Railroad Retirement benefits are based on months of service and earnings credits. Earnings are creditable, up to certain annual maximums, on the amount of compensation subject to Railroad Retirement taxes.
Credit for a month of railroad service is earned for every month in which an employee had some compensated service covered by the Railroad Retirement Act. (Local lodge compensation is disregarded for any calendar month in which it is less than $25. However, work by a local lodge or division secretary collecting insurance premiums, regardless of the amount of salary, is creditable railroad work.) Also, under certain circumstances, additional service months may be deemed in some cases where an employee does not actually work in every month of the year.
The following questions and answers describe the conditions under which an employee may receive additional Railroad Retirement service month credits under the deeming provisions of the Railroad Retirement Act.
1. What requirements must be met before additional service months can be deemed?
A service month can be deemed if an employee has less than 12 service months reported in the year, has sufficient compensation reported and is in an “employment relation” with a covered railroad employer, or is an employee representative, during that month. (An employee representative is a labor official of a non-covered labor organization who represents employees covered under the acts administered by the Railroad Retirement Board.)
For this purpose, an “employment relation” generally exists for an employee on an approved leave of absence (for example, furlough, sick leave, suspension, etc.). An “employment relation” is severed by retirement, resignation, relinquishing job rights in order to receive a separation allowance or termination.
2. How is credit for additional service months computed?
For additional service months to be deemed, the employee’s compensation for the year, up to the annual Tier II maximum, must exceed an amount equal to 1/12 of the Tier II maximum multiplied by the number of service months actually worked. The excess amount is then divided by 1/12 of the Tier II maximum; the result, rounded up to the next whole number, equals the maximum number of months that may be deemed as service months for that year. Fewer months may be deemed, if an employment relation, as defined in Question 1, does not exist.
3. An employee works seven months in 2021 before being furloughed, but earns compensation of $108,000. How many deemed service months could be credited to the employee?
The employee could be credited with five additional service months. One-twelfth of the 2021 $106,200 Tier II maximum ($8,850) times the employee’s actual service months (seven) equals $61,950. The employee’s compensation in excess of $61,950 up to the $106,200 maximum is $44,250, which divided by $8,850 equals five. Therefore, five deemed service months could be added to the seven months actually worked and the employee would receive credit for 12 service months in 2021.
4. Another employee works for seven months in 2021 and earns compensation of $85,200. How many deemed service months could be credited to this employee?
In this case, the excess amount ($85,200 minus $61,950) is $23,250, which divided by $8,850 equals 2.627. After rounding, this employee could receive credit for three deemed service months and be credited with a total of 10 months of service in 2021.
5. Another employee works for eight months in 2021 before resigning on August 15, but earns compensation of $91,000. How many deemed service months could be credited to this employee?
None. Since the employee resigned in August, there is no employment relationship for the remaining months and no additional service months may be deemed and credited.
6. Should an employee preparing to retire take deemed service months into account when designating the date his or her Railroad Retirement annuity begins?
An employee may wish to consider credit for deemed service months in selecting an annuity beginning date. For instance, in some cases, a designated annuity beginning date that considers deemed service months could be used to establish basic eligibility for certain benefits, increase an annuity’s Tier II amount, or establish a current connection, as illustrated in Questions 7, 8 and 9, respectively. It should be noted that service months cannot be deemed after the annuity beginning date.
7. What would be an example of using deemed service months to establish benefit eligibility?
An example would be an employee between the ages of 60 and 62 who might be able to use deemed service months to establish the 360 months of service needed to qualify for an unreduced age annuity prior to full retirement age.
For instance, a 60-year-old employee last performed service on May 15, 2021, and received $61,800 in compensation in 2021. She is credited with 358 months of creditable railroad service through May 2021. If the employee wishes to retire on age, she must wait until she is full retirement age, which ranges between 66 and 67 depending upon the employee’s year of birth, or age 62 if she is willing to accept an age-reduced annuity. She needs at least two additional months of service to establish eligibility for an unreduced annuity prior to full retirement age.
The employee’s excess amount ($61,800 minus $44,250) is $17,550, which divided by $8,850 equals 1.983. Therefore, two deemed service months could be added to the five months actually worked and the employee would receive credit for seven service months in 2021 for a total of 360 service months, allowing her to receive an unreduced annuity beginning July 2, 2021.
8. How could deemed service months be used to increase an employee’s Tier II amount?
An employee worked in the first five months of 2021 and received compensation of $59,500. He does not relinquish his rights until July 2, 2021, and applies for an annuity to begin on that date.
The excess amount ($59,500 minus $44,250) is $15,250, which divided by $8,850 equals 1.723, which yields two deemed service months for a total of seven service months in 2021. Had the employee relinquished his rights and applied for an annuity to begin on July 1, he would have been given credit for only six service months.
The employee received the maximum compensation in all of the last five years and had 360 months of service through 2020. The additional service and compensation increases his Tier II from $1,726.75 to $1,746.92. However, delaying the annuity beginning date past the second day of the month after the date last worked solely to increase the Tier II amount would not generally be to the employee’s advantage.
9. Can deemed service months help an employee establish a current connection?
Yes. For example, an employee left the railroad industry in 2002 and engaged in employment covered by the Social Security Act. In August 2020, she returned to railroad employment and worked through June 28, 2021. She received compensation of $53,650 in 2021. She does not relinquish her rights until July 2, 2021, and applies for an annuity to begin on July 2, 2021.
