A decision by the U.S. Supreme Court found that the portion of a damages award attributable to lost wages for a workplace injury is considered to be taxable compensation under the Railroad Retirement Tax Act (RRTA). The decision in BNSF Railway Co. v. Loos (No. 17-1042) was released March 4.
Michael Loos pursued a claim against his then-employer, BNSF, for a workplace injury under the Federal Employers’ Liability Act (FELA), a law allowing railroad workers to file suit against their employers for on-the-job injuries. Loos was awarded damages of $126,212, of which $30,000 was attributable to lost wages from BNSF. BNSF indicated that it would withhold railroad retirement taxes from the lost wages portion of the award. Loos disagreed with this theory of withholding, arguing that, consistent with the RRTA’s definition of compensation, the payment must be “for services rendered” in order to be taxable and instead of compensation for services rendered the payment at issue compensated for an injury.
The issue worked its way from the lower courts to the Supreme Court. Oral arguments took place on November 6, 2018, and the court reached its decision on a 7-2 vote. In reversing the decision of the Circuit Court of Appeals for the Eighth Circuit, the Supreme Court held that the RRTA’s definition of compensation includes not simply pay for active service, but also “pay for periods of absence from active service provided there is an employer-employee relationship.” Whether the employer chooses to make the payment through a voluntary settlement or is involuntarily made to do so through an award of damages is immaterial so long as the payment for lost wages is provided based on the recipient’s status as a service-rendering employee.
The Internal Revenue Service administers the RRTA and, therefore, is the official source for Railroad Retirement tax information.
However, for purposes only of illustrating the court’s decision, the following example is provided.
In 2019, railroad employers and employees are subject to a Railroad Retirement tier I payroll tax of 7.65 percent (6.20 percent on earnings up to $132,900 for retirement, and 1.45 percent on all earnings for Medicare hospital insurance) and a tier II tax of 13.1 percent and 4.9 percent, respectively, on earnings up to $98,700. (An additional 0.9 percent in hospital insurance taxes, 2.35 percent in total, applies to an individual’s income exceeding $200,000, or $250,000 for a married couple filing a joint tax return).
If a railroad employee with no other earnings in 2019 is awarded $550,000 due to an on-the-job injury, of which $200,000 is attributable to lost wages (both past and future), the employer and employee would be required to pay $11,139.80 in tier I taxes ($8,239.80 retirement and $2,900 Medicare) and $12,929.70 and $4,836.30, respectively, in tier II taxes. (The additional Medicare tax would not apply as the award for lost wages did not exceed $200,000).
Under the Railroad Retirement Act, a “current connection with the railroad industry” is one of the eligibility requirements for occupational disability annuities and is one of the factors that determines whether the Railroad Retirement Board (RRB) or the Social Security Administration has jurisdiction over the payment of monthly benefits to survivors of a railroad employee. It is also one of the eligibility requirements for supplemental annuities.
The following questions and answers describe the current connection requirement and the ways the requirement can be met.
1.How is a current connection determined under the Railroad Retirement Act?
To meet the current connection requirement, an employee must generally have been credited with railroad service in at least 12 months of the 30 months immediately preceding the month his or her railroad retirement annuity begins. If the employee died before retirement, railroad service in at least 12 months in the 30 months before the month of death will meet the current connection requirement for the purpose of paying survivor benefits.
However, 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 current connection requirement. This alternative generally applies if the employee did not have any regular employment outside the railroad industry after the end of the last 30-month period which included 12 months of railroad service, and before the month the annuity begins or the date of death.
Once a current connection is established at the time the railroad retirement annuity begins, an employee never loses it, no matter what kind of work is performed thereafter.
2.Can nonrailroad work before retirement break a former railroad employee’s current connection?
Yes. Full or part-time work for a nonrailroad employer in the interval between the end of the last
30-month period including 12 months of railroad service and the month an employee’s annuity begins, or the month of death if earlier, can break a current connection, even where the earnings are minimal.
Self-employment in an unincorporated business will not break a current connection. However, if the business is incorporated the individual is considered to be an employee of the corporation, and such self-employment can break a current connection.
Federal employment with the Department of Transportation, National Transportation Safety Board, Surface Transportation Board, National Mediation Board, Railroad Retirement Board or Transportation Security Administration will not break a current connection. State employment with the Alaska Railroad, as long as that railroad remains an entity of the State of Alaska, will not break a current connection. Also, railroad service in Canada for a Canadian railroad will neither break nor preserve a current connection.
