Prepared by Public Affairs 312-751-4777
Railroad employees frequently ask the Railroad Retirement Board how the
acceptance of a buy-out from a railroad employer affects their future
eligibility for benefits under the
Railroad Retirement and
Railroad Unemployment Insurance Acts. The following questions and answers
provide information on this subject.
1. Would leaving railroad work and accepting
a buy-out mean that an employee forfeits any future entitlement to an annuity
under the Railroad Retirement Act?
As long as an employee has acquired at least 120 months (10 years) of creditable
rail service or 60 months (5 years) of creditable service if such service was
performed after 1995, he or she would still be eligible for a regular railroad
retirement annuity upon reaching retirement age, or, if totally and permanently
disabled, for an annuity before retirement age, regardless of whether or not a
buy-out was ever accepted.
However, if a person permanently leaves railroad employment before attaining
retirement age, the employee may not be able to meet the requirements for
certain other benefits, particularly the current connection requirement for
annuities based on occupational, rather than total, disability and for
supplemental annuities paid by the Board to career employees.
In addition, if an employee does not have a current connection, the Social
Security Administration, rather than the Railroad Retirement Board, would have
jurisdiction of any survivor benefits that become payable on the basis of the
employee's combined railroad retirement and social security covered earnings in
the future. The survivor benefits payable by the Board are generally greater
than those paid by the Social Security Administration.
2. How are buy-out payments treated under
the Railroad Retirement and Railroad Unemployment Insurance Acts?
Payments that result from abolishment of an employee's job are creditable as
compensation under the Railroad Retirement and Railroad Unemployment Insurance
Acts. While the actual names of these employer payments may vary, the treatment
given them by the Board will depend upon whether the employee
relinquished or
retained his or her job rights. If the employee
relinquishes job rights to
obtain the compensation, the Board considers the payment a
separation allowance.
While all compensation subject to tier I payroll taxes is considered in the
computation of a railroad retirement annuity, no additional service months can
be credited after the month in which rights are relinquished.
The Board considers the buy-out payment a
dismissal allowance, even though the employer might designate the payment
a separation allowance, if the employee
retains job rights and receives monthly payments credited to the months
for which they are allocated under the dismissal allowance agreement. This is
true even if the employee relinquishes job rights after the end of the period
for which a monthly dismissal allowance was paid. However, supplemental
unemployment or sickness benefits paid under a Railroad Retirement
Board-approved nongovernmental plan by a railroad or third party are not
considered compensation for railroad retirement purposes.
3. Suppose an employee is given a choice
between (1) accepting a separation allowance, relinquishing job rights and
having the payment he or she receives credited to one month or (2) accepting a
dismissal allowance, retaining job rights and having the payment credited to the
months for which it is allocated. What are some of the railroad retirement
considerations the employee should keep in mind?
Individual factors such as an employee's age and service should be considered.
For example, if an employee is already eligible to begin receiving a railroad
retirement annuity, he or she may find it advantageous to relinquish job rights,
accept a separation allowance, and have the annuity begin on the earliest date
allowed by law. Any periodic payments made after that date would not preclude
payment of the annuity because the employee has relinquished job rights.
On the other hand, some younger employees may find it more advantageous to
retain job rights and accept monthly compensation payments under a dismissal
allowance if these payments would allow them to acquire 120 months of creditable
rail service (or 60 months of creditable rail service if such service was
performed after 1995) and establish future eligibility for a railroad retirement
annuity. Also, additional service months might allow a long-service employee to
acquire 30 years of service, which is required for early retirement at age 60,
or 25 years of rail service, which is required for supplemental annuities paid
by the Board. Establishing 25 years of service could also aid an employee in
maintaining a current connection under the Railroad Retirement Act.
4. How would acquiring 25 years of railroad
service assist an employee in maintaining a current connection?
The current connection requirement is normally met if the employee has railroad
service in at least 12 of the last 30 consecutive months before retirement or
death. If an employee does not qualify on this basis but has 12 months of
service in an earlier 30-month period, he or she may still meet the requirement
if the employee does not work outside the railroad industry in the interval
following the 30-month period and the employee's retirement, or death if that
occurs earlier. Nonrailroad employment in that interval will likely break the
employee's current connection.
However, since 1981, a current connection can be maintained for purposes of
supplemental and survivor annuities, but not occupational disability annuities,
if the employee completed 25 years of railroad service, was involuntarily
terminated without fault from the railroad industry, and did not thereafter
decline an offer to return to work in the same class or craft as his or her most
recent railroad service, regardless of the location of the work offered. If all
of these requirements are met, an employee's current connection may not be
broken, even if the employee works in regular nonrailroad employment after the
30-month period and before retirement or death.