In this case, the excess amount ($53,650 minus $53,100) is $550, which divided by $8,850 equals 0.0621, which yields one deemed service month. Consequently, the employee is given credit for seven service months in 2021. With five months of service in 2020 and seven months in 2021, the employee establishes a current connection. Had she designated the earliest annuity beginning date permitted by law, she would not have met the 12-in-30-month requirement for a current connection. (An employee who worked for a railroad in at least 12 months in the 30 months immediately preceding the month his or her Railroad Retirement annuity begins will meet the current connection requirement for a supplemental annuity, occupational disability annuity or survivor benefits.)
10. Can an employee ever receive credit for more than 12 service months in any calendar year?
No. Twelve service months are the maximum that can be credited for any calendar year.
11. Where can an employee get more information on how deemed service months could affect his or her annuity?
Employees with questions about deemed service months can send a secure message to their local RRB office by accessing Field Office Locator at RRB.gov and clicking on the link at the bottom of their local office’s page. If a customer needs to talk to an RRB employee, they can call the agency’s toll-free number (1-877-772-5772). However, customers are asked to be patient because of the increase in call volume due to the closure to the public of RRB offices during the COVID-19 pandemic.
Tag: RRB annuity
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.
The following questions and answers describe the tax statements issued by the Railroad Retirement Board (RRB) each January for Federal income tax purposes. Railroad retirement beneficiaries needing information about these statements, or about tax withholding from their benefits, should contact an office of the RRB. For further Federal income tax information, railroad retirement beneficiaries should contact the nearest office of the Internal Revenue Service (IRS).
1. How are the annuities paid under the Railroad Retirement Act treated under the Federal income tax laws?
A railroad retirement annuity is a single payment comprised of one or more of the following components, depending on the annuitant’s age, the type of annuity being paid, and eligibility requirements: a Social Security Equivalent Benefit (SSEB) portion of tier I, a Non-Social Security Equivalent Benefit (NSSEB) portion of tier I, a tier II benefit, a vested dual benefit, and a supplemental annuity.
In most cases, part of a railroad retirement annuity is treated like a social security benefit for Federal income tax purposes, while other parts of the annuity are treated like private pensions for tax purposes. Consequently, most annuitants are sent two tax statements from the RRB each January, even though they receive only a single annuity payment each month.
2. Which railroad retirement benefits are treated as social security benefits for Federal income tax purposes?
The SSEB portion of tier I (the part of a railroad retirement annuity equivalent to a social security benefit based on comparable earnings) is treated for Federal income tax purposes the same way as a social security benefit. The amount of these benefits that may be subject to Federal income tax, if any, depends on the beneficiary’s income. (To determine if any amount of a SSEB benefit is taxable, please refer to IRS publication 915, Social Security and Equivalent Railroad Retirement Benefits.) If part of a SSEB benefit is taxable, how much is taxable depends on the total amount of a beneficiary’s benefits and other income. Usually, the higher that total amount, the greater the taxable part of a beneficiary’s benefit.
Generally, up to 50 percent of a beneficiary’s benefits will be taxable. However, up to 85 percent of his or her benefits can be taxable if either of the following situations applies.
- The total of one-half of a beneficiary’s benefits and all his or her other income is more than $34,000 ($44,000 if a beneficiary is married filing jointly).
- A beneficiary is married filing separately and lived with his or her spouse at any time during the year.
3. Which railroad retirement benefits are treated like private pensions for Federal income tax purposes?
The NSSEB portion of tier I, tier II benefits, vested dual benefits, and supplemental annuities are all treated like private pensions for Federal income tax purposes. In some cases, primarily those in which early retirement benefits are payable to retired employees and spouses between ages 60 and 62, some occupational disability benefits, and other categories of unique RRB entitlements, the entire annuity may be treated like a private pension. This is because social security benefits based on age and service are not payable before age 62, social security disability benefit entitlement requires total disability, and the Social Security Administration does not pay some categories of beneficiaries paid by the RRB.
4. What information is shown on the railroad retirement tax statements sent to annuitants in January?
One statement, Form RRB-1099 for U.S. citizens or residents (or Form RRB-1042S for nonresident aliens), shows the SSEB portion of tier I or special minimum guaranty payments made during the tax year, the amount of any such benefits that an annuitant may have repaid to the RRB during the tax year, and the net amount of these payments after subtracting the repaid amount.
The amount of any offset for workers’ compensation and the amount of Federal income tax withheld from these payments are also shown. Illustrations and explanations of items found on Form RRB-1099 and Form RRB-1042S can be found in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
The other statement, Form RRB-1099-R (for both U.S. citizens and nonresident aliens), shows the NSSEB portion of tier I, tier II, vested dual benefit, and supplemental annuity paid to the annuitant during the tax year, and may show an employee contribution amount. The NSSEB portion of tier I along with tier II are considered contributory pension amounts and are shown as a single combined amount in the Contributory Amount Paid box (Item 4) on the statement.
The vested dual benefit and supplemental annuity are considered noncontributory pension amounts and are shown as separate items on the statement. The total gross paid amount shown on Form RRB-1099-R is the sum of the NSSEB portion of tier I, tier II, vested dual benefit and supplemental annuity payments. Also shown is the amount of Federal income tax withheld from these payments.
The statement also shows the amount of any of these prior year benefits repaid by the annuitant to the RRB during the tax year. This amount is not subtracted from the gross amounts shown because its treatment depends on the years to which the repayment applies and its taxability in those years. To determine the year or years to which the repayment applies, annuitants should contact the RRB. Illustrations and explanations of items found on Form RRB-1099-R can be found in IRS Publication 575, Pension and Annuity Income.
