UNITED STATES GOVERNMENT FORM G-115F(1-92)

MEMORANDUM

RAILROAD RETIREMENT BOARD

October 25, 2000
L-2000-32

TO : Wayne J. Scharnak
Chief, Employee Service/Training Center

FROM : StevenA. Bartholow a
General Counsel

SUBJECT: Burlington Northern and Santa Fe Railway / UTU Supplemental
Severance Benefit

This is in response to an informal inquiry through the Retirement Post
Adjudication Section of the Office of Programs as to whether the Burlington
Northern and Santa Fe Railway / UTU Supplemental Severance Benefit is a
supplemental pension plan within the meaning of section 2(h)(2) of the

e@ Railroad Retirement Act for purposes of offset of the supplemental annuity in
the case submitted. For the reasons set forth below, it is my opinion that the
plan is a supplemental pension plan.

The case in question arises in connection with a railroad employee who last
worked for the Burlington Northern Santa Fe Railway (BNSF) on March 14,
1998, and was awarded both an employee annuity and a supplemental annuity
under the Railroad Retirement Act. At or about that time, he also received two
lump sum payments from the employer in the amounts of $60,000 and $2,500.
Material from the district office of the Board in connection with the $2,500 paid
to the employee establishes that the applicant received a letter from the BNSF
which notified him of “a new supplemental severance benefit”. The enclosed
leaflet explained that “Because the RRB is taking away the S[upplemental]
Af{nnuity] Playment] from potentially eligible participants” covered by the
BNSF plans for the Atchison, Topeka and Santa Fe Railway Former Eastern
and Western Lines and the Atchison, Topeka and Santa Fe Railway Western
Region (Coast Lines) and Texas Division, “the BNSF is voluntarily putting in a
new plan to help make up the difference.”

As a result of discussions between the Board’s Office of Operations and my
staff, your office contacted the BNSF to obtain copies of the plans under which
@ payments were made. The employer responded that the $60,000 payment was
made by the employer pursuant to the Burlington Northern and Santa Fe



Wayne J. Scharnak

Railway / UTU Voluntary Separation Program (the “BNSF VSP”). The lump
sum payment of $2,500 was made pursuant to a plan which provides for a
“severance allowance” for employees who are eligible for the BNSF Company
Pension Plan and who (1) were active participants in the plan on or after
January 1, 1998; (2) retired on or after age 60 with at least 25 years of railroad
service; and (3) are “ineligible to receive a supplemental annuity benefit or any
future equivalent under Railroad Retirement law”. The plan states that upon
retirement or resignation after December 1997, the employee will receive a
lump sum payment of $2,500 before taxes. Those employees who retired
between December 1, 1993 and January 1, 1998 will receive a lump sum
payment of $750 before taxes.

Section 2(h)(2) of the Railroad Retirement Act provides for the reduction of a
supplemental annuity as follows:

(h)(2) The supplemental annuity provided an individual by subsection (b)
of this section shall, with respect to any month, be reduced by the
amount of the supplemental pension, attributable to the employer’s
contribution, that such individual is entitled to receive for that month
under any other supplemental pension plan * **.

Regulations of the Board at 20 CFR 216.42 define a supplemental pension for
purposes of section 2(h)(2) of the Act as follows:

(a) What is a private railroad pension. The Board determines whether a
pension established by a railroad employer is a private pension that will
cause a reduction in the employee’s supplemental annuity. A private
pension for purposes of this subpart is a plan that:

(1) Is awritten plan or arrangement which is communicated to the
employees to whom it applies;

(2) Is established and maintained by an employer for a defined group
of employees; and

(3) Provides for the payment of definitely determinable benefits to
employees over a period of years, usually for life, after retirement
or disability. Such a plan is sometimes referred to as a defined
benefit plan.



Wayne J. Scharnak

(b) Defined contribution plan. A plan under which the employer is obligated to
make fixed contributions to the plan regardless of profits (sometimes known
as a money purchase plan) is a private pension plan. * * *

(c) Other than retirement benefits. A plan which provides benefits not
customarily considered retirement benefits (such as unemployment

benefits, sickness or hospitalization benefits) is not a private pension plan
under this section.

A plan which yields a lump sum benefit may be a defined benefit plan under
section 2(h)(2) of the Act. See : Legal Opinion L-89-112.

The “BNSF VSP” plan has been determined to be a supplemental pension plan
for purposes of section 216.42(a) of the Board’s regulations on the basis that it is
a defined benefit plan funded entirely by employer contributions. See Legal
Opinion L-93-54. Further, in Legal Opinion L-99-20, I advised that recently
published regulations of the Internal Revenue Service did not affect that
determination’ because the definition of a supplemental pension plan under
the Railroad Retirement Act had not changed. The supplemental annuity paid
to this employee therefore must be reduced for the $60,000 payment.

Payment of the $2,500 “supplemental severance benefit” is made according to a
plan funded entirely by employer contributions and is available only to
individuals who meet the eligibility requirements for the BNSF VSP. It
therefore follows that the $2,500 supplemental severance benefit is also a
supplemental pension plan for purposes of section 2(h)(2) of the Railroad
Retirement Act.’

1 See 26 CFR 31.3221-4(c), effective January 1, 2000, which define a “supplemental pension
plan” for purposes of section 3221(d) of the Internal Revenue Code.

? Despite the employer’s denoting the plan as a “severance benefit”, this means that the
payment is not a separation allowance as defined under the regulations of the Board. See 20
CFR 211.10; and 20 CFR 322.7.