“I have a client who participates in a pension with the railroad. Can you give me information on the arrangement?”
ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor is representative of a common inquiry related to Railroad Retirement Benefits.
Highlights of the Discussion
The client is likely covered by the Railroad Retirement Act and the Railroad Unemployment Insurance Act, federal laws that provide retirement and disability benefits for qualified railroad employees and their spouses, and survivor benefits for family members. The program is governed by the Railroad Retirement Board and has been in existence since the 1930s.
Railroad Retirement Benefits are provided under a federal program parallel to the way Social Security operates for nonrailroad workers. There are several differences, however. For more information, interested parties can visit the following links online U.S. Railroad Retirement Board and An Overview of the Railroad Retirement Program.
Generally, Railroad Retirement Benefits have two tiers. Tier I was designed to be equivalent to Social Security benefits, while Tier II was structured to provide additional benefits comparable to private pension plans. And those covered by Railroad Retirement Benefits can login in here to check their benefits: https://rrb.gov/Benefits/myRRB
The form of payment is an annuity at full retirement age, which is approaching age 67 (like Social Security). Payments can start as early as age 62 with a reduction in benefit amount (also like Social Security). And if an individual has at least 30 years of service with the railroad, benefits can start at age 60 with no reduction of benefit. Annuities are payable to surviving widow(er)s, children, and certain other dependents. Lump-sum benefits are payable only in limited circumstances (i.e., after the death of a railroad employee if there are no qualified survivors of the employee, and in the case of a residual lump sum death benefit).
Railroad companies can also cover their employees with their own defined contribution or defined benefit plans. Receipt of a private railroad pension (but not a 401(k) distribution) could reduce the amount of annuity benefits payable by the Railroad Retirement Board (see Private Rail Pensions May Reduce Supplemental Annuities).
Coverage under Social Security or Railroad Retirement isn’t coverage under an employer retirement plan. Therefore, such benefits may not be rolled over to a qualified plan or IRA. Additional information on Railroad Retirement Benefits is available in IRS Publication 575, Pension and Annuity Income, and IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits .
Railroad employees may be eligible for unique benefits paid through the federal Railroad Retirement Board, which are similar to–but different from–benefits paid from the Social Security Administration. Railroad companies could also sponsor private qualified retirement plans for their employees. Individuals affected by Railroad Retirement Benefits should seek tax advice to help them sort out the details of how their various retirement benefits interact with each other.