Railroad retirement benefits
If you work for CSX, Union Pacific, Norfolk Southern, or Amtrak and are confused by the difference between your Tier 1 and Tier 2 benefits, you aren’t alone. What about coordinating Tier 1 benefits with social security, the supplemental annuity, or spousal benefits… How do those work? We have all of that and more covered for you in this blog series.
To learn more, choose from one of our many blog posts on railroad retirement benefits below:
Understanding Your Railroad Retirement Benefits at CSX
You are a Railroader….
You’ve worked for CSX Corporation or other lines… and now you are edging closer to RETIREMENT…
DO YOU KNOW HOW YOUR RAILROAD RETIREMENT BENEFITS WORK?
Here you’ll find a monthly blog series to help you navigate the world of railroad benefits: coordination with Social Security, how spousal/ex-spousal benefits work, benefits for your dependents, taxation, and so on. Since this is the first article, we’ll start with the basics of RAILROAD RETIREMENT BENEFITS.
The Railroad Retirement Board (RRB) is an independent agency in the Executive Branch of the Federal Government. It was started in the 1930s to nationalize railroad retirement. Railroaders already had individual company pension plans, but the Great Depression shook up that unstable system and created a retirement crisis for railroad retirees. The Social Security system was still in its planning stages and was only going to cover work performed AFTER 1937, so something more had to be done. Railroaders wanted a separate system that would create a uniform national retirement plan for railroad workers and were able to successfully lobby for the 1937 Railroad Retirement and Carriers’ Taxing Act, which established the National Railroad Retirement program. Later legislation in the early 1970’s restructured the retirement plan into 2 tiers, allowing full coordination of benefits with Social Security.
A good deal of confusion about Railroad Retirement centers around the two separate tiers, so we’ll start off by explaining those first.
Tier 1 – These benefits are based on the combined credits you have earned throughout your career both in the Railroad Retirement and the Social Security Systems.
How do I qualify for retirement benefits?
If you have 5-9 years of service (if at least 5 years were after 1995), you can start your retirement benefits at age 62 – with an age reduction prior to Full Retirement Age just like Social Security.
If you have 10-29 years of service, you can start your retirement benefits at age 62 – also with an age reduction prior to Full Retirement Age.
If you have 30 years of service, you can start my benefits at age 60 and there are NO age-based reductions. This last point is the HUGE advantage you have as a Railroader and why a lot of people love railroad retirement. Unlike Social Security, as long as you have worked 30 years in covered railroad service, you can retire at 60 and get your FULL benefits.
Like Social Security, the retirement benefit amount is based on your highest 35 years of railroad service income.
An additional benefit that is not available through Social Security the Supplemental Annuity. How do you qualify for that?
If you have 25 years of service that started BEFORE October 1, 1981, and you are still “connected” to a railroad company at the time of retirement, you are eligible for the Supplemental Annuity. What does “connected” mean? It means you have 12 months of railroad service in the 30 month period before you start your annuity.
You can start receiving the supplemental annuity at age 60 if you have 30 years of service. You’ll receive the annuity at age 65 if you have 25-29 years of creditable service.
Included in Tier 1 benefits are also Spousal Benefits, Disability, Survivor, and Unemployment and Sickness benefits - all of which will be covered in future monthly blog posts.
Tier 2- Tier 2 is an additional benefit for Railroaders that is not available in the Social Security system. It is built to resemble a defined benefit pension and is based on the tenure you have in the railroad system. This benefit is in addition to any pension, 401k, deferred compensation, or other retirement benefits you are entitled to by the specific railroad company your work for.
How do you qualify for this benefit?
You meet the same Age and Service requirement as with your Tier 1 benefits.
How is your benefit amount determined?
Your benefit is calculated by taking your average monthly earnings (up to the annual Tier 2 maximum of $75,900) of your highest 60 months. Then, that amount is multiplied by 7/10 of 1% (.007) and again by the number of years in railroad employment.
For example, you retire at the end of 2021 with your highest 60 months being the last five years. Your average monthly earnings during that period were $6000 per month and you will have 30 years of retirement service at the end of 2021.
