Under the Railroad Retirement Act certain railroad employees who have received separation or severance payments may be entitled to a lump-sum payment if tier II railroad retirement taxes were deducted from these payments. This part sets forth the conditions for entitlement to the lump-sum payment and explains how the payment is computed.
(a) An employee who has completed 10 years of service at the time of his or her retirement or death and who has received on or after January 1, 1985, a separation allowance or severance payment (see § 210.11 of this chapter) which would have been used to increase his or her tier II benefit, except for the fact that he or she was neither in an employment relation to one or more employers as defined in part 204 of this chapter nor an employee representative (see part 205 of this chapter), shall be entitled to a lump sum in the amount provided for in § 234.58.
(b) If an employee, otherwise eligible for the lump sum provided for in this section, dies before he or she becomes entitled to a regular annuity or before he or she receives payment of the lump sum, the lump sum is payable to the employee's widow or widower who will not have died before receiving payment. If the employee is not survived by a widow or widower who will not have died before receiving payment, the lump sum is payable to the employee's survivors in the same order of priority as shown for the residual lump-sum (RLS) in § 234.44.
The tier II separation allowance lump-sum payment has no effect on the payment of other benefits.
The separation allowance lump-sum payment is calculated as follows:
(a) Determine the amount of the compensation due to the receipt of separation or severance pay that could not be considered in the computation of tier II;
(b) Multiply this amount by the rate or rates of tax imposed by section 3201(b) of the Internal Revenue Code of 1954 or 1986 on the compensation (tier II tax); and
(c) The product is the amount of the separation allowance lump-sum payment.
Example:In January of 1988 an employee with 10 years of railroad service relinquished his seniority rights in order to receive a separation allowance of $20,000, thereby severing his employment relation. This was the only creditable railroad compensation earned by the employee in 1988. Both the employer and employee would have paid their share of railroad retirement taxes on this amount. With respect to the employee tier II tax, the tax rate for 1988 was 4.9% under section 3201(b) of the Internal Revenue Code of 1986. Although the full $20,000 was creditable under the Railroad Retirement Act for tier I benefit computation purposes, only one month's compensation, $2,800, one-twelfth of the annual tier II earnings base of $33,600 for 1988, was creditable for tier II benefit purposes. This is because section 3(i)(4) of the Railroad Retirement Act does not permit crediting of compensation for tier II computation purposes after the employment relation has been severed. Under the lump-sum provision discussed above, the employee in this example would, upon award of his employee annuity, receive a payment of $842.80 ($20,000 minus $2,800, the amount of separation allowance that was creditable, or $17,200 times 4.9%).