3.Are there any exceptions to these normal procedures for determining a current connection?
A current connection can also be maintained, for purposes of survivor and supplemental annuities, but not for an occupational disability annuity, if the employee completed 25 years of railroad service, was involuntarily terminated without fault from his or her last job in the railroad industry, and did not thereafter decline an offer of employment in the same class or craft in the railroad industry regardless of the distance to the new position.
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. This exception to the normal current connection requirement became effective October 1, 1981, but only for employees still living on that date who left the rail industry on or after October 1, 1975, or who were on leave of absence, on furlough or absent due to injury on October 1, 1975.
4.Would the acceptance of a buy-out have any effect on determining whether an employee could maintain a current connection under this exception provision?
Generally, in cases where an employee has no option to remain in the service of his or her railroad employer, the termination of the employment is considered involuntary, regardless of whether the employee does or does not receive a buy-out.
However, if an employee has the choice of either accepting a position in the same class or craft in the railroad industry or termination with a buy-out, accepting the buy-out is a part of his or her voluntary termination, and the employee would not maintain a current connection under the exception provision.
5.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?
The employee must always relinquish job rights in order to accept the buy-out, regardless of whether it is paid in a lump sum or in monthly payments. Neither payment option would extend the 30-month period. The determining factor for the exception provision to apply when a buy-out is paid is not the payment option. It is whether or not the employee stopped working involuntarily.
An employee considering accepting a buy-out should also be aware that if he or she relinquishes job rights to accept the buy-out, the compensation cannot be used to credit additional service months beyond the month in which the employee severed his or her employment relation, regardless of whether payment is made in a lump sum or on a periodic basis.
6.What if the buy-out agreement allows the employee to retain job rights and receive monthly payments until retirement age?
The RRB considers the buy-out to be a dismissal allowance. When a monthly dismissal allowance is paid, the employee retains job rights, at least until the end of the period covered by the dismissal allowance. If the period covered by the dismissal allowance continues up to the beginning date of the railroad retirement annuity, railroad service months would be credited to those months. These railroad service months would provide at least 12 railroad service months in the 30 months immediately before the annuity beginning date and maintain a regular current connection. They will also increase the number of railroad service months used in the calculation of the railroad retirement annuity.
7.Could the exception provision apply in cases where an employee has 25 years of railroad retirement coverage and a company reorganization results in the employee’s job being placed under social security coverage?
The exception provision has been considered applicable by the RRB in cases where a 25-year employee’s last job in the railroad industry changed from railroad retirement coverage to social security coverage and the employee had, in effect, no choice available to remain in railroad-retirement-covered service. Such 25-year employees have been deemed to have a current connection for purposes of survivor and supplemental annuities.
8.Where can a person get more specific information on the current connection requirement?
More information is available by visiting the RRB’s website, RRB.gov,or by calling an RRB office toll-free at 1-877-772-5772. Persons can also find the address of the RRB office servicing their area by calling the toll-free number, or by clicking on the Field Office Locator tab at RRB.gov. Most RRB offices are open to the public on weekdays from 9:00 a.m. to 3:30 p.m., except on Wednesdays when offices are open from 9:00 a.m. to 12:00 p.m. RRB offices are closed on Federal holidays.
Many railroad employees have at some time served in the Armed Forces of the United States. Under certain conditions, their military service may be credited as rail service under the Railroad Retirement Act.
The following questions and answers provide information on how military service may be credited towards railroad retirement benefits.
1. Under what conditions can military service be credited as railroad service?
The intent behind the crediting of military service under the Railroad Retirement Act is to prevent career railroad employees from losing retirement credits while performing active duty military service during a war or national emergency period. Therefore, to be creditable as compensation under the Railroad Retirement Act, service in the U.S. Armed Forces must be preceded by railroad service in the same or preceding calendar year. With the exceptions noted later, the employee must also have entered military service when the United States was at war or in a state of national emergency or have served in the Armed Forces involuntarily. Military service is involuntary when an employee is required by law, such as Selective Service System conscription or troop call-up from a reserve unit, to leave railroad service to perform active duty military service.