Tier 2 Benefit = $6000 x .007 x 30 years = $1260/month
It is important to note that when you start taking your annuity retirement benefit, you give up any rights to work for another railroad employer. So, make sure you have no intention to go back to railroad work after you retire and start your retirement benefits. This is an important concept that we will explore later in our series.
As you start to consider retiring from CSX, make sure you fully understand the nuances of your benefits and how to maximize your railroad retirement benefits. Work with a planning firm that understands railroad retirement and how to best fit it into your overall family retirement plan.
RAILROAD RETIREMENT AND SOCIAL SECURITY: How are they the same? How are they different? Is it possible to have both?
When we look back in the history of Railroad Retirement, we know that Railroad Retirement was started before Social Security even began. However, in time it became more integrated. In 1951, a financial interchange was established between the two. In 1965, a provision was created to coordinate the tax rates and allow Medicare to expand and cover those in the Railroad Retirement system. In 1974, the Railroad Retirement Act split the Railroad Retirement benefit into Tier I and Tier 2, with Tier 1 is designed to be equivalent to the benefits offered by Social Security.
So, how are Railroad Tier 1 Benefits similar to Social Security?
Just like Social Security, a railroad worker is not entitled to take retirement benefits until the age of 62. If benefits are accepted at this age, it is considered early retirement, and there is a permanent reduction of benefits.
Similar to Social Security’s Full Retirement Age (FRA), the Normal railroad retirement age is between 65 and 67, depending on the worker's birthdate.
How are Tier 1 Benefits different from Social Security Benefits?
Tier 1 has a GREAT benefit available to those Railroaders with at least 30 years in a Railroad Retirement Board approved company – you can get your FULL retirement benefits AT AGE 60! No reduction!
How you qualify for benefits is different. While Social Security retirement beneficiaries need 40 credits earned by paying payroll taxes on a specified amount of wages, railroad workers qualify for their benefits by working for a specified period: 120 months as of 2013 or 60 months or five years of railroad work after 1995.
You may be one of the many people who have worked both in AND out of the Railroads. How does that work?
Let’s say you worked outside of the Railroad System long enough to earn your 40 credits needed to qualify for your Social Security benefits. Then you started to work for the Railroads and worked there for 20 years. You might wonder how your Social Security benefits and Railroad Retirement benefits work together. Can you “double dip” and collect BOTH Social Security and Railroad Retirement?
The short answer is NO. When you file for social security benefits, the Railroad Board must reduce your Tier 1 component by the amount of Social Security benefits you would receive. Why? Tier 1 benefits approximate what Social Security would have paid if you were covered by Social Security. Therefore, if you had actual SS benefits paid on the basis of non-railroad retirement, Tier 1 would be reduced to prevent a duplication of benefits.
What if your Social Security benefit is higher than your Tier 1 benefit? You can accrue additional Social Security benefits by delaying your filing until age 70 while drawing your Railroad benefits. If you look at your Social Security statement and realize your benefit at age 70 is still lower than Tier 1 benefit, there is no point to ever file for Social Security.
What if you didn’t work in the Railroads for more than 5 years? You wouldn’t qualify for Railroad Retirement benefits, so what happens to those benefits? Those benefits would transfer into the Social Security system.
As you make your career in Railroad, the more you can learn about the nuances of your Railroad Benefits and how they integrate into your life, the more successful your overall financial planning will be. Continue to follow our monthly blogs about your Railroad Retirement Benefits!
Railroad Retirement Benefits for My Spouse?
We’ve discussed how your railroad retirement benefits, Tier I and Tier II, work in a previous blog. Your spouse has been by your side for many of those railroad years and you know they are supposed to receive some type of spousal retirement benefit. But what will they receive?
First, they must qualify to receive the benefit.
In order to qualify, you and your spouse have to have been married at least 1 year when you retire or share a child together under the age of 18.
If you have spent 30 years in Railroad retirement and you are 60 you get the awesome benefit of receiving your retirement benefits early. When your spouse turns age 60, they TOO can get their spousal annuity. No need to wait until age 62 like Social Security.
If you have LESS than 30 years’ service and are age 62, your spouse is also eligible once they are 62. Just like with Social Security, the monthly benefit will be a reduced benefit because it is being drawn prior to your spouse’s Full Retirement Age.
