Rail Employer Reporting Instructions

Part IV - Particular Types of Compensation Payments

Chapter 7: Separation/Severance Payments and Dismissal Allowances 

1

Separation/ Severance and Dismissal Allowances are Creditable Compensation

Payments that result from the abolition of an employee's job may be known as separation, 

severance, termination, coordination, dismissal, continuation, or guarantee payments or 

allowances. By whatever name they are called, they constitute creditable and taxable 

compensation. The regulations of the Railroad Retirement Board (RRB) distinguish between 

separation or severance allowances and dismissal allowances. These two types of payments are 

creditable in different ways.

Know the Terminology

The term that an employer gives the allowance does not govern the rules under which the payment 

is taxed and credited. If the terms of an agreement meet the Railroad Retirement Act's definition 

of a dismissal allowance, but the employer calls it a separation allowance, the rules for a dismissal 

allowance will still apply.

Separation Allowance Defined

Under the Railroad Retirement Act (RRA) and Railroad Unemployment Insurance Act (RUIA), if 

an employee relinquishes job rights for the purpose of receiving an allowance, the payment is 

considered to be a separation allowance. A separation allowance is considered earned in the month 

that the employee fulfills the conditions necessary to receive the pay, which is usually the month 

in which the employment relation is severed or month last worked.

Reporting Separation/ Severance Payments

Whenever you make separation allowance or severance payments to an employee, such payments 

are to be reported to the RRB on Form BA-9, "Report of Separation Allowance or Severance Pay". 

See Part V, Chapter 6 for information on completing Form BA-9.

Reporting Separation Allowances on an Earned Basis

Employers electing to report on an earned basis should report the entire separation allowance 

amount to the year last worked or to the year of separation, up to the annual maximum. If the 

compensation exceeds the maximum for that year, the excess Tier I compensation is reported as 

miscellaneous compensation on Form BA-3 in the following year. See Part V, Chapter 3 for 

information on completing Form BA-3.

Reporting Separation Allowances on a Paid Basis

Employers electing to report on a paid basis will report the separation allowance paid in the year 

as compensation on their Form BA-3 annual report for that year. This is true regardless of whether 

the payment is made in a lump sum or in periodic installments.
Rail Employer Reporting Instructions

Part IV - Particular Types of Compensation Payments

Chapter 7: Separation/Severance Payments and Dismissal Allowances 

2

Employment Relation in Separation/ Severance Allowances

If, according to the terms of the agreement, the employee does not retain a genuine employment 

relation within the meaning of the RRA and receives monthly or periodic payments, the payment 

is considered a separation allowance. The following, although not exhaustive, is evidence that an 

employment relation has ended: 

• The employee has resigned or relinquished employment rights from an employer; 

• The employee resigns or relinquishes employment rights before receiving any payment 

from an employer; 

• The employee may not be recalled during the period of the allowance; 

• The employee may not continue to receive employee benefits. 

Example of a Separation Allowance

Employee Bennie Fit last worked in June 2005 at which time his employer was downsizing. He 

agreed in June to accept $48,000, paid in 24 monthly installments, in consideration of his 

immediate resignation. No service months are creditable after June 2005 because no employment 

relation existed. 

Employers who elect to report compensation on an earned basis should credit all compensation 

paid in the 24 month period to June 2005, Mr. Fit's date last worked, by using a Form BA-3 for 

money paid in 2005 and a Form BA-4 for money paid in 2006 and 2007 up to the 2005 annual 

maximum earnings base. Employers who elect to report compensation on a paid basis should report 

the compensation actually paid in 2005, 2006 and 2007, on their BA-3 annual reports for those 

years without crediting additional service months. 

Separation Allowance and Supplemental Tax

Separation allowances and severance payments are not subject to conversion to work-hours for the 

purpose of paying supplemental tax.

Dismissal Allowance Defined

A dismissal allowance is a type of pay for time lost, as described in Chapter 6 of this Part, and is 

creditable as service and compensation. Whereas most pay for time lost is awarded retroactively 

to a prior period where earnings were lost, a dismissal allowance is usually paid as part of current 

payroll. For reporting purposes, a dismissal allowance appears on the report as though the 

employee had continued to work during the period of the allowance.

Employment Relation in Dismissal Allowance

If, according to the terms of the agreement, the employee retains a genuine employment relation 

within the meaning of the RRA and receives monthly or periodic payments, the payment is 
Rail Employer Reporting Instructions

Part IV - Particular Types of Compensation Payments

Chapter 7: Separation/Severance Payments and Dismissal Allowances 

3

considered a dismissal allowance, not a separation allowance. The following, although not 

exhaustive, is evidence an employment relation exists: 

• The employee has not resigned or relinquished employment rights from an employer; 

• The employee resigns or relinquishes employment rights after receiving final payment 

from an employer; 

• The employee may be recalled during the period of the allowance; 

• The employee remains covered under various employee plans; or 

• The employee continues to receive employee benefits. 

Example of a Dismissal Allowance

Employee Morris Code last worked in June 2007 at which time his job was abolished. Based on a 

labor-management agreement, Mr. Code was entitled to monthly payments of $1,000 for two years 

beginning in July 2007. During the two years, Mr. Code retained various employee benefits. At 

the end of two years, he will officially retire from his employer. Mr. Code is considered to be in 

receipt of a dismissal allowance. Service and compensation should be reported for the 24 months 

from July 2007 through June 2009 on a Form BA-3.

Determining When to Credit Compensation

As illustrated in the examples, the creditability of payments paid in consideration of termination 

of employment cannot be determined solely by when the payment is made and taxed. The date of 

the cessation of a genuine employment relation must also be considered when determining the 

period to which compensation is creditable.

Separation Allowance Paid With Other Payments

If both a separation allowance and some other payment are being paid at the same time, it is 

preferable if the two payments are issued separately. This will make clear to both the employee 

and the RRB, the amount of separation allowance which is subject to Tier II tax. If a separation 

payment and another payment are combined, the Tier II tax on the pay receipt may not agree with 

the amount reported on Form BA-9 as subject to Tier II tax. Any such differences must be resolved. 

Separate payments will help to prevent unnecessary inquiries to the employer for clarification.