Labor Employer Reporting Instructions

Part II	Principles of Service and Compensation
Chapter 1	Service Months
Chapter 2	Employment Relation
Chapter 3	Creditable Maximum Compensation Amounts
Chapter 4	Taxable Compensation under the Railroad Retirement Tax Act
Chapter 5	Taxation of Compensation under the Railroad Unemployment Insurance Act

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CHAPTER 1: Service Months

A service month is a unit of credit used to determine eligibility for railroad retirement, unemployment and sickness benefits, as well as the amount of such benefits. A service month should be reported for the month in which service is actually or constructively performed even if the payment of compensation for the service is not made until a later month. For example, an employee begins employment on February 27 but is not paid until March. The employee works until November 27 and resigns. The last pay is received in December. The employee is entitled to service credit for February through November. Service is considered constructively performed if service is established by legal guidelines or interpretation such as in the case of pay for time lost. Under the Railroad Retirement Act (RRA), there are two types of service months: reported and deemed.

Service Months Reported by Labor Employers
As the name implies, reported service months are months reported to the Railroad Retirement Board (RRB) by the employer. A service month is reported for a calendar month in which an employee either actively or constructively rendered compensated service or received pay for time lost for an identifiable period of absence from active service. In order for service to local lodges to be considered creditable, there are two other requirements which must be met. First, the compensation for the service must be at least $25 a month. Second, the employee must have, at some previous time, rendered creditable railroad service to a carrier employer.

A service month should be reported for every month in which service was performed regardless of when the maximum creditable compensation bases are reached. If an employee reaches the Tier I creditable maximum amount in October but works through December, the employer should report twelve months, not ten.

A period of military service which meets specific conditions may also be credited as service months for railroad retirement purposes. Creditable military service, however, is outside the scope of an employer's reporting responsibilities.

Deemed Service Months determined by RRB
Deemed service months are credited directly to an employee's record by the RRB. Service is deemed when an employee does not have all twelve months reported in the year, but has sufficient Tier II compensation and has an employment relationship in months not reported.

To determine the maximum number of deemed months for an employee for a year, 1) multiply the number of reported service months by 1/12 the annual Tier II maximum compensation for the year; and 2) subtract this product from the reported Tier II compensation. If the result is zero or negative, no deemed months are possible. If the result is a positive amount, 3) divide by 1/12 the Tier II maximum compensation and 4) round up to a whole number. This is the maximum or potential number of deemed service months. The actual number of deemed months will depend on whether the employee has an employment relation in the months not worked.

Part VIII, Chapter 4 has more information and an example about deemed service months, including the conditions which permit the deeming of service months and the employer's role in the deeming of service months by the RRB.

Employment Relation and Service Months
Both reported and deemed service may only be credited for a month in which an employment relation exists with a railroad employer. In other words, service can only be reported for a month in which an individual was an employee. When a person becomes a former employee, for whatever reason, the employment relation ends and service cannot be credited after that month.

Additional Information on Service Months
See Chapter 2 of this Part for information about how an employee's employment relation affects crediting of service months.

See Chapter 4 of this Part for information on the options for reporting creditable compensation, whether on an earned or paid basis, and how this relates to reporting service months.

See Part III, Chapter 5 for a discussion on service months and vacation pay in lieu of vacation taken.

See Part III, Chapter 7 for an explanation of why deemed months should not be considered in awarding pay-for-time lost.

Part VIII, Chapter 4 has information about the procedure the RRB uses to obtain information about an employee's employment relation for purposes of deeming service.

CHAPTER 2: Employment Relation

Service months may be credited only for months in which an employment relation is maintained. An employment relation is maintained during periods in which active service is not performed because of:

• furlough;

• authorized leave of absence; or,

• continuous disability.

An employment relation ends when an employee:

• dies;

• retires or receives a company pension;

• is discharged;

• resigns; or,

• relinquishes employment rights.

See Part VIII, Chapter 4 for an explanation of why the Railroad Retirement Board may request an employee's employment status when deeming service months.

A Common Employer Error: Reporting Service Months Not Due
It is a common employer error to report service months after the employment relation has ended when a payment is made in a later month for earnings due. But a payment alone never constitutes reason for reporting a creditable service month if an employment relation does not also exist in the month.

Example of correctly reporting service months
An employee retires in November. Earnings payments due are made in December and again in the following February. The payments made after November may be credited as compensation to November (or earlier months, if earned in earlier months) or to the months paid, but no service months are creditable after November. The employee is not entitled to service credit for December or February because the employment relation ended in November.