How is the Railroad Retirement Spousal Benefit determined?
Generally, the spousal annuity is HALF of your Tier I benefits and about 45% of your Tier 2 Benefits and is dependent on your age, your employee retirement date and how many years of railroad service.
I heard that spousal benefits might be offset by other benefits. Tier 1 benefits may be OFFSET from other benefits your spouse may receive. What would cause an offset?
Reduction from any Social Security entitlement whether it is based on the spouse’s earning, the employee’s earnings or earnings of another person. Just like Social Security, your spouse will receive the higher of the benefits payable to them.
If your spouse receives a Federal, State or local pension based on their own earnings.
**Military service pensions or payments from the Department of Veterans Affairs generally do not reduce Tier 1 benefits.
Only Tier 1 Benefits can be offset, NOT Tier II spousal benefits.
Both my spouse and I are Railroaders – how does that work?
If you and your spouse are both Railroaders do you both receive spousal benefits IN ADDITION to your own benefits? IT DEPENDS.
If you both started in the Railroads before 1974, then you are the lucky ones – BOTH OF YOU can receive your own railroad benefit AND a spousal entitlement benefit.
If you started after 1974, then NO – YOUR spousal annuity benefit will be reduced by your employee annuity. No double benefits.
My spouse and I have gotten a divorce – now what happens? Will my ex-spouse still be able to receive the spousal annuity?
Just like Social Security, your ex-spouse CAN receive benefits based upon your record. To do this they must have:
Been married to you for at least 10 consecutive years
Not remarried
Not be entitled to a social security benefit (before any reductions) on their own earnings record that exceeds the amount of the divorced spouse railroad annuity.
If your ex-spouse draws benefits based on your work record, does that mean you will get a reduction in benefits? NO.
Are they entitled to receive Tier 2 Benefits? Generally, NO. However, they could receive Tier 2 benefits if the entitlement was part of the property settlement agreement.
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There are other spousal benefits and family benefits that are part of Railroad employment – Survivorship benefits, Disability, Unemployment, etc. – all of which we will cover in future monthly blogs in our Client Resources section. Make sure you and your spouse are fully aware of ALL the benefits you are entitled to. These benefits are one of the many reasons so many value their time being a Railroader!
Railroad Retirement Benefits and Taxation Does it work any differently when I finally retire?
We are coming to the end of tax season and you have your taxes already filed, right? GREAT NEWS – or hopefully soon it will be great news! You are about to retire from the Railroad industry and the thought pops up – do I know how my railroad retirement benefits will be taxed? Other than my income amount, will my next years’ tax return look different that last years? So much of what I’ve read online is SO confusing! Let’s try to simplify and first examine how your benefits are taxed.
The taxation of your benefits are different based on the type of benefit.
Tier I Taxation – You’ll recall from previous blogs that Tier I benefits are based on the combined credits you have earned throughout your career both in Railroad Retirement and the Social Security Systems. This amount of Tier I that would have been payable if railroad employment had actually been covered by the Social Security Act, is your Social Security Equivalent Benefit or SSEB. This amount is treated the same as Social Security for Federal income tax purposes.
To find out if any of your SSEB is taxed, you have to compare the base amount for your filing status against your Provisional Income which is the SUM of:
Your household Adjusted Gross Income PLUS
Your tax-exempt interest income PLUS
½ of your SSEB
Here are the base amounts based on filing status:
$25,000 Single, Head of Household, Qualifying Widow(er)
$25,000 Married filing Separately and lived apart from your spouse for the entire year
$32,000 Married Filing Jointly
$0 Married Filing Separately and lived with your spouse at any time of the year
If that Provisional Income EXCEEDS your base number then some of your benefits may be taxable. Those benefits, like Social Security, can be taxed up to 85% based on how you file your taxes and your total combined income.
What about the Non-Social Security Equivalent Benefit (NSSEB) portion of Tier 1, Tier 2, Vested Dual benefits and Supplemental Annuity payments?
These combined are considered TAXABLE INCOME and will be completely subject to Federal income taxes.
