which is discussed at the end.
Because sick pay is reported separately, all payments reported on the annual
service and compensation report are taxable and creditable as both Tier I and
Tier II. A single payment subject to Tier I and Tier II taxes can yield only a
single amount creditable as Tier I and Tier II compensation. This applies until
a payment is no longer subject to Tier II tax because the maximum has been
reached.
But what if sick pay is paid first? Won't
the Tier I maximum be reached before the Tier II maximum?
Let's look at some examples of compensation as it is paid, month by month.
Example 1
An employee has a 1999 salary of $60,000; is covered under a sick pay plan
paying $2,000 bimonthly; and is off sick for 6 months.
Sick Pay |
4,000 |
4,000 |
4,000 |
4,000 |
4,000 |
4,000 |
0 |
0 |
0 |
0 |
0 |
0 |
24,000 |
Tier 1 |
0 |
0 |
0 |
0 |
0 |
0 |
5,000 |
5,000 |
5,000 |
5,000 |
5,000 |
5,000 |
30,000 |
Tier 2 |
0 |
0 |
0 |
0 |
0 |
0 |
5,000 |
5,000 |
5,000 |
5,000 |
5,000 |
5,000 |
30,000 |
Neither the Tier I nor Tier II annual maximum is reached. The annual service and
compensation report will show Tier I and Tier II compensation of $30,000, thus
passing the edit check. The annual sick pay report will show $24, 000. The
combined Tier I compensation, which does not appear on any report to the RRB, is
$54,000.
Example 2
An employee has a 1999 salary of $84,000; is covered under a sick pay insurance
plan paying 100% salary; and is off sick for 2 months.
Sick Pay |
7,000 |
7,000 |
7,000 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
21,000 |
Tier 1 |
0 |
0 |
0 |
7,000 |
7,000 |
7,000 |
7,000 |
7,000 |
7,000 |
7,000 |
2,600 |
0 |
51,600 |
Tier 2 |
0 |
0 |
0 |
7,000 |
7,000 |
7,000 |
7,000 |
7,000 |
7,000 |
7,000 |
4,700 |
0 |
53,700 |
The employee reached both annual maximums during the year so the payments made
after that point are no longer subject to the Tier tax. The annual service and
compensation reported will show Tier I compensation of $58,600 and Tier II
compensation of $53,700, thus passing the edit check. The annual sick pay report
will show $14,000. The combined Tier I, which does not show on any report to the
RR, is $72,000.
NOTE: If the employee worked in every month, service is credited for November
and December. Since RUIA is based on monthly maximums, RUIA tax and credit would
apply to all 12 months.
Is there a situation where Tier I is less than the Tier II maximum and Tier I
and Tier II are not equal?
Yes, but the circumstances occur very rarely. In the last example, we will
extend the employee'' sick time to 3 months.
Example 3
Sick Pay |
7,000 |
7,000 |
7,000 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
21,000 |
Tier 1 |
0 |
0 |
0 |
7,000 |
7,000 |
7,000 |
7,000 |
7,000 |
7,000 |
7,000 |
2,600 |
0 |
51,600 |
Tier 2 |
0 |
0 |
0 |
7,000 |
7,000 |
7,000 |
7,000 |
7,000 |
7,000 |
7,000 |
4,700 |
0 |
53,700 |
The annual service and compensation report
will show Tier I compensation of $51,600 and Tier II compensation of $53,700.
These amounts will fail the edit check but are correct. What is unique about the
Example 3? This employee has high earnings and high sick pay coverage and
received sick pay in the early part of the year.
The specific criteria where Tier II may correctly exceed Tier I are:
- Sick pay exceeds the difference between the
Tier I and Tier II maximums.
- Sick pay is paid before non-sick pay
earnings reach the Tier II maximum.
- Combined sick pay and other Tier I
compensation exceed the Tier II maximum.
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