U n i t e d S t a t e s G o v e r n m e n t

M e m o r a n d u m

FORM 0-1151(1-92)

R a i l r o a d R e t i r e m e n t B o a r d

JUL2 42000

L-2000-24

TO Ronald Russo

Director of Policy and Systems

FROM Steven A. Barthol 

General Counsel^

SUBJECT : Experience Rating - Defunct and New Employers

This is in response to your May 8,2000 request for a legal opinion concerning 

the treatment of compensation of defunct and new employers under section 

8(a) of the Railroad Unemployment Insurance Act (RUIA) (45 U.S.C. § 358(a)), 

which provides for the computation of employer contribution rates.

As you know, Public Law 100-647, the Railroad Unemployment and Retirement 

Improvement Act of 1988, introduced an experience rating formula for 

determining payroll tax rates for railroad employers under the RUIA, based in 

part, on the actual unemployment experience of the employer’s workforce. The 

contribution rate established under experience rating consists of a basic rate, 

plus 0.65 percent to cover the administrative expenses incurred by the Railroad 

Retirement Board, plus the amount of any surcharge that becomes applicable 

when the balance to the credit of the Railroad Unemployment Insurance (RUI) 

Account declines to specified levels. The overall basic contribution rate has 

three aspects: 1) a railroad specific rate based upon benefit payments paid to 

the employer’s workers; 2) an overall industry rate to cover costs which cannot 

be attributed to any one employer; and 3) a “risk-shared” rate which is 

designed to recapture any revenue lost in cases where the statutory cap on the 

tax rate is less than the rate that would be calculated for a rail employer. The 

monthly compensation amount which is subject to taxation for each employee 

is currently $1^05*^06. The employer tax rate is limited by statute to 12 percent, 

unless the surcharge tax is in effect, in which case the statutory limit is 12.5 

percent. /|65^ »j>
- 2-

Several computations used in the experience rating formula use the “system 

compensation base.” The system compensation base is computed as of June 30 

of each year and is the sum of the employers’ “one-year compensation bases.” 

(An employer’s one-year compensation base is computed as of June 30 and is 

the amount of compensation with respect to which the employer is liable for 

contributions in the twelve-month period ending on such June 30.) You 

question the treatment of defunct and new employers in computing the system 

compensation base.

DEFUNCT EMPLOYERS

According to your memorandum, compensation from defunct employers is 

presently included in the system compensation base. You inquire whether 

compensation of defunct employers may be excluded from the system 

compensation base, arguing that the inclusion of such compensation corrupts 

the data used to compute the unallocated charge, pooled charge ratio, pooled 

credit ratio and surcharge rate.

^ Provisions governing the computation of the system compensation base are

found in section 8(a), which provides in pertinent part as follows:

(11) The system compensation base as of any given June 30 shall 

be determined by adding together the amounts of the 1-year 

compensation bases of all employers and employee representatives 

subject to this Act, computed in accordance with paragraph (5), as 

of such June 30. (Emphasis added). 45 U.S.C. § 358(a)(ll).

It is my opinion that the proposed exclusion of compensation of defunct 

employers in the computation of the system compensation base is permissible 

under a literal reading of the above provision.

Under the rules of statutory construction, it can be presumed that the phrase 

“subject to this Act” was included in the subparagraph quoted above for a 

specific reason. It can also be presumed that the phrase was not included to 

exclude employers outside of the railroad industry, as it would be unreasonable 

for anyone to presume that the provisions of the RUIA applied to such 

employers. It is reasonable to conclude that the phrase “subject to this Act” 

was used to limit the system compensation base to the one-year compensation 

bases of those employers subject to the RUIA at the close of the.period for 

^ which the system compensation base is computed. Such a lim itation would not
include the one-year compensation base of a defunct employer, as an employer 

is no longer subject to the RUIA once a determination has been made by the 

Board that an employer is a defunct employer.

A review of the statutory provisions regarding the unallocated charge, pooled 

charge ratio, pooled credit ratio and surcharge rate also indicates that the 

proposed exclusion of the compensation of defunct employers from the system 

compensation base is not inconsistent with the goal of the experience rating 

provisions. These elements of the experience rating formula are discussed 

below.

Unallocated Charge - The “system unallocated charge balance” is the 

mechanism to account for the income and outgo of the Railroad 

Unemployment Insurance (RUI) Account that cannot be directly 

assigned as benefit charges, or adjustments, to the cumulative benefit 

balance of a particular employer. It is cumulative from January 1,1990 

and is distributed among employers through the unallocated charge.

The unallocated charge for an employer as of any given June 30 is the 

amount that, as of such June 30, bears the same ratio to the system 

unallocated charge balance as the employer’s one-year compensation 

base bears to the system compensation base. See 45 U.S.C. § 8(a)(9).

As demonstrated in the example provided in your memorandum, the 

inclusion of the one-year compensation bases of defunct employers in 

the system compensation base results in a sum of unallocated charges 

which does not equal the system unallocated charge balance. This result 

occurs because an employer’s share of the unallocated charge balance is 

determined by multiplying the balance by a fraction, the numerator of 

which is the employer’s one-year compensation base and the 

denominator of which is the system compensation base. See 45 U.S.C. § 

8(a)(9). As noted earlier, the system compensation base presently 

includes the one-year compensation bases of defunct employers. The 

inclusion of the one-year compensation bases of defunct employers in 

the system compensation base essentially results in computing an 

unallocated charge for defunct employers. Such a result appears to be 

inconsistent with the intent behind the experience-rating method of 

determining an employer’s contribution rate, as a portion of the 

unallocated charge balance is never actually apportioned since defunct 

employers are no longer subject to the RUIA.
Pooled Charge Ratio - If applicable, the pooled charge ratio is a pro-rata 

increase in the rate of contribution assigned to each employer that is not 

already paying contributions at the maximum rate. The charge is used to 

recoup income lost to the RUI Account because some employer 

contributions are calculated at the maximum contribution rate rather 

than at the higher experience-based rate that their benefit charges would 

otherwise require. The pooled charge ratio for a calendar year is the 

same for all employers whose rate is less than the maximum.

