U n i t e d S t a t e s G o v e r n m e n t FOIIM 0-1111 (1-12)

M e m o r a n d u m R a i l r o a d R e t i r e m e n t b o a r d

MAR 05 896

L-98-9"**

TO John L. Thoresdale

Director of Unemployment and Sickness Insurance

FROM Catherine C. Cook 

General Counsel

SUBJECT : Conrail Separation Program

This is in response to your recent inquiry as to w hether payments under the 

above-referenced program should be considered a separation allowance under 

the Railroad Unemployment Insurance Act (RUIA).

Conrail has established a program under which an employee may voluntarily 

resign and receive w hat is term ed a separation payment, plus an incidental 

allowance of $5000, in return for the resignation. Payments are to be made 

from the Conrail Supplemental Pension Trust Fund, which Conrail purports to 

be a tru st exem pt from tax under section under 501 of the Internal Revenue 

Code (IRC). Payments may be in the form of a lump-sum payment either 

directly from the trustee to the employee or to an Individual Retirement Account 

maintained by the employee, an immediate annuity for life, a deferred joint and 

survivor annuity, or an immediate annuity for a term certain.

Section 4(a-1)(iii) of the RUIA provides for a disqualification for the receipt of 

benefits under that Act for any employee who receives a separation allowance. 

The disqualification period lasts for the length of time it would have ordinarily 

taken the employee to have earned the amount of separation payment. Section 

322.7(b) of the Board's regulations under the RUIA defines a separation 

allowance as a lump-sum payment paid to an employee who elects to sever his 

em ploym ent relationship with the employer. That section also provides th at a 

separation payment is not remuneration under the RUIA for any day after the 

term ination of employment. Finally, section 3232(e)(1)(iv) of the IRC excludes 

from the definition of compensation under the Railroad Retirement Tax Act, 

rem uneration which is exem pt from the definition of w ages under section 

3121(a)(5) of the IRC. Section 3121(a)(5)(A) in turn exem pts from the 

definition of w ages paym ents from a trust exempt under section 501(a).
2

John L. Thoresdale

Director of Unemployment and Sickness Insurance

I am of the opinion that payments under the Conrail program are separation 

allowances under the RUIA and its regulations. As such, the paym ents would 

trigger the disqualification period described above, but would not be 

remuneration under that statute for any day after cessation of employment.

Although paym ents under the program are made from a pension trust and thus 

may not be taxable under the RRTA (we have no authority to determine an 

RRTA issue) or compensation under the Railroad Retirement Act (no opinion is 

expressed at this time on the RRA issue), the payments nevertheless are made 

in return for severance of the employment relationship and fall squarely into the 

definition of section 322.7(b) of the regulations. Payments under the program 

are based upon years of service and compensation and are paid in the form of 

a lump-sum or are readily convertible to a lump-sum even though the m ethod 

of paym ent is in the form of an annuity. In this regard, I believe the program 

is fundam entally different from a "pension enhancem ent" used as an incentive 

to retirem ent. Under that type of program an individual is usually credited with 

additional years of service and age for purposes of qualifying for a pension or 

for increasing the amount of pension payable in return for an election of 

retirem ent. In the program before us, we are presented with essentially a lumpsum separation program with the option of payment in the form of an annuity.

For purposes of computing the disqualification period, where the separation 

paym ent is made in the form of an annuity, the amount of separation allowance 

is not the lump-sum as computed under the formula provided for in the 

program, but rather the present value of the annuity or deferred payment.

TWSadlerrcmw

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