If the annuitant is taxed as a nonresident alien of the United States, Form RRB-1042S and/or Form RRB-1099-R will show the rate of tax withholding (0 percent, 15 percent or 30 percent) and country of residence for income tax purposes.
Nonresident aliens may receive more than one set of original tax statement Forms RRB-1042S and/or RRB-1099-R in a tax year if there was a change in the country of residence for income tax purposes, or a change in the rate of income tax applied to annuity payments. Nonresident aliens who resided in the United States for part of a tax year may receive a set of original U.S. citizen tax statement Forms RRB-1099 and/or RRB-1099-R and one or more sets of nonresident alien tax statement Forms RRB-1042S and/or RRB-1099-R.
The total Medicare premiums deducted from the railroad retirement annuity may also be shown on either Form RRB-1099 (Form RRB-1042S for nonresident aliens) or Form RRB-1099-R. Medicare premiums deducted from social security benefits paid by the RRB, paid by a third party, or paid through direct billing are not shown on RRB-issued tax statements.
Copy B and/or Copy 2 of Form RRB-1099-R must be submitted with the annuitant’s tax return. Annuitants should retain copy C of all statements for their records, especially if they may be required to verify their income in connection with other Government programs.
5. What is the significance of the employee contribution amount?
For railroad retirement annuitants, the employee contribution amount is considered the amount of railroad retirement payroll taxes paid by the employee that exceeds the amount that would have been paid in social security taxes if the employee’s railroad service had been covered under the Social Security Act.
The employee contribution amount is referred to by the IRS as an employee’s investment, or cost, in the contract. An employee contribution amount is not a payment or income received during the tax year. Only employee and survivor annuitants may have an employee contribution amount shown in Item 3 of their Form RRB-1099-R.
The contributory amount paid (NSSEB portion of tier I and/or tier II) is considered income and is reported to the IRS. The contributory amount paid is either fully taxable or partially taxable depending on whether the employee contribution amount has been used to compute a tax-free (nontaxable) portion of the contributory amount paid. If no employee contribution amount is shown on Form RRB-1099-R, then the contributory amount paid is fully taxable.
The use and recovery of the employee contribution amount is important for annuitants since it affects the amount of taxable income to be reported on income tax returns. There is a tax savings advantage in using (recovering) employee contributions since it may reduce the taxability of the contributory amount paid and in turn the amount of taxable income.
Annuitants should refer to IRS Publication 575, Pension and Annuity Income, and Publication 939, General Rule for Pensions and Annuities, for more information concerning the tax treatment of the contributory amount paid (see questions 6 and 7 below) and use of the employee contribution amount.
6. If an employee contribution amount is shown on my Form RRB-1099-R, may I use the entire amount?
The employee contribution amount shown is attributable to the railroad retirement account number. This means that the employee contribution amount must be shared by all eligible annuitants under that same railroad retirement account number.
If an employee contribution amount is shown on your Form RRB-1099-R and your annuity beginning date is July 2, 1986, or later, you may be able to use some or all of the employee contribution amount shown to compute the nontaxable (tax-free) amount of your contributory amount paid. Therefore, your contributory amount paid and total gross paid shown on your Form RRB-1099-R may be partially taxable.
If an employee contribution amount is not shown on your Form RRB-1099-R, you cannot use or share the employee contribution amount. Therefore, your contributory amount paid and total gross paid shown on your Form RRB‑1099-R are fully taxable.
When more than one annuitant is or was entitled to a contributory amount paid under the same railroad retirement account number, any eligible annuitants may not use the entire employee contribution amount shown on their Form RRB-1099-R for themselves. They must first determine the amount of the total employee contribution amount they are individually entitled to use. That means determining:
- The portion of the total employee contribution amount still potentially available for use, and
- The portion of that amount that must be shared by those eligible annuitants currently receiving contributory amounts paid.
For example, a survivor family group consists of a widow and two full-time students. All three annuitants are eligible to use a portion of the employee contribution amount shown on their Forms RRB-1099-R. They must determine the portion of the employee contribution amount they may each use. Question 7 below provides general information on how to calculate this amount. For more specific information, annuitants should refer to IRS Publication 575, Pension and Annuity Income, and Publication 939, General Rule for Pensions and Annuities.
Any change in the total number of eligible annuitants receiving contributory amounts paid will affect the nontaxable amounts of these annuitants. This change is retroactive to the date on which the number of eligible annuitants changed. Any of these changes could potentially affect the taxable amounts reported to the IRS on prior year income tax returns. Annuitants should determine if any change would require them to file original or amended U.S. Federal income tax returns for prior tax years. For more specific information, annuitants should refer to IRS Publication 575, Pension and Annuity Income, and Publication 939, General Rule for Pensions and Annuities.
7. How are contributory and noncontributory pension amounts taxed?
Amounts shown on Form RRB-1099-R are treated like private pensions and taxed either as contributory pension amounts or as noncontributory pension amounts. The NSSEB portion of tier I and tier II (shown as the contributory amount paid on the statement) are contributory pension amounts. Contributory pension amounts may be fully taxable or partially taxable depending on the presence and use (recovery) of the employee contribution amount. Vested dual benefits and supplemental annuities are considered noncontributory pension amounts. Noncontributory pension amounts are always fully taxable and do not involve the use of the employee contribution amount.