These may seem like a calculations that you do not want to have to figure out at the end of the tax year. The good news is….YOU DON’T HAVE TO FIGURE THIS OUT on your own!!
No later than January 31st following the tax year, you will get TWO statements that show the total annuity payments made to you and the amount of taxes withheld so that you can file your taxes.
You will get Form RRB-1099 that shows your portion of the Tier 1 Railroad Benefit that you would have been entitled to receive under the Social Security system that is taxed based on the base number comparison.
You will also get a Form RRB-1099-R that will show the other NSSEB portion of Tier 1, your Tier II, vested dual benefit and any supplemental annuity payments made to you, combined in a single amount.
Can I set up withholding from my Railroad Retirement Benefits so that I don’t have a big tax bill at the end of the year?
Yes, you CAN, but it will require TWO forms:
W-4V – Voluntary Withholding Request – this form is to withhold taxes from your SSEB payments. You will submit this form to the Railroad Board and select the one of the following withholding rates: 7%, 10%, 15% or 25%.
Form RRB W-4P – Withholding Certificate for Railroad Retirement Payments. Just like your pay when you were working, you have to list the number of withholding allowances you can claim rather than give a percentage of payment withheld. This is NOT a required form. However, if you do not file this form and your combined NSSEB, Tier II, vested dual benefit and supplemental annuity exceeds $2047, they will automatically withhold taxes as if you were married claiming 3 allowances.
Dual retired railroaders? It is recommended that all of your allowances are claimed on the form for the person who has the largest payment and then claim zero on the other persons RRB W-4P. This will ensure your withholding is more accurate.
I live in a state with State income tax. Will I have to pay state taxes on my Railroad Retirement benefits?
YES AND NO.
Like Social Security, your SSEB is excluded from State income tax.
The NSSEB portion of Tier 1, Tier 2, Vested Dual benefits and Supplemental Annuity payments is treated like a private pension, so it will be fully taxable.
While we are not tax advisors, we do help our clients gain an awareness of how their tax situation impacts their retirement plan. For your specific circumstance, we always encourage others to seek out advice from tax professionals. Especially as the Railroad Retirement system is so nuanced, we would highly recommend you find a tax professional who has experience working with other Railroad retirees!
Railroad Retirement Survivor Benefits – Will my family be taken care of if I pass away?
This is a question that plagues every person who has family that depends on them. There is no replacing those relationships or the memories, but at least you can ensure that your family is not burdened with financial struggles. Survivorship planning can include a plan to replace future lost income, take care of existing debts and possibly provide a legacy to your heirs. For those still working, a big part of funding those goals will come from your Employee Benefits. How does this work for Railroaders? Is there anything that a Railroad Retirement beneficiary will receive that is different than the average worker?
Being “insured”
Before we discuss what benefits are available for your family, it is important to know HOW you qualify for those benefits. You need to be “insured” under the Railroad Retirement Act. You are considered “insured” if:
You have at least 120 months (10 years) of railroad service, OR
You have 60 months (5 years) after 1995 AND a current connection with the railroad industry as of the month the retirement annuity begins or the month of death, whichever occurs first.
There are very specific rules that determine how you can meet the current connection requirement. Generally, if you have worked in the railroad industry for at least 12 of the previous 30 months, you are considered to have a connection. If there were gaps in railroad employment, self-employment after the last 30 month period, etc. you will want to review the Railroad Retirement standards for meeting the current connection requirement. The good news is, once you qualify for the connection at the time your retirement annuity begins, you will NEVER lose that current connection requirement.
What happens if you die without having an “insured” status? Jurisdiction of survivor benefits falls to the Social Security Administration who will consider both your railroad retirement and social security credits to determine the benefit your family will receive.
Widow(er) Eligibility
Not only do you have to be insured, but your widow(er) has to be eligible to receive benefits.
Generally, you have to have been married 9 months prior to death for your spouse to receive their benefits. However, they are not going to be able to start benefits until they are age 60 unless they are caring for your child who is under age 18 or caring for your disabled child who became disabled before age 22. Your spouse is also eligible to receive survivor benefits between ages 50-59 if they have a total disability.
The benefits are the same for an ex-spouse - as long as they were married to you for at least 10 years. Benefits are also the same for your remarried widow(er).
