Payments that result from the abolition of an employee's job may be known as separation, severance, termination, coordination, dismissal, continuation, or guarantee payments or allowances. By whatever name they are called, they constitute creditable and taxable compensation. The regulations of the Railroad Retirement Board (RRB) distinguish between separation or severance allowances and dismissal allowances. These two types of payments are creditable in different ways.

The term that an employer gives the allowance does not govern the rules under which the payment is taxed and credited. If the terms of an agreement meet the Railroad Retirement Act's definition of a dismissal allowance, but the employer calls it a separation allowance, the rules for a dismissal allowance will apply.

Under the Railroad Retirement Act (RRA) and Railroad Unemployment Insurance Act (RUIA), if an employee relinquishes job rights for the purpose of receiving an allowance, the payment is considered to be a separation allowance. A separation allowance is considered earned in the month that the employee fulfills the conditions necessary to receive the pay, which is usually the month in which the employment relation is severed or the month last worked.

Employers electing to report on an earned basis, the entire separation allowance should be reported as service and compensation in the month the employee relinquished their rights or the month last worked.

Employers electing to report compensation on a paid basis will report the separation allowance paid in the year as compensation on their annual report for that year. This is true regardless of whether the payment is made in a lump sum or in periodic installments. Employers electing to report compensation on an earned basis should report the entire amount of the allowance to the year last worked or to the year of separation, up to the annual maximum. If the compensation exceeds the maximum for that year, the excess Tier I compensation is reported as miscellaneous compensation on Form BA-10. See Part IV, Chapter 2.

Separation allowances and severance payments are not subject to conversion to work-hours for the purpose of paying supplemental tax.

• the employee has not resigned or relinquished employment rights;

• the employee may be recalled during the period of the allowance;

• the employee remains covered under various employee plans; or

• the employee continues to receive employee benefits.

A dismissal allowance is a type of pay for time lost, as described in Part IV Chapter 6, and is creditable as service and compensation. Whereas most pay for time lost is awarded retroactively to a prior period where earnings were lost, a dismissal allowance is usually paid as part of current payroll. For reporting purposes, a dismissal allowance appears on the report as though the employee had continued to work during the period of the allowance.

As illustrated above, the creditability of payments paid in consideration of termination of employment cannot be determined solely by when the payment is made and taxed. The date of the cessation of a genuine employment relation must also be considered when determining the period to which compensation is creditable.

It is to the employer's advantage to timely file Form BA-9. If Form BA-9 is not filed and a disqualification period is not established, unemployment benefits could be overpaid and the experience-rated contribution rate inflated. The absence of Form BA-9 may also result in employee inquiries. See Part V, Chapter 5, for information about filing reports of separation allowances or severance pay.

If both a separation allowance and some other payment are being paid at the same time, it is preferable if the two payments are issued separately. This will make clear to both the employee and the RRB, the amount of separation allowance which is subject to Tier II tax. If a separation payment and another payment are combined, the Tier II tax on the pay receipt may not agree with the amount reported on Form BA-9 as subject to Tier II tax. Any such differences must be resolved. Separate payments will help to prevent unnecessary inquiries to the employer for clarification.