For annuitants with annuity beginning dates before July 2, 1986, the contributory amount paid is fully taxable. These annuitants cannot use the employee contribution amount, even if the amount is shown on Form RRB-1099-R, to compute a nontaxable amount of their contributory amount paid because their employee contribution amount has been fully recovered. Since the contributory amount paid is fully taxable, the total gross pension paid in Item 7 of Form RRB-1099-R is fully taxable.
For annuitants with annuity beginning dates from July 2, 1986, through December 31, 1986, the contributory amount paid may be partially nontaxable for the life of the annuity. These annuitants may be able to use some or all of the employee contribution amount to compute a nontaxable contributory amount paid. Once that nontaxable amount is computed, it does not need to be recomputed and can be used for each tax year unless there is a change in the employee contribution amount, annuity beginning date, date of birth used to determine life expectancy, or the number of eligible annuitants receiving contributory amounts paid. Therefore, the contributory amount paid in Item 4 and the total gross pension paid in Item 7 of Form RRB-1099-R may be partially taxable.
For annuitants with annuity beginning dates effective January 1, 1987, and later, the contributory amount paid may be partially nontaxable for a specified period of time based on life expectancy as determined by IRS actuarial tables. These annuitants may use some or all of the employee contribution amount to compute the nontaxable amount of their contributory amount paid.
Once that nontaxable amount is computed, it does not need to be recomputed and can be used for each tax year unless there is a change in the employee contribution amount, annuity beginning date, date of birth used to determine life expectancy, or the number of eligible annuitants receiving contributory amounts paid. Therefore, the contributory amount paid in Item 4 and the total gross pension paid in Item 7 of Form RRB-1099-R may be partially taxable. However, once the specified life expectancy is met, the employee contribution amount is considered fully recovered, and the contributory amount paid and total gross pension paid are both fully taxable.
The contributory amounts paid of disabled employee annuitants under minimum retirement age are fully taxable and these annuitants cannot use the employee contribution amount. Therefore, the contributory amount paid in Item 4 and the total gross pension paid in Item 7 of Form RRB-1099-R are fully taxable. (Minimum retirement age is generally the age at which individuals could retire based on age and service, which is age 60 with 30 or more years of railroad service or age 62 with less than 30 years of railroad service.)
However, once the disabled employee annuitant reaches minimum retirement age, the annuitant may use the employee contribution amount shown on Form RRB-1099-R to compute the nontaxable amount of his or her contributory amount paid.
The RRB does not calculate the nontaxable amount of the contributory amount paid for annuitants. Annuitants should contact the IRS or their own tax preparer for assistance in calculating the nontaxable amount of their contributory amount paid. For more information on the tax treatment of the contributory amount paid, vested dual benefits, supplemental annuities, the employee contribution amount, and how to use the IRS actuarial tables, annuitants should refer to IRS Publication 939, General Rule for Pensions and Annuities, and IRS Publication 575, Pension and Annuity Income.
8. Does Form RRB-1099-R show the taxable amount of any contributory railroad retirement benefits or just the total amount of such benefits paid during the tax year?
Form RRB-1099-R shows the total amount of any contributory railroad retirement benefits (NSSEB and tier II) paid during the tax year. The RRB does not calculate the taxable amounts. It is up to the annuitant to determine the taxable and nontaxable (tax-free) amounts of the contributory amount paid using the employee contribution amount.
9. Can an employee contribution amount change?
Yes. The employee contribution amount shown on Form RRB-1099-R is based on the latest railroad service and earnings information available on the RRB’s records. Railroad service and earnings information (and the corresponding employee contribution amount) often changes in the first year after an employee retires from railroad service.
That is when the employee’s final railroad service and earnings information is furnished to the RRB by his or her employer. As a result, the employee contribution amount shown on the most recent Form RRB-1099-R may have increased or decreased from a previously-issued Form RRB-1099-R.
Any change in an employee contribution amount is fully retroactive to the railroad retirement annuity beginning date. Therefore, the nontaxable amount of the contributory amount paid should be recomputed.
This could affect the taxable amounts reported to the IRS on prior income tax returns. Generally, an increase in the employee contribution amount is advantageous, as it will yield a larger tax-free amount. However, a decrease in the employee contribution amount may be disadvantageous since it may result in an increased tax liability. In any case, annuitants should determine if any change in their employee contribution amount would require them to file original or amended Federal income tax returns for prior tax years.
10. What if a person receives social security as well as railroad retirement benefits?
Railroad retirement annuitants who also received social security benefits during the tax year receive a Form SSA-1099 (or Form SSA-1042S if they are nonresident aliens) from the Social Security Administration. They should add the net social security equivalent or special guaranty amount shown on Form RRB-1099 (or Form RRB-1042S) to the net social security income amount shown on Form SSA-1099 (or Form SSA-1042S) to get the correct total amount of these benefits. They should then enter this total on the Social Security Benefits Worksheet in the instructions for Form 1040 or 1040A to determine if part of their social security and railroad retirement social security equivalent benefits is taxable income.
Additional information on the taxability of these benefits can be found in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
11. Are the residual lump sums, lump-sum death payments or separation allowance lump-sum amounts paid by the RRB subject to Federal income tax?
No. These amounts are nontaxable and are not subject to Federal income tax. The RRB does not report these amounts on statements.
12. If an annuity was due but unpaid at the time of an annuitant’s death, it may be payable to another person. Would that person be subject to Federal income tax on this annuity?
Yes, if the deceased annuitant would have had to pay Federal income tax on the benefit. The taxable amount of the annuity is reported to the IRS and on Form RRB-1099 (or Form RRB-1042S) or Form RRB-1099-R, as appropriate, which is sent to the person who received the annuity.