What the ex-spouse and remarried widow(er) do NOT qualify for are your Tier 2 Benefits.
Benefits
We’re discussed Tier 1 and Tier 2 Benefits in previous blog posts. You’ll recall that Tier 1 Benefits are calculated using your combined credits in both the Railroad Retirement and Social Security Systems and are based off your highest 35 years of income. The Tier 2 benefit is an additional benefit for Railroaders that resembles a defined benefit pension based on tenure.
Tier 1 Survivor Benefits are treated the same as Social Security. Generally, your spouse is going to get amount of survivor benefits that would have been payable under social security. They are going to get the higher of your Tier 1 benefits or their Tier 1 Spousal retirement annuity/Social Security benefit at your death.
Their Tier 2 benefit will be equal to the Tier 2 benefit you would have received, minus any applicable age reductions.
While it is true that your spouse can access their survivor benefits at age 60, it will be at a reduced amount based on the number of months prior to their Full Retirement Age. Once they get to full retirement age, they will receive their full benefits. Like Social Security, the eligibility age for a full widow(er)’s annuity is gradually rising to age 67 for those born in 1962 or later.
Family Benefits
What about benefits to my children? What if I have an aging parent that was my dependent, are they included in receiving benefits?
As long as your children are under the age of 18 and unmarried or age 19 and unmarried (if they are Full time students in high school), they will receive benefits. If that unmarried child over 18 becomes totally disabled before the age of 22, they will also receive survivor benefits. In 2020, children received about $1550/month on average.
Monthly survivor benefits are also payable to a parent at age 60 if they were dependent on the employee for at least half of their support. If that same employee was also survived by a spouse, divorced spouse or child who could qualify for the annuity, the parent’s annuity will be limited to what Social Security would pay.
Also like Social Security, your family will receive a $255 lump sum benefit. This benefit amount is higher if you completed 10 years of creditable railroad service before 1975.
The railroad retirement lump-sum benefit is generally payable only if survivor annuities are not immediately due upon an employee’s death. The social security lump-sum benefit may be payable regardless of whether monthly benefits are also due.
These benefits will be just a piece in the overall survivorship strategy of your Financial Plan. Understanding these Railroad Survivor Benefits will be important as you determine how much your family needs, to make sure they will be well taken care of after you die. Contact our team of Certified Financial Planner advisors at PARAGON to bring a plan together that fulfills your wishes of taking care of your family if the unexpected were to happen.
Railroad Retirement “Current Connection” – Why is this important?
The idea of a Current Connection comes up in the Railroad Benefit conversation often. But what does this have to do with your benefits?
FIRST - You need to have qualified for a Current Connection to be insured under the Railroad Retirement Act.
NEXT - If you are “insured” under the Railroad Retirement Act, then you and your family can qualify for the following benefits:
Occupational Disability Annuity
Supplemental Annuity
Survivor Benefits
So, what do you need to establish a Current Connection?
You need to have worked for the Railroad in at least 12 of the 30 consecutive months immediately before the month when your annuity begins OR
You worked in Railroad for 12 months of any period of 30 months, BUT then you DID NOT work in any significant NON-RAILROAD employment between the end of the 30 month period and the month when your annuity begins.
For example, John will retire from CSX this month and his annuity begins next month in August, 2021. He would have to have worked for the railroad for at least 12 months in between February 2019 and July 2021 to establish a Current Connection. He did – great for John as he established his Current Connection!
Now let’s say John’s co-worker, Paul, left CSX as an IT professional after working there 15 years, and then decided to go to work for a local bank as their Head of Information Technology. Paul hadn’t yet started his monthly retirement annuity…AND he’s not going to be able to. Working for the bank broke his Current Connection and therefore he lost his eligibility for the supplemental annuity AND future survivor benefits for his spouse!
Are there any EXCEPTIONS to this???
Yes, a Current Connection can be “deemed” for purposes of the supplemental annuity and survivor annuity (NOT occupational disability), if the employee:
Completed 25 years of railroad service
Was involuntary terminated without fault from his last job in the railroad industry, and
After termination, did not decline an offer to remain or return to employment in the same class or craft as their most recent railroad service.