5. Would the acceptance of a buy-out have
any effect on determining whether an employee could maintain a current
connection under the exception provision?
In cases where an employee has no option
to remain in the service of his or her employer, the termination of the
employment is considered involuntary, regardless of whether the employee does or
does not receive a buy-out.
However, an employee who chooses a
buy-out instead of keeping his or her seniority rights to railroad employment
would, for railroad retirement purposes, generally be considered to have
voluntarily terminated railroad service, and consequently would not maintain a
current connection under the exception provision.
6. An employee with 25 years of service is
offered a buy-out with the option of either taking payment in a single lump sum
or of receiving monthly payments until retirement age. Could the method of
payment affect the employee's current connection under the exception provision?
If the employee had the choice to remain
in employer service and voluntarily
relinquished job rights prior to accepting the payments, his or her
current connection would not be maintained under the exception provision,
regardless of which payment option is
chosen. Therefore, nonrailroad work after the 30-month period and before
retirement, or the employee’s death if earlier, could break the employee's
current connection. Such an employee could only meet the current connection
requirement under the normal procedures.
7. Is it always advantageous to maintain a
current connection?
While a current connection is generally advantageous for railroad retirement
purposes, the costs of maintaining a current connection could outweigh its
value, depending on individual circumstances. There may be other financial or
personal factors involved besides railroad retirement eligibility and/or the
preservation of a current connection, and these will vary from individual to
individual.
8. Are separation and dismissal allowances
subject to railroad retirement payroll taxes?
Under the Railroad Retirement Tax Act, which is administered by the Internal
Revenue Service, payments of compensation, including most buy-outs, are subject
to tier I and tier II taxes on earnings up to the annual maximum earnings bases
in effect when the compensation is paid. This is true whether payment is made in
a lump sum or on a periodic basis.
To the extent that a separation allowance does not yield additional tier II
railroad retirement service credits, a lump sum, approximating part or all of
the railroad retirement tier II payroll taxes deducted from the separation
allowance, will be paid upon retirement to employees meeting minimum service
requirements or their survivors. This lump sum applies to separation allowances
made after 1984.
If an employee receives a dismissal allowance, he or she receives service
credits for the tier II taxes deducted from the dismissal allowance payments.
Consequently, such a lump sum would not be payable.
If an employee has an option about how a buy-out is to be distributed, he or she
should consider the impact of both payroll taxes and income tax on the payments.
Employees with questions in this regard should contact the payroll department of
their railroad employer and/or the Internal Revenue Service.
9. Would an employee be able to receive
unemployment or sickness benefits paid by the Railroad Retirement Board after
accepting a separation allowance?
An employee who accepts a separation allowance cannot receive unemployment or
sickness benefits for roughly the period of time it would have taken to earn the
amount of the allowance at his or her straight-time rate of pay. This is true
regardless of whether the allowance is paid in a lump sum or installments. For
example, if an employee's salary was $3,000 a month without overtime pay and the
allowance was $12,000, he or she would be disqualified from receiving benefits
for approximately four months.
10. Can an employee receive unemployment
benefits after his or her separation allowance disqualification period has
ended?
An employee who has not obtained new employment by the end of the
disqualification period and is still actively seeking work may be eligible for
unemployment benefits at that time. The employee must meet all the usual
eligibility requirements, including the availability for work requirement. An
employee can establish his or her availability for work by demonstrating a
willingness to work and making significant efforts to obtain work. In judging
the employee's willingness to work, the Board considers, among other factors,
the reason the employee accepted the separation allowance and the extent of his
or her work-seeking efforts during the disqualification period.
11. How would the acceptance of a dismissal
allowance affect an employee's eligibility for unemployment and sickness
benefits?
Payments made under a dismissal allowance would be considered remuneration under
the Railroad Unemployment Insurance Act and the employee would not be eligible
for unemployment or sickness benefits during the period the dismissal allowance
is being paid. The employee may, of course, be eligible for benefits after the
end of this period if he or she is still actively seeking work or is unable to
work because of illness or injury.
12. Where can employees get more specific
information on how benefits payable by the Board are affected by a buy-out?
Employees can contact an office of the Railroad Retirement Board by calling toll
free at 1-877-772-5772 for information as to how a buy-out they have been
offered could affect their eligibility for benefits. However, Board personnel
are not equipped to advise on other financial or personal factors, which may
also bear consideration. Most offices are open to the public from 9:00 a.m. to
3:30p.m., Monday through Friday, except on Federal holidays. Employees can also
send their questions to a Railroad Retirement Board office via secure e-mail
through the agency’s Web site, www.rrb.gov.
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