13. Are Federal income taxes withheld from railroad retirement annuities?
Yes, and the amounts withheld are shown on the statements issued by the RRB each year. However, an annuitant may request that Federal income taxes not be withheld, unless the annuitant is a nonresident alien or a U.S. citizen living outside the 50 States or Washington, D.C.
Annuitants can voluntarily choose to have Federal income tax withheld from their SSEB payments. To do so, they must complete IRS Form W-4V, Voluntary Withholding Request, and send it to the RRB. They can choose withholding from their SSEB payments at the following rates: 7 percent, 10 percent, 15 percent, or 25 percent.
Annuitants who are taxed as U.S. citizens and who do not live outside the 50 States or Washington, D.C., and wish to have Federal income taxes withheld from their NSSEB and tier II (contributory amount paid), vested dual benefit, and supplemental annuity payments must complete a tax withholding election on Form RRB W-4P, Withholding Certificate For Railroad Retirement Payments, and send it to the RRB. An annuitant is not required to file Form RRB W-4P.
If that form is not filed, the RRB will withhold taxes only if the combined portions of the NSSEB and tier II (contributory amount paid), vested dual benefit and supplemental annuity payments are equal to or exceed an annual threshold amount. In that case, the RRB withholds taxes as if the annuitant were married and claiming three allowances.
14. How is tax withholding applied to the railroad retirement benefits of nonresident aliens?
A nonresident alien is a person who is neither a citizen nor a resident of the United States. Under the Internal Revenue Code, nonresident aliens are subject to a 30-percent tax on income from sources within the United States not connected to a U.S. trade or business. The 30-percent rate applies to all annuity payments exceeding social security equivalent payments and to 85 percent of the annuity portion treated as a social security benefit. The Internal Revenue Code also requires the RRB to withhold the tax.
The tax can be at a rate lower than 30 percent or can be eliminated entirely if a tax treaty between the United States and the country of residence provides such an exemption, and the nonresident alien completes and sends Form RRB-1001, Nonresident Questionnaire, to the RRB. Form RRB-1001 secures citizenship, residency and tax treaty claim information for nonresident beneficiaries (nonresident aliens or U.S. citizens residing outside the United States).
Form RRB-1001 is sent by the RRB to nonresident aliens every three years to renew the claim for a tax treaty exemption. Failure by a nonresident alien to complete Form RRB-1001 will cause loss of the exemption until the exemption is renewed. Such renewals have no retroactivity. Also, a nonresident alien must include his or her United States taxpayer identifying number on Form RRB-1001. Otherwise, any tax treaty exemption claimed on the form is not valid. The majority of nonresident aliens receiving annuities from the RRB are citizens of Canada, which has a tax treaty with the United States.
If a Canadian citizen claims an exemption under the tax treaty, no tax is withheld from the SSEB portion of tier I and a tax withholding rate of 15 percent is applied to the benefit portions treated like pension payments.
Additional information concerning the taxation of nonresident aliens can be found in IRS Publication 519, U.S. Tax Guide for Aliens.
15. Are unemployment benefits paid under the Railroad Unemployment Insurance Act subject to Federal income tax?
All unemployment benefit payments are subject to Federal income tax. Each January, the RRB sends Form 1099-G to individuals, showing the total amount of railroad unemployment benefits paid during the previous year.
16. Are sickness benefits paid by the RRB subject to Federal income tax?
Sickness benefits paid by the RRB, except for sickness benefits paid for on-the-job injuries, are subject to Federal income tax under the same limitations and conditions that apply to the taxation of sick pay received by workers in other industries. Each January, the RRB sends Form W-2 to affected beneficiaries. This form shows the amount of sickness benefits that each beneficiary should include in his or her taxable income.
17. Does the RRB withhold Federal income tax from unemployment and sickness benefits?
The RRB withholds Federal income tax from unemployment and sickness benefits only if requested to do so by the beneficiary. A beneficiary can request withholding of 10 percent of his or her unemployment benefits by filing IRS Form W-4V, Voluntary Withholding Request, with the RRB. A beneficiary can request withholding from sickness benefits by filing IRS Form W-4S, Request for Federal Income Tax Withholding from Sick Pay.
18. Are railroad retirement and railroad unemployment and sickness benefits paid by the RRB subject to State income taxes?
The Railroad Retirement and Railroad Unemployment Insurance Acts specifically exempt these benefits from State income taxes.
19. Can a railroad employee claim a tax credit on his or her Federal income tax return if the employer withheld excess railroad retirement taxes during the year?
If any one railroad employer withheld more than the annual maximum amount, the employee must ask that employer to refund the excess. It cannot be claimed on the employee’s return.
20. Can a railroad employee working two jobs during the year get a tax credit if excess retirement payroll taxes were withheld by the employers?
Railroad employees who also worked for a nonrailroad social security covered employer in the same year may, under certain circumstances, receive a tax credit equivalent to any excess social security taxes withheld.
Employees who worked for two or more railroads during the year, or who had tier I taxes withheld from their RRB sickness benefits in addition to their railroad earnings, may be eligible for a tax credit of any excess tier I or tier II railroad retirement taxes withheld. The amount of tier I taxes withheld from sickness benefits paid by the RRB is shown on Form W-2 issued to affected beneficiaries.
Employees who had tier I taxes withheld from their supplemental sickness benefits (benefits paid under an RRB-approved nongovernmental sickness insurance plan, such as a supplemental sickness benefit plan established by a railroad) may also be eligible for a tax credit of any excess tier I tax.