So in Paul’s case, if he had worked 25 years in the railroad industry instead of 15, he would have a “deemed connection” even if he did go to work for the bank and would still be eligible for his annuity and his spouse would be able to get future survivor annuity benefits.
Now let’s say Paul decided that instead of being an employee of the bank, he was going to do IT contract work for the bank and earn self-employment income in an un-incorporated business. In this case, the self-employment income would NOT BREAK the Current Connection.
Other employment options that would not break the Current Connection?
Federal Employment with the DOT (Department of Transportation), NTSB (National Transportation Safety Board), TSA (Transportation Security Administration), RRB (Railroad Retirement Board), Surface Transportation Board and National Mediation Board.
State Employment with the Alaska Railroad
Canadian Railroad Service
Interestingly, once your Current Connection is established at the time your Railroad Annuity BEGINS, you can never lose your Current Connection no matter what work you do after you begin your annuity.
What benefits does Current Connection status NOT impact?
Eligibility for age and service (including 60/30 benefits) or total disability annuities
Spouse’s eligibility for an annuity while the employee is alive
Having a Current Connection can be critical to your retirement income and even more important to your family when you pass away. Make sure you’ve met the requirements to establish your Current Connection and be careful not to make choices that would break that connection after you leave Railroad service. As always, your best resource to determine if you have met the Current Connection requirement is by contacting your local Railroad Retirement Benefit Field office.
Railroad Retirement Benefits and Your Military Service Time
The history of Railroad Benefits dates back to the 1930’s, with the National Railroad Retirement program being established by the 1937 Railroad Retirement and Carriers’ Taxing Act. Our country soon after entered WWII which was followed by the Korean War, then the Vietnam War, and so on. Many Railroaders were drafted or volunteered for service during these wars… would their Railroad Retirement be negatively impacted by that pause in their time working for the Railroad?
The quick answer is NO. But first, let’s dive into who qualifies for that coordination of benefits.
FIRST, you must have been working in Railroad service in the same or preceding year that you are called to service.
SECOND, you must be called to Active Duty when the United States was at war or in a state of national emergency or have served in the Armed Forces involuntarily. The war or national emergency periods are:
August 2, 1990, to date as yet undetermined.
December 16, 1950, through September 14, 1978.
September 8, 1939, through June 14, 1948.
THIRD, only ACTIVE Duty service is considered creditable. You are active duty if you are:
A member of the Armed Forces of the United States (including the U.S. Coast Guard).
Ordered to Federal active duty from any RESERVE component of the uniformed Armed Forces. A reservist’s required annual training is also considered Active Duty time.
State National Guard or State Air National Guard and you are called to FEDERAL active duty by the President or Congress.
Let’s take Tom as an example. Tom is a Locomotive Engineer and was employed with CSX in December 2011. At the time, he was also a member of the National Guard. He and his Guard unit were called in to deploy with another 250,000 National Guard members to support the final crossing of the U.S. troops from Iraq into Kuwait. He was deployed for 24 months overseas. Tom is now retiring from the Railroad. Are those 24 months in Kuwait considered “creditable” service?
YES, Tom’s two years deployed CAN be used to meet his 25-year requirement for a supplemental annuity.
The other benefits that count creditable military service:
Basic 10-year or 5-year service requirement for a regular annuity.
20-year requirement for an occupational disability annuity before age 60.
30-year requirement for early retirement benefits.
Tom will also have completed enough years of qualifying service to be eligible for a military pension as a soldier in the National Guard. He wonders if there is any offset to his Railroad retirement benefits because of his military pension. Tom had heard about other CSX retired employees whose railroad retirement benefits were reduced for a dual entitlement with a government pension and he is hoping that is not the case.
GOOD NEWS for Tom - Railroad retirement employee annuities are always exempt from reduction for military service pensions or payments by the Department of Veterans Affairs.
If you have military service that should be counted as “creditable” service in the calculation of your Railroad Retirement benefits, it is recommended by the Railroad Retirement Board that you file your proof of service in the military well in advance of your retirement date. The information will be stored until you do retire, and you can avoid any unnecessary delays when you are ready to claim those hard-earned Retirement benefits.