As you can see from the above example, the employment relation is an essential factor in crediting service months but is not a requirement in crediting compensation.

CHAPTER 3: Creditable Maximum Compensation Amounts

The three types of creditable compensation which must be reported are known as Tier I, Tier II, and Railroad Unemployment Insurance Act (RUIA) compensation. The terms do not refer to three different types of earnings but rather to three differing compensation maximums.

For system subordinate units and grand lodges, a single payment is creditable as Tier I, Tier II, and RUIA compensation until the applicable compensation maximums are reached. Labor employers must ensure that the logical relationships between Tier I, Tier II, and RUIA compensation described below are accurately met when completing an annual report of service and compensation.

Notification of Compensation Maximums
The compensation maximums, also known as the earnings bases, for Tier I and Tier II are established by the Social Security Administration and published in the Federal Register. The Railroad Retirement Board (RRB) determines the RUIA compensation maximum. Each October, the RRB notifies all employers of the earnings maximums for the following year, via a circular letter to the NRO. This information can also be accessed through our Web site at www.rrb.gov.

Tier I and Tier II Compensation
Tier I and Tier II compensation is subject to annual maximums. Both Tier I and Tier II compensation are creditable until the annual earnings attain the Tier II maximum. Amounts earned over and above the Tier II maximum are creditable as Tier I compensation, until the annual earnings attain the Tier I maximum.

Two examples of Reporting Compensation up to the Annual Maximums
The 1997 Tier I and Tier II earnings maximums are $65,400 and $48,600, respectively. Example employee earns $60,000 in 1997. The employer should report $60,000 as creditable Tier I compensation and $48,600 as creditable Tier II compensation.

A second employee earns $23,500 in 1997. The employer should report $23,500 as creditable Tier I compensation and $23,500 as creditable Tier II compensation.

Reported Tier I and Tier II compensation amounts should never exceed the applicable annual maximums. The combined Tier I compensation (regular earnings and sick pay) reported by any one employer should not exceed the Tier I compensation maximum in a given year.

Employers should report service for every month in which service was performed regardless of when the maximum creditable compensation bases are reached. If an employee reaches the

Tier I creditable maximum amount in October but works through December, the employer should report twelve months, not ten.

Compensation from Multiple Employers
Labor employers must tax and report Tier I and Tier II compensation amounts up to the applicable annual maximums regardless of whether the employee worked for another carrier employer either concurrently or in a different period in that calendar year. In other words, the employer must treat an employee as solely its employee for tax withholding and reporting purposes.

As a result, the total compensation reported by all employers for an individual may exceed the annual maximum creditable by law. In that situation, the RRB automatically adjusts the record to reflect the annual maximum creditable compensation for that employee's record.

See Chapter 4 about what an employee should do when this situation results in excess employment tax withholding. See Chapter 5 for information on RUIA compensation from multiple employers.

RUIA Compensation
RUIA compensation is subject to monthly maximums. If actual earnings in a month are less than the monthly maximum amount, actual earnings should be reported.

Example of Crediting RUIA Compensation
The 1997 RUIA monthly maximum is $890. An employee earns $1,500 each month while continuously employed from January through November. The employee earns $600 December 1-3 and takes an unpaid leave of absence for the remainder of the calendar year. The employer should report $10,390.00 in RUIA compensation for 1997 - $890 per month for January through November, plus $600 for December earnings.

When RUIA monthly maximums are applied correctly, the reported RUIA compensation for the year will not exceed 12 times the applicable monthly maximum. The reported RUIA compensation may, however, exceed the number of reported months times the applicable monthly maximum.

Earnings Taxed for Medicare: No Maximum, No RRB Report
Amounts earned over and above the Tier I maximum are not creditable under the Railroad Retirement Act even though additional amounts earned are taxable for Medicare purposes. Taxable Medicare earnings beyond the creditable Tier I maximum are not reported to the RRB, except possibly on Form BA-11, Gross Earnings Report.

If an employee earns $75,000 in 1997, the employer should report $65,400 as creditable Tier I compensation and $48,600 as creditable Tier II compensation because those are the 1997 Tier I and Tier II maximums. The entire $75,000 is taxable for Medicare purposes.