Such tax credits may be claimed on an employee’s Federal income tax return.
Employees who worked for two or more railroads, received sickness benefits, or had both railroad retirement and social security taxes withheld from their earnings should see IRS Publication 505, Tax Withholding and Estimated Tax, for information on how to figure any excess railroad retirement or social security tax withheld.
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For more information, visit the RRB’s website at www.rrb.gov.
Most railroad retirement annuities, like Social Security benefits, were scheduled to increase Jan. 1 on the basis of the rise in the Consumer Price Index (CPI) from the third quarter of 2016 to the corresponding period of 2017.
The Railroad Retirement Board (RRB) reports that Tier I benefits, like Social Security benefits, will increase by 2 percent, which is the percentage of the CPI rise. Tier II benefits will go up by 0.7 percent. Vested dual benefit payments and supplemental annuities also paid by RRB are not adjusted for the CPI change.
In January 2018, the average regular railroad retirement employee annuity will increase $42 a month to $2,711 and the average of combined benefits for an employee and spouse will increase $60 a month to $3,937. For those retirement-aged widow(er)s eligible for an increase, the average annuity will increase $24 a month to $1,353. However, widow(er)s whose annuities are being paid under the Railroad Retirement and Survivors’ Improvement Act of 2001 will not receive annual cost-of-living adjustments until their annuity amount is exceeded by the amount that would have been paid under prior law, counting all interim cost-of-living increases otherwise payable. Some 50 percent of the widow(er)s on the RRB’s rolls are being paid under the 2001 law.
The cost-of-living increase is the largest since 2012, and follows a Tier I increase of 0.3 percent in January 2017.
The RRB was mailing notices in December to all annuitants providing a breakdown of the annuity rates payable to them in January 2018.
Earning limit increases
The RRB also announced that railroad retirement annuitants subject to earnings restrictions can earn more in 2018 without having their benefits reduced as a result of increases in earnings limits indexed to average national wage increases.
For those under full retirement age throughout 2018, the exempt earnings amount rises to $17,040 from $16,920 in 2017. For beneficiaries attaining full retirement age in 2018, the exempt earnings amount for the months before the month full retirement age is attained increases to $45,360 in 2018 from $44,880 in 2017.
For those under full retirement age, the earnings deduction is $1 in benefits for every $2 of earnings over the exempt amount. For those attaining full retirement age in 2018, the deduction is $1 for every $3 of earnings over the exempt amount in the months before the month full retirement age is attained.
For employee and spouse annuitants, full retirement age ranges from age 65 for those born before 1938 to age 67 for those born in 1960 or later. For survivor annuitants, full retirement age ranges from age 65 for those born before 1940 to age 67 for those born in 1962 or later.
When applicable, earnings deductions are assessed on the Tier I and vested dual benefit portions of railroad retirement employee and spouse annuities, and the Tier I, Tier II, and vested dual benefit portions of survivor benefits.
All earnings received for services rendered, plus any net earnings from self-employment, are considered when assessing deductions for earnings. Interest, dividends, certain rental income, or income from stocks, bonds, or other investments are not considered earnings.
Retired employees and spouses, regardless of age, who work for their last pre-retirement non-railroad employer are also subject to an additional earnings deduction in their Tier II and supplemental benefits of $1 for every $2 in earnings up to a maximum reduction of 50 percent. This earnings restriction does not change from year to year and does not allow for an exempt amount.
A spouse benefit is subject to reduction not only for the spouse’s earnings, but also for the earnings of the employee, regardless of whether the earnings are from service for the last pre-retirement non-railroad employer or other post-retirement employment.
Special work restrictions continue to be applicable to disability annuitants in 2018. The monthly disability earnings limit increases to $920 in 2018 from $910 in 2017.
Regardless of age and/or earnings, no railroad retirement annuity is payable for any month in which an annuitant (retired employee, spouse or survivor) works for a railroad employer or railroad union.
More information about RRB benefits is available at the agency’s website at www.rrb.gov or by contacting the RRB toll free at 1-877-772-5772.
Railroad retirement beneficiaries are reminded that receipt of a private railroad pension may reduce the amount of a supplemental annuity payable by the Railroad Retirement Board (RRB). The following questions and answers provide information on this subject, as well as how distributions from a 401(k) plan affect supplemental annuities, and whether railroad employee contributions to 401(k) plans are subject to railroad retirement payroll taxes.
1. What are the eligibility requirements for a supplemental annuity?
Individuals receiving a railroad retirement age and service, or disability annuity, can be paid a monthly supplemental annuity at age 60, if the employee has at least 30 years of creditable railroad service, or at age 65 with at least 25 years of service. (Disabled annuitants under full retirement age, which ranges from age 65 to 67, depending on the year of birth, must relinquish employment rights in order for a supplemental annuity to be paid by the RRB.) A “current connection” with the railroad industry is also required, as is at least one month of creditable rail service before October 1981. The maximum monthly supplemental annuity rate is $43.
2. What effect does the receipt of a private railroad pension have on the payment of a supplemental annuity?
If a retired employee also receives a private pension funded entirely or in part by a railroad employer, the supplemental annuity is permanently reduced by the amount of the monthly pension benefit that is based on the railroad employer’s contributions. However, if the employer reduces the pension for the employee’s entitlement to a supplemental annuity, the amount by which the pension is reduced is restored to the supplemental annuity (but does not raise it over the $43 maximum). There is no reduction for a pension paid by a railroad labor organization.
