Labor Employer Reporting Instructions

Part IV – Particular Types of Compensation Payments

Chapter 8: 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 the 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, Annual Report of Creditable Compensation. See 

Part V, Chapter 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 annual report for that year. This is true regardless of whether the 

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

Part IV – Particular Types of Compensation Payments

Chapter 8: 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; or 

• The employee may not continue to receive employee benefits. 

Example of a Separation Allowance 

Employee Bennie Fit last worked in June 2002 at which time his employer was downsizing. He 

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

immediate resignation. No service months are creditable after June 2002 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 2002, Mr. Fit's date last worked, by using a Form BA-3a for 

money paid in 2002 and a Form BA-4 for money paid in 2003 and 2004 up to the 2002 annual 

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

report the compensation actually paid in 2002, 2003 and 2004, on their BA-3 annual reports for 

those years without crediting additional service months. 

Dismissal Allowance Defined 

A dismissal allowance is a type of pay for time lost, as described in Chapter 7 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 

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

exhaustive, is evidence an employment relation exists: 
Labor Employer Reporting Instructions

Part IV – Particular Types of Compensation Payments

Chapter 8: Separation/Severance Payments and Dismissal Allowances

3

• 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 2002 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 2002. 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 2002 through June 2004 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.