Retirees: Stock tax refunds could cause reduction in your monthly annuity

Published: February 5, 2019

Last updated on March 12th, 2019

In a recent decision (Wisconsin Central Ltd., et al v. United States), the U.S. Supreme Court ruled that non-qualified stock options granted to railroad employees are not considered compensation under the Railroad Retirement Tax Act of 1937, and are, therefore, not subject to taxation.

As a result, certain railroad employers and employees who previously paid railroad retirement taxes based on the exercise of such stock options may be eligible for tax refunds through the Internal Revenue Service (IRS).

Railroad employees and railroad retirement annuitants considering filing for such a tax refund should know that doing so may reduce the amount of their total creditable railroad compensation. Under the Railroad Retirement Act (RRA), creditable compensation is a factor in the computation of a railroad retirement annuity. A reduction in compensation could cause a reduction in an annuitant’s monthly benefit rate, and may result in an overpayment. For active employees, a change in creditable compensation may impact any estimated annuity amounts they were previously given by the Railroad Retirement Board (RRB).

At this time, the RRB is able to provide guidance to only a select group of individuals trying to determine if their total creditable railroad compensation will be reduced and/or if their annuity amounts will change as a result of claiming refunds of taxes paid on non-qualified stock options. That group is comprised of those individuals who have been identified by their railroad employers as employees whose regular earnings met the maximum compensation taxable caps without the inclusion of the stock option payment. In those cases, if the employees file claims for refunds of taxes paid on the stock option payment, payment of the refund will not impact their annuity rate computations. Employees who believe they are members of this group should review their consent letters to confirm whether they have been reported by their employers to be a “Medicare Tax Only” employee. If you are uncertain whether you are a “Medicare Tax Only” employee, please contact your railroad employer. Employees may also call the RRB’s toll-free number at 877-772-5772 if there are any other questions.

The RRB is currently unable to provide guidance to individuals not in the above group. The agency’s three-member board (appointed by the President with the advice and consent of the Senate, and representing rail labor, rail management and the public interest) has the authority to determine what effect, if any, the court’s decision will have on the RRB’s administration of the RRA. However, the position of chairman of the board is currently vacant, and the management member of the board must recuse himself from this issue as he previously worked for a railroad and received non-qualified stock options. The labor member of the board alone lacks statutory authority to make a decision, as a two-member quorum is required by law.

It is expected that in the first quarter of 2019, the agency will get a three-member board in place that will be able to make policy decisions related to this matter. The RRB is currently in discussions with the IRS to determine if it is possible to hold open the period for railroad employees and retirees to file claims for tax refunds until such time as the RRB gets a three-member board in place. The RRB would then be better able to provide information regarding the effect on RRB benefits to those needing assistance.

Read more about how to apply for the refunds and court decision.