What Is The Railroad Retirement Plan?
The Railroad Retirement Plan provides retirement income for individuals who have either worked for a railroad or who qualify as their dependents or survivors. The plan was created in the 1930s through several pieces of federal legislation referred to as the Railroad Retirement Act(s). While Social Security was being developed, railroad workers sought a national plan that would build on railroad industry programs already in place.
Caution: The following information is only an overview of Railroad Retirement Plan benefits. For more details, visit www.rrb.gov.
Who Administers The Railroad Retirement Plan?
The Railroad Retirement Board administers the retirement plan as well as Railroad Unemployment Insurance and certain Medicare benefits. The board administers the Railroad Retirement Plan under the Social Security Act. The board's headquarters are in Chicago, Illinois, and branch offices are located in many major cities. Contact the Railroad Retirement Board at (877) 772-5772 or at www.rrb.gov.
How Is The Railroad Retirement Plan Similar To Social Security?
The Railroad Retirement Plan is separate from the Social Security program, but they are closely linked in terms of taxes, finances, and benefits. Legislation in 1974 restructured railroad retirement benefits into two tiers to align them even more closely with those of Social Security. Tier I is based on the combined credits of railroad employment and Social Security, while Tier II is based on railroad service only.
How Is The Railroad Retirement Plan Funded?
Railroad workers and their employers support the Railroad Retirement Plan through wage taxes similar to those paid to the Social Security Administration by nonrailroad workers. Railroad Retirement Tier I and Medicare taxes on employees and employers are the same as Social Security taxes. Employees and employers each pay a Tier I tax equal to 6.2 percent of the employee's wages, up to a maximum earnings limit of $137,700 (in 2020). Employees and employers also each pay a Medicare tax equal to 1.45 percent of the employee's wages (no maximum earnings limit applies). Employees with higher incomes will also pay an additional tax of 0.9 percent. This tax will be due if an individual's income exceeds $200,000 or a married couple's income exceeds $250,000 if they are filing a joint tax return. Additionally, rail employees pay a Tier II tax of 4.9 percent on earnings up to $102,300 per year (in 2020), while employers pay Tier II taxes of 13.1 percent. Rail employees must also pay a work-hour tax (the rate varies quarterly) that finances the Railroad Retirement Supplemental Annuity Program.
Who Is Eligible To Receive Benefits?
Railroad Workers (Based On Age and Service)
Individuals having railroad employment experience and meeting certain plan criteria are eligible to receive railroad retirement benefits. As a general rule, benefit recipients must have worked for a railroad for at least 120 months (10 years), or at least 60 months (5 years) if the service was performed after 1995. Some exceptions apply. Age and service annuity benefits are payable at:
- Age 60, if the worker has at least 360 months (30 years) of creditable railroad service. No early retirement reduction applies (if the employee retired in 2002 or later).
- Age 62, if the worker has 120 to 359 months (10 to 29 years) of creditable railroad service, or 60 to 119 months (5 to 9 years), if at least 60 service months (5 years) were after 1995. However, an early retirement reduction applies. The annuity benefit is reduced by 1/180 for each of the first 36 months the worker is under full retirement age when the annuity begins, and for each month thereafter. Full retirement age is currently 66 to 67, depending on the employee's year of birth.
- Age 66-67 (full retirement age), if the worker meets the above length of service requirements. No benefit reduction applies.
Workers may also earn delayed retirement credits for each month they delay retirement past full retirement age, up to age 70. In certain circumstances, benefits may be reduced for earnings from work after retirement from railroad service.
Disabled Railroad Workers
Disability benefits may be payable to workers at any age based on total disability. To receive benefits based on total disability, workers must have at least 120 months (10 years) of creditable railroad service, and they must be permanently disabled. To be permanently disabled, the worker must be unable to work in any substantial gainful activity and the disability must be expected to last 12 months or more or result in death. Workers who have 60 to 119 months (5 to 9 years) of creditable railroad service, if at least 60 service months (5 years) were after 1995, may qualify for more limited benefits based on total disability. Disability benefits may also be payable based on occupational disability (i.e., the worker is unable to perform work in his or her regular railroad occupation). To receive benefits based on occupational disability at any age, workers must have at least 240 months (20 years) of creditable railroad service. To qualify at age 60 or older, workers must have at least 120 months (10 years) of service. In addition, workers must have a current connection with the railroad industry.
Spouses of Railroad Workers
A spouse of a retired worker with 30 years of service who has reached age 60 is eligible for an unreduced annuity benefit at age 60 if the annuity beginning date is January 1, 2002, or later. The spousal benefit is 50 percent of the worker's unreduced benefit. A spouse of a disabled annuitant with 30 years of service can also receive an unreduced annuity as early as age 60. A spouse of a retired worker with fewer than 30 years of service who has reached age 62 is also eligible for an annuity at age 62. An early retirement reduction applies if the spouse is under full retirement age. The spousal benefit will be reduced by 1/144 for each of the first 36 months the spouse is under full retirement age when the annuity begins, and by 1/240 for each month thereafter. A spouse of a retired or disabled annuitant (in certain cases) may receive a spousal annuity at any age if he or she is caring for the worker's child. The child must be under age 18 or disabled (if disability began before age 22). Other requirements may apply. Divorced spouses may also be eligible for annuities based on their ex-spouses' records if the marriage lasted at least 10 years, both parties have attained age 62, and the divorced spouse is not currently married.
Survivors of Eligible Railroad Employees
Survivors of eligible railroad employees who meet certain criteria may also receive railroad retirement benefits. A surviving spouse of an eligible railroad employee may be eligible for plan benefits. Divorced spouses may be eligible as well if they have reached retirement age or they support the child of an eligible railroad employee. A child of a deceased employee may also be eligible for benefits.
How Much Railroad Retirement Benefits Will A Worker Receive?
Tier I benefits are based on average earnings, calculated much like Social Security retirement benefits. Tier II benefits, however, are based on years of service and average monthly earnings. Because employers and employees covered by the Railroad Retirement Act pay higher taxes than those covered by Social Security, railroad retirement benefits are higher. The average age annuity paid to career rail employees is considerably higher than the average Social Security retirement benefit.
Tip: Supplemental annuity benefits between $23 and $43 a month are payable to workers who retire directly from rail work with 25 years or more of service and who have a current connection with the railroad industry (e.g., worked for a railroad in at least 12 months in the 30 months immediately preceding the month the retirement annuity began).
Railroad Retirement Benefits and the Social Security Offset
In situations where a retiree has contributed to both Social Security and the Railroad Retirement Plan, benefits received from Social Security will offset those from the Railroad Retirement Plan.
Medicare Benefits for Railroad Retirement Recipients
Railroad retirement recipients are entitled to Medicare health coverage under the same rules that govern other workers. To receive Medicare benefits, individuals must be age 65 or older or be disabled under certain circumstances.
Income Tax Considerations
Generally, part of a railroad retirement annuity is treated like Social Security income (the part equivalent to a Social Security benefit), while the other part is treated like a private or public pension. For more information, see IRS Publication 915, Social Security Benefits and Equivalent Railroad Retirement Benefits, and Publication 575, Pension and Annuity Income.
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.
The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.