3. What if an employee elects to receive the pension in a lump-sum payment instead of as a monthly benefit?
If a retired employee elects to receive his or her pension in a lump-sum payment instead of as a monthly benefit, the supplemental annuity is reduced in the same way as it would be if the employee was receiving the monthly benefit. If the lump sum is paid in installments, the installment payments are not considered monthly benefit payments, but part of the single, lump-sum payment.
4. Does the receipt of a 401(k) plan distribution reduce the amount of a supplemental annuity?
No. In Legal Opinion L-2014-2, issued January 13, 2014, the RRB’s General Counsel determined that 401(k) plans should not be considered supplemental pension plans as defined by the Railroad Retirement Act and, therefore, employee supplemental annuities should not be reduced due to the receipt of 401 (k) distributions.
In accordance with the legal opinion, the RRB removed the 401(k) distribution reduction from the supplemental annuities of affected beneficiaries effective January 1, 2014, or the supplemental annuity beginning date, whichever date is later. Refunds of the amounts previously deducted for the 401(k) distribution reduction (beginning on the applicable date above) were issued to those beneficiaries in July 2015.
5. Are employee contributions to a 401(k) plan subject to railroad retirement Tier I and Tier II payroll taxes?
Yes. Federal budget legislation enacted in 1989 and effective January 1, 1990, provided that employee contributions to 401(k) plans are subject to railroad retirement payroll taxes and brought the treatment of 401(k) plans under railroad retirement law into conformity with the treatment of such plans under social security law. Consequently, employee contributions to a 401(k) plan are also treated as creditable compensation for railroad retirement benefit purposes. For example, an employee earning $40,000 a year, but who has 10 percent of his earnings deferred under a 401(k) plan, would have only $36,000 reported to the IRS as earnings subject to Federal income tax. However, the entire $40,000 would be subject to railroad retirement payroll taxes and therefore creditable as compensation under the Railroad Retirement Act.
6. How can a person get more information about the effect of private rail pensions and 401(k) plan payments on supplemental annuities?
Persons can contact an RRB field office for more information via the agency’s website, www.rrb.gov, or by calling toll-free at 1-877-772-5772. Most RRB offices are open to the public from 9:00 a.m. to 3:30 p.m., Monday through Friday, except on Federal holidays.
On July 29, Railroad Retirement Board Labor Member Walt Barrows addressed attendees at the SMART Transportation Division’s Anaheim, Calif., regional meeting.
He spoke about the beginnings of the RRB, pensions and retirement plans, attacks on workers in both the public and private sectors.
“We are entitled because we worked for it. We are entitled because we sacrificed for it. We are entitled because we contributed to it,” Barrows said. “We are entitled because the profits enjoyed by the railroad industry came from our blood and our sweat. Nobody gave us anything. We earned it.”
Read the complete text of Barrows address below.
Also note the chart comparing Railroad Retirement and Social Security Administration annuities.
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“Thank you, Mike (Futhey) for the invitation.
“It is truly an honor to be here with you today (July 29) and to have the privilege of addressing SMART Transportation Division members and questions.
“You can take great pride in the fact that your union’s leaders are fighting to protect our railroad retirement system. Your union has a proud history of fighting to protect and improve Railroad Retirement.
“Our retirement system is something all of rail labor can be proud of and it is certainly worth fighting for. There were many challenges to establish the Railroad Retirement Act and challenges have continued over its 78-year history.
“The first contributory private pension plans were established in the railroad industry in late 19th century, on the Grand Trunk Railway of Canada and then on the B&O Railroad. By the end of the first decade of the 20th century, 66% of railroaders were covered by some type of private pension. The number grew to over 80% at the beginning of the great depression. The pioneer trade unionist of the SMART’s predecessor unions were a part of the establishing these early pension plans.
“The problem with the plans was that the benefits provided by these plans were inadequate. A 1930s survey of the plans showed that while 80% were covered by the plans, that because of restrictions in the plans, only 17% of railroader workers would ever qualify for the benefits. In addition, the plans were easily terminated by the railroads and gave little or no assistance to disabled workers or survivors.
“When the Great Depression hit, the already unstable railroad pension plans were thrown into a state of crisis. Railroad unions sought a separate federal retirement system. The system would consolidate the existing railroad plans into a uniform national plan. The first law was passed in 1934 and the railroads immediately went to court to challenge the new law. The Supreme Court sided with the railroads, and in a 5 to 4 decision deemed the law unconstitutional. The unions went back to Congress and, in 1935, a new law was passed. Again the railroads went to court to challenge the law. This time the court held some of the law to be constitutional but deemed other parts of the law unconstitutional. In 1936, President Roosevelt asked labor and the industry to work out their differences. An agreement between rail labor and the rail industry was enacted in the 1937 amendments to the Railroad Retirement Act.
“Since that time, there have been nine significant pieces of legislation that made changes to the system. Many of those changes resulted in improved benefits. The 1937 law did not include occupational disability, spouse or survivor benefits. These were all added later. Other changes improved funding of our pension. In the 1970s and 1980s, the system faced a funding crisis. This was due in large part to sharply declining employment and increased benefit costs brought on by very high inflation. Labor and the rail industry agreed to changes that addressed the problems.
“The most recent major legislation was enacted in 2001. These changes reduced full retirement age from 62 to 60 with 30 years of service, improved the survivors benefits and created the National Railroad Retirement Trust Fund which now invests the Railroad Retirement assets.
“The fight to protect retirement benefits for American workers is never over. No, this fight is an ongoing battle. If you read the newspaper or turn on the TV, it seems like every day there is another assault against American workers and their pension plans.