Only active duty military service is creditable under the Railroad Retirement Act. A person is considered to have been on active duty while commissioned or enrolled in the active service of the Armed Forces of the United States (including the U.S. Coast Guard), or while ordered to Federal active duty from any reserve component of the uniformed Armed Forces.
2.What are some examples of creditable service performed by a member of a reserve component, such as the Army Reserve?
Any military service a reservist was required to perform as a result of a call-up to active duty, such as during a partial mobilization, would be creditable under the Railroad Retirement Act, so long as the military service was preceded by railroad service in the same or preceding year.
Annual training duty as a member of a reserve component of a uniformed service is also considered active duty and may be creditable, provided the employee service requirement is met. The period of active duty for training also includes authorized travel time to and from any such training duty. However, weekend alone or evening reserve duty is not creditable.
Active duty in a State National Guard or State Air National Guard unit may be creditable only while the reservist was called to Federal active duty by the Congress or President of the United States. Emergency call-up of the National Guard by a governor for riot or flood control would not be creditable.
3.What are the dates of the war or national emergency periods?
The war or national emergency periods are:
August 2, 1990, to date as yet undetermined.
December 16, 1950, through September 14, 1978.
September 8, 1939, through June 14, 1948.
If military service began during a war or national emergency period, any active duty service the employee was required to continue in beyond the end of the war or national emergency is creditable, except that voluntary service extending beyond September 14, 1978, is not creditable.
Railroad workers who voluntarily served in the Armed Forces between June 15, 1948, and December 15, 1950, when there was no declared national state of emergency, can be given railroad retirement credit for their military service if they:
performed railroad service in the year they entered or the year before they entered military service, and;
returned to rail service in the year their military service ended or in the following year, and;
had no intervening non-railroad employment.
4.How can military service be used to increase benefits paid by the Railroad Retirement Board (RRB)?
Railroad retirement annuities are based on length of service and earnings. If military service is creditable as railroad service, a person will receive additional compensation credits for each month of creditable military service and railroad service credit for each active military service month not already credited by actual railroad service.
Creditable military service may be used in addition to regular railroad service to meet certain service requirements, such as the basic 10-year or five-year service requirements for a regular annuity, the 20-year requirement for an occupational disability annuity before age 60, the 25-year requirement for a supplemental annuity, or the 30-year requirement for early retirement benefits.
5.Can United States Merchant Marine service be creditable for railroad retirement purposes?
No. Service with the Merchant Marine or civilian employment with the Department of Defense is not creditable, even if performed in wartime.
6.Are railroad retirement annuities based in part on military service credits reduced if other benefits, such as military service pensions or payments from the Department of Veterans Affairs, are also payable on the basis of the same military service?
No. While railroad retirement employee annuities are subject to reductions for dual entitlement to social security benefits and, under certain conditions, Federal, State, or local government pensions, as well as certain other payments, railroad retirement employee annuities are always exempt from reduction for military service pensions or payments by the Department of Veterans Affairs.
7.Are the unemployment and sickness benefits payable by the RRB affected if an employee is also receiving a military service pension?
Yes. The unemployment and sickness benefits payable by the RRB are affected if a claimant is also receiving a military service pension. However, payments made by the Department of Veterans Affairs will not affect railroad unemployment or sickness benefits.
When a claimant is receiving a military service pension or benefits under any social insurance law for days in which he or she is entitled to benefits under the Railroad Unemployment Insurance Act, railroad unemployment or sickness benefits are payable only to the extent to which they exceed the other payments for those days. In many cases, the amount of a military service pension precludes the payment of unemployment or sickness benefits by the RRB. Examples of other such social insurance payments are firefighters’ and police pensions, or certain workers’ compensation payments. Claimants should report all such payments promptly to avoid having to refund benefits later.
8.Can proof of military service be filed in advance of retirement?
Railroad employees are encouraged to file proofs of their military service well in advance of retirement. The information will be recorded and stored electronically until they actually retire. This will expedite the annuity application process and avoid any delays resulting from inadequate proofs of military service.
If employees do not have an official record of their military service, their local RRB office will explain how to get acceptable evidence. All evidence brought or mailed to an RRB office will be handled carefully and returned promptly.
9.How can an employee get more information about the crediting of military service by the RRB?
More information is available by visiting the agency’s website, www.rrb.gov, or by calling an RRB office toll-free at 1-877-772-5772. Persons can find the address of the RRB office serving their area by calling the RRB’s toll-free number or at www.rrb.gov.