As noted in your memorandum, step 4 of the computation of the pooled 

charge ratio found at section 8(a)(13)(D) provides as follows:

Divide the aggregate amount arrived at under step 3 by the 

system compensation base as of the preceding June 30 as 

computed under paragraph (11) minus the one-year 

compensation base of those employers whose rates 

computed through step 6 of paragraph (1)(C) exceeded the 

maximum contribution rate computed under paragraph (20).

45 U.S.C. § 358(a)(13)(D).

As you note, the statute specifically excludes from the system 

compensation base the one-year compensation base of employers with 

experience-based contribution rates over the maximum. Presumably, 

the one-year compensation base of such employers is excluded because 

the maximum precludes increasing their contribution rates for the 

pooled charge. You argue that the one-year compensation of defunct 

employers should not be included in the system compensation base for 

the same reason. That is, because they are defunct employers not subject 

to the RUIA, it is not possible to increase their rate of contribution for the 

pooled charge.

I agree with your opinion. An argument could be made against 

excluding the compensation of defunct employers on the basis that, if 

Congress intended such compensation to be excluded in step 4 of the 

computation of the pooled charge, it would have specified such, as it did 

with employers whose experience-based contribution rates are over the 

maximum. However, if it is presumed, as discussed earlier, that 

Congress never anticipated the inclusion of the one-year compensation 

base of defunct employers in the system compensation base, there would 

be no reason to provide language which would exclude such 

compensation.
Pooled Credit Ratio and Surcharge Rate - The pooled credit, if applicable, 

is a pro-rata decrease in the rate of contribution assigned to each 

employer. The ratio is computed by reference to the accrual balance to 

the credit of the RUI Account as of the preceding June 30. The surcharge 

rate, if applicable, is an increase in the employer’s rate of contribution of 

1.5,2.5 or 3.5 percent which is applied when the accrual balance of the 

RUI Account as of the preceding June 30 falls within a range of balances 

set by statute.

The pooled credit ratio and the surcharge rate are computed only if 

statutory trigger levels are attained. The calculations for both 

components index the trigger levels by comparing the current system 

compensation base to the system compensation base as of June 30,1991. 

Where the trigger level for the pooled credit ratio is met, the computation 

of the pooled credit ratio uses a fraction, the denominator of which is the 

system compensation base.

You suggest exclusion of the compensation of defunct employers from 

the system compensation base used as the denominator in the pooled 

credit ratio formula. As to the trigger levels, you see no compelling 

reason to exclude the payroll of defunct employers for purposes of 

determining the trigger levels, as long as the 1991 system compensation 

base and the current compensation base are computed consistently. 

Finally, you note that the pooled credit ratios or surcharges that the 

system has had to date would not have changed had such compensation 

been excluded from the system compensation base in both trigger 

determinations and the pooled credit determination.

As previously stated, it is my opinion that the statute may be read to 

mean that the compensation of defunct employers should not be 

included in the system compensation base. However, if this 

interpretation is adopted, it must be applied consistently throughout 

section 8. This would mean that the system compensation base, 

whenever used in a computation in section 8 of the RUIA, should not 

include the compensation of defunct employers. Under this 

interpretation, the system compensation base used in the denominator in 

the pooled credit ratio formula should exclude the compensation of 

defunct employers, as should the system compensation base used to 

index the trigger levels, including the present system compensation base 

and the system compensation base as of June 30,1991.
NEW EMPLOYEES

• System Compensation Base - As noted previously, the system 

compensation base, as computed under section 8(a)(ll) of the RUIA, is 

the sum of the employers’ one-year compensation bases. Section 8(a)(5) 

of the RUIA defines the one-year compensation base as of any given 

June 30 as “the aggregate compensation with respect to which 

contributions were paid by the employer” in the 4 calendar quarters 

ending on such June 30. 45 U.S.C. § 358(a)(5). You indicate that you 

believe section 8(a)(5) contradicts the provisions of section 

8(a)(l)(D)(vi)(H), and therefore question the proper method to calculate a 

new employer’s one-year compensation base.

The two provisions noted above are not contradictory. The introductory 

paragraph to section 8(a)(1)(D) provides as follows:

Notwithstanding subparagraphs (B) and (C), the 

contribution rate applicable to a new employer who 

does not become subject to this Act until after 

December 31,1989, shall be determined as follows:

Therefore, the special method of calculation as provided in subparagraph 

(D) of section 8(a)(1) applies only when computing the contribution rate 

of a new employer. Otherwise, the one-year compensation base of a new 

employer is computed in accordance with the provisions of section 8(a)(5) 

of the RUIA. As the provisions are not in conflict, I agree with your 

statement that the special method of calculation should continue to be 

limited to new employer calculations.

• New Employer Contribution Rate for the 1st Calendar Year - The new 

employer contribution rate for the first calendar year under section 

8(a)(l)(D)(i) is the average contribution rate paid by all employers during 

the 3 calendar years preceding the calendar year before the calendar year 

in which the compensation is paid. This average is calculated using the 

ratio of contributions paid by all employers to the corresponding 

compensation in three prior calendar years. At present, you indicate 

compensation and contributions are used for all employers not defunct in 

that calendar year’s quarters. I concur with your opinion that including 

the compensation and contribution of all active employers in each 

quarter will produce the most accurate rate for new employers.

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