“Since 1985, 84,350 pension plans have been ended by employers. We have gone from nearly 50 percent of U.S. workers covered by a defined benefit plan to about 15 percent covered.
“Rail workers find themselves in a unique situation. They have good wages, they have good health care and they have a good retirement system. But all around us that is not the case;
“All around us workers are making less,
“All around us workers are losing their good health care coverage.
“And all around us workers are losing their defined benefit pension plans.
“Defined benefit pension plans have been replaced by tax deferred savings accounts, like 401(k) plans, and other less desirable substitutes. During that same period, we have seen good health care plans replaced by high deductible plans that only provide catastrophic coverage. We have seen industries that paid a good living wage, now paying wages you can barely live on.
“It is happening all around us. Workers in the manufacturing, steel, airline, and auto industries have all seen their pension plans stripped away. And now we see a new attack on public workers.
“While other workers watch their standard of living recede, their health care becoming too costly, and their retirement security stripped away, we cannot sit back and believe this will not impact us.
“An attack on public workers, an attack on private workers, an attack on union or non-union workers must be seen as an attack on our pension system.
“For far too many workers, the defined pension plan is becoming a relic from a past generation. And with the disappearance of pension plans, far too many Americans cannot retire with any sense of dignity or security.
“Recently, a union member asked me, “What am I going to get out of the money I’m paying into Railroad Retirement?”
“Good question. You see workers are being told they would be better off if they saved their own money. Let me tell what you get. 60/30, occupational disability after 20 yrs, and a survivor benefit that far exceeds most retirement plans. For the career railroad worker who retired in 2012 at age 60 with at least 30 years of service, we estimate that over the lifetime of that railroad worker, Railroad Retirement will pay him and his spouse total benefits of about $2 million. That same worker under social security, who couldn’t retire until age 62, will receive with his spouse, benefits totalling about $900 thousand over their lifetime.
“For the past 30 years, the 401(k) has been presented to workers as the future of a secure retirement. It is a lie. The average worker in America cannot save their own money and have true retirement security. The fact today is that in America the average 401(k) savings for a worker between the ages 55 – 60 is about $100k. That is clearly not a plan for a secure retirement.
“Over our 78-year history, the Railroad Retirement Board has paid out over $300 billion in benefits to more than 5.5 million retired employees, spouses and survivors.
“A key component of our retirement system is the Trust Fund. I am happy to report that the Trust Fund continues to outperform many other retirement funds. The balance of the Trust Fund is currently around $26 billion. More important is the report from the Railroad Retirement Board’s Chief Actuary. He assures us that absent a catastrophic loss of rail employment, the Railroad Retirement system is solvent well into the future.
“Wondering if you will be able to receive a steady income during your retirement years is important to you and your family when you consider retirement. Well, railroad retirement gives you that assurance.
“You would think that the strength and solvency of our system would exempt us from attacks, but our retirement system is never totally safe from attack.
“As most of you know, last year a House budget resolution proposed massive changes to our retirement system. While this proposal did not go anywhere, it again demonstrates that rail workers must remain vigilant if we expect our retirement system to be there for us and for future generations of rail workers.
“On March 1 of this year, rail workers were again victims of Washington budget cuts, when their Unemployment and Sickness benefits were reduced 9.2% by the sequestration order. While no reductions were made to retirement, disability or survivor benefits, the RRB administrative budget, which is used to run the agency, was reduced.
“You can be very proud of the work that James Stem and John Risch are doing on Capitol Hill defending our retirement system against those who try to weaken it. Last year rail labor quickly went to Capitol Hill to kill any plans to change our retirement system, and this year they are fighting to get the unemployment and sickness benefits restored.
“Our retirement system has faced many challenges over the 78-year history of the Railroad Retirement Act. At times its solvency was in question; at times the White House and Members of Congress questioned the need for a separate RR system; and at times, the commitment by the rail industry to the system was less than lukewarm.
“But every time there was an issue threatening the integrity and stability of the system, rail labor has met the challenge. That speaks volumes to the strength and solidarity of the rail labor movement.
“Let me say a little bit about the agency itself. I am proud of the RRB’s long history of excellent service to both active and retired railroad workers.
“That record of service is the result of nearly 900 Federal workers at the Board’s Chicago headquarters and 53 field offices who show up and work every day on behalf of railroad workers. As trade unionist, I ask you to defend Federal workers, like those who work on your behalf at the RRB.
“I applaud each and every one of you for your efforts to protect and carry forward the work of those who preceded us. It is now up to us to ensure that our retirement system is there to provide protection and retirement security for future generations.
“So let me close with this. When we hear retirement benefits attacked; and when we hear them referred to as entitlements; and when we hear the code words “entitlement reform,” remind people that railroad workers are entitled.
“We are entitled because we worked for it.
“We are entitled because we sacrificed for it.
“We are entitled because we contributed to it.
“And we are entitled because the profits enjoyed by the railroad industry came from our blood and our sweat. Nobody gave us anything. We earned it.
“Since the establishment of the railroad retirement system 78 years ago, labor has fought to protect and preserve these benefits. And as your member on the Railroad Retirement Board, it is an honor for me to stand here today to tell you that I will fight to protect our retirement system.”
View RRB/SSA annuity comparison chart here.
SMART Transportation Division President Mike Futhey, left, presents Railroad Retirement Board
Labor Member Walt Barrows with a UTU clock following Barrows’ address to attendees at the TD’s
Anaheim regional meeting. At right is meeting master of ceremonies Ed Carney.