CHAPTER 4: Taxable Compensation Under the Railroad Retirement Tax Act

The retirement, survivor, and disability benefit programs under the Railroad Retirement Act (RRA) are funded by mandatory employment taxes on both employees and employers under the Railroad Retirement Tax Act (RRTA). Under the current provisions of the RRTA, Tier I and Tier II compensation is subject to the tax rates and earnings bases in effect when payment is made. In other words, taxation under the RRTA is on a "paid basis" and is always in terms of the payment year.

Reporting Compensation: Earned vs. Paid
When crediting compensation under the RRA, employers may choose to credit compensation either to the period in which the services were rendered, "earned basis" or to the period in which payment is made, "paid basis." However, as mentioned in Chapter 3 of this part, service months are always creditable to the month when earned.

Example of Earned vs. Paid Reporting
Employee earns $400 per week and is paid bi-weekly. The pay period for the last two weeks of the calendar year ends December 28 and the paycheck is issued on January 10 of the new calendar year. Taxes from that paycheck must be withheld at the new year's rates and the compensation begins to be counted toward the new year's maximum earnings bases. If the employer chooses to report compensation on an earned basis, the $800 compensation amount earned in the final pay period of December is reported for the earlier year for creditability purposes. If the employer chooses to report compensation on a paid basis, the $800 is reported for the next year. In either case and regardless of any other work or non-work in the earlier half of December, a service month is reported for December because the employee rendered service in December.

If compensation is reported on an earned basis consistent with the reporting of service months, the tax treatment of a payment made in a different calendar year than the year for which it is reported may not be consistent under the RRTA with the manner in which the payment is credited as compensation under the RRA. If, on the other hand, compensation is reported when paid in order to conform to the taxation method required by the RRTA, compensation will not necessarily be linked to the service period which is reported for that compensation.

See Part III, Chapter 1 for more important information about an employer's earned/paid election, including reporting RUIA compensation and an employee's rights with respect to the employer's earned/paid election.

IRS Jurisdiction
Because the RRTA is administered by the Internal Revenue Service (IRS), the Railroad Retirement Board has no authority to provide definitive answers to railroad retirement tax questions. A staff member in the Quality Reporting Service Center (QRSC) may be able to help you with basic information about railroad retirement taxes. If not, you will be referred to a railroad retirement tax specialist at the IRS.

See Part V, Chapter 5 for information about an employer's annual employment tax return which is submitted to the IRS and about the supplemental tax on compensation.

Excess Tax Withholding Treatment in Multiple Employer Situations
Employees who have paid employment tax for Tier I, Tier II, or Medicare in excess of the annual maximum taxable amounts because they had two or more employers in a calendar year, and the sum of their earnings exceeded the maximum creditable amount, should claim an income tax credit on their annual tax return with the IRS. Instructions on how to compute the credit amount are in IRS Publication 17, Your Federal Income Tax. QRSC has developed a worksheet to help employees determine their tax credit. The worksheet is specific for each year's tax return. To request a worksheet for a specific tax year, contact QRSC.

There is no provision for a credit or refund of tax to the employers in this situation.

Employees who have paid employment tax Tier I or Tier II in excess of the annual maximum from a single employer must seek their refund from that employer.

CHAPTER 5: Taxation of Compensation under the Railroad Unemployment Insurance Act

Unlike compensation under the Railroad Retirement Act and the Railroad Retirement Tax Act, the monthly maximum taxable and creditable compensation amount under the Railroad Unemployment Insurance Act (RUIA) for an employee may be allocated among multiple concurrent employers. In other words, if an employee worked only for a system unit in a month, earnings are creditable and taxable under the RUIA up to the monthly maximum. If the employee also worked for a railroad carrier in the same month, the employee's combined earnings are creditable up the RUIA monthly maximum. If the combined earnings exceed the RUIA monthly maximum, the creditable RUIA compensation may be allocated or prorated between the two employers. The method of proration is not set by the Railroad Retirement Board, but by agreement between the two employers. Any method which yields the correct total RUIA compensation and produces payment of the RUIA contribution liability is acceptable to the RRB. Part III, Chapter 2 and the Form OE-1 handbook have more detailed information about alternative ways, including examples, to apportion RUIA earnings between multiple employers.

If a labor employer does not report or tax RUIA compensation because of primary carrier earnings, proper documentation must exist in the system subordinate unit's records to substantiate non-reporting of RUIA earnings. Because the RUIA maximum earnings are monthly, substantiation must exist for each month non-reporting and the corresponding non-payment of RUIA contributions is assumed. Substantiation is needed to prevent the underpayment of RUIA tax and possible resultant penalties and interest.

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