Navigating the Railroad Retirement System
May 8, 2023
At Bowers, our expertise is based on almost 50 years of analysis and accumulated knowledge of the Short Line Railroad industry. In that time, we have served more than 150 railroad clients. We are also a member of the American Short Line and Regional Railroad Association and have prepared and presented numerous webinars regarding the railroad retirement system, which is not an easy system to navigate. However, with a little help from this article, we can make it a little less painful.
How is Railroad Retirement Different from Other Retirement Plans?
In order to understand railroad retirement, you first must first recognize that it is NOT a retirement plan. It is a federally mandated tax. It’s important to note, if you work in the railroad industry for a covered employer, you are required to participate. The Railroad Retirement program is in lieu of Social Security (SS). While it works with the Social Security Administration on some things, it is run by a separate government organization called the Railroad Retirement Board. It is a closed system, self-sufficient and paid for by the railroad industry. It is designed to serve as a supplemental piece of retirement for railroad workers.
What Is the Railroad Retirement Board and How Does it Work?
The Railroad Retirement Board (RRB) is responsible for the operations of the Railroad Retirement system. RRB was founded in 1935 and is an independent Federal Agency that is fully funded by Railroad taxes. Their main concern has always been looking out for employees riding the rails and following the work from line to line, keeping the freight lines of the country moving. The RRB administers Railroad Retirement with similar but different funding and benefit structures than Social Security. Railroad Retirement (RR) benefits, as well as the overhead operation of the RRB, are all paid for with a small percentage from payroll taxes of railroads. Financing for the Railroad Retirement system is through investments of the National Railroad Retirement Investment Trust (NRRIT), an independent organization run by a board of trustees. The NRRIT manages and invests Railroad Retirement assets.
How an Employer Becomes Part of the System
Railroad Retirement is not optional. If you are deemed to be a common carrier by the STB, then you are required to file under railroad retirement. To obtain common carrier status, first you file with the Surface Transportation Board (STB) wherein you will become a common carrier. Next you must apply to the RRB to become a covered employer. There is an application that needs to be filled out. This is specific to your line from the RRB, which will go to the Audit & Compliance Department. Then it is vetted by the General Counsel, which can take months. Lastly, it will be submitted to a three-person board to be voted on.
What does that mean for your new entity if this process takes so long?
If you are purchasing assets of another railroad, you do not get their common carrier status. Also, if you are forming a brand-new railroad, you must apply right away to the STB. You are not able to perform any duties until you are approved by the STB. Once approved by the STB, you can then start operating, even if you are waiting on RRB. You then set up your payroll under FICA and withhold Tier II taxes and accrue the liability to be paid once RRB determination is received. When approval from the RRB is make, then amended returns will be required to file. Once the amended returns are filed, the funds will be transferred appropriately between the two systems.
Benefit Structure of Railroad Retirement
Railroad employers and employees pay higher retirement taxes than those under Social Security, which results in higher benefits. In order to provide the higher benefits, RR is split into three different parts:
- RR Medicare
- Tier I
- Tier II
Rates and maximums are set and distributed annually to each railroad from the RRB in a Program Letter.
Railroad Retirement Medicare was added to Railroad Retirement to equal the Medicare coverage of the Social Security Administration.
RR Medicare does not have a maximum earnings base. However, there is an additional 0.9% Employee Medicare tax for wages over $200,000 in both systems. These parts of RR are withheld from all railroad employees, which cover retirement, disability, spousal, and survivor benefits. These benefits are subject to federal income taxes, the same as Social Security.
RR Tier I is similar to Social Security in that it provides the retirement portion.
The RR Tier I tax rate is set by Congress, and the employer matches this dollar for dollar. After 1951, a financial interchange was created to allow SS and RR to collect and exchange funds for retirees based on a determination of jurisdiction. Thus, a retiree deemed to not be covered by RR has their withholdings transferred to SS. Conversely, a retiree determined to be under the RR jurisdiction, who worked both inside and outside of the rail industry, has their regular withholdings from the outside job transferred from SS to RR.
RR Tier II tax is taken in addition to the Tier I and RR Medicare taxes.
The purpose of RR Tier II tax was to provide additional benefits that would be comparable to the original stand-alone private pension plans that existed prior to the establishment of this system. The Tier II tax is paid by both employee and employer. However, there is no dollar for dollar match. The employer pays 13.1% while the employee pays 4.9%.
What Is Required to be Vested?
In order to be vested and qualify for RR coverage, a railroad employee needs at least 5 years or 60 months of railroad service over their lifetime. The normal retirement age is 65-67 depending on the year the employee was born. There is an early retirement reduction of anywhere from 20 to 30%. There is a special industry specific exception for employees who have at least 30 years of creditable service. They can retire early at the age of 60 with no reductions. Conversely, for those who choose to work longer, Tier I benefits are increased by a certain percentage for each month an employee delays retirement past full retirement age, up until age 70, about 8% a year. Additionally, when you become vested in RR, you are automatically covered under the Railroad Unemployment Insurance Act (RUIA). This covers unemployment and sickness, which are two benefits that the Social Security Act does not cover. Employees are exempt from regular federal and state unemployment and must go through an application process directly through RRB for both unemployment and sickness benefits. Railroad Retirement is a complex multi-faceted program, which is independent but also linked to the Social Security program. Therefore, despite the two systems being separate, the future outlook of SS does have a direct impact on RR. However, RRB projections in 2015 suggest that the system will remain stable for the next 20 years. Thankfully, the system was set up to allow for more security. Additionally, being able to operate separately for the past 80 years has allowed Railroad Retirement to grow, change and remain untapped by the Federal Government.
Bowers aims to offer helpful information to our clients and friends. Learn more about how we can help should your railroad business need accounting and financial services. Disclaimer: To ensure compliance with requirements imposed by the Department of Treasury, we inform you any U.S. federal tax advice contained in this document or video is not intended for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.