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208.1 Compensation Defined

Compensation is the amount an individual is paid for services performed in a 

month as an employee of a covered railroad employer or as an employee

representative. Compensation may be creditable even if there is no credit for 

railroad service months. For information on determining if railroad service is 

creditable refer to Section 207 above.

208.1.1 Included as Compensation

Compensation includes: 

A Remuneration paid for time lost as an employee (see FOM 211); 

B Payments in a medium other than cash (non-monetary remuneration); 

C Vacation pay and pay in lieu of vacation (see FOM 210.1); 

D Earnings in the service of a local lodge (see FOM 213); 

E Compensation based on military service (see FOM 215); 

F Cash tips of $20.00 or more in any calendar month after 1965; 

G Voluntary payment by the employer (without deduction from the

compensation of the employee) of any tax imposed on the employee's 

compensation. Compensation may be credited for services rendered after 

June 30, 1983; and 

H Payments made under Title VII of the Regional Rail Reorganization Act of 

1973. 

I Back pay

J Separation allowance

K Bonus pay

L Wage continuation plans

M The cost of group term life insurance if it is included in the gross income of 

an employee and subject to Railroad Retirement tax.

N Employee contributions to Section 401(k) or Section 457 salary reduction 

plans are considered creditable railroad compensation at the time of 

contribution.
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O Cash payment under cafeteria plans. Cafeteria plans are flexible benefit 

plans are plans where participating employee can choose either to receive 

cash or qualified benefits. If an employee elects cash, the payment is 

creditable as compensation.

P Payment made after an employee’s death but in the same year of death.

Q Compensation paid to officers of a railroad excluding the Director.

R Payments to partners in a Limited Liability Company for physical work 

performed. The partner pays FICA taxes on their individual tax return. 

There is no method by which a partner can pay RRTA taxes.

S Compensated personal leave days.

T Holiday pay.

U Productivity fund payments.

V Profit sharing/loss sharing – Employees who receive more or less than 

their regular earnings due to profit or loss sharing plans are credited and 

taxed with and taxed on the actual amount received.

W Retention pay

X Sick pay paid under a plan or agreement available on the same basis to 

employees in a like class and payable for days not worked on account of 

injury, illness, pregnancy, or childbirth.

Y Payment to an employee for the termination of or ‘purchase” of an 

employee right or benefit, such as seniority rights, profit sharing rights, 

sick benefits, etc.

NOTE: Some sick pay is creditable as "miscellaneous compensation" for the tier I 

computation only (see FOM 211.3).

208.1.2 Not Included as Compensation

Compensation does not include: 

A Tips totaling less than $20.00 in any calendar month; or 

B Other gratuitous payments unless paid for services rendered as an 

employee.

C Qualified Stock Options—Any remuneration on account of A) a transfer of 

a share of stock to any individual through an exercise of an incentive stock 

option (ISO) (as defined in Section 422(b) of the Internal Revenue Code) 
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or under an employee stock purchase plan (ESPP) (as defined in section 

423(b) of the Internal Revenue Code), or B) any disposition by the 

individual of such stock.

D Employer matching contributions to the Section 401(k) or Section 457 

salary reduction plans.

E Sick pay paid after the sixth month following the month last worked.

F Contributions and payment for pension or profit sharing made under a 

plan that qualifies for exclusion from income under the Internal Revenue 

Code.

G Payments which are intended to supplement military pay that are paid to 

an employee who has been called to active military service.

H Payments made to an employee’s survivor to an estate in the year after 

the employee died.

I Interest paid on compensation earned but not timely paid.

J The value of “qualified” fringe benefits received under a Section 125 

cafeteria plan also known as a flexible benefits plan.

K Compensation paid to a non-resident alien with a “F-1” or “J-1” visa.

L Payments made to the director of a railroad and payments made to 

receivers and trustees. They are designated employers and may not be 

employees.

M Payments to partners in a Limited Liability Company is not creditable 

compensation.

N Education assistance that is excluded from compensation under Section 

127 of the Internal Revenue Code.

O Allowances made for meals and lodgings that are excluded from 

compensation under Section 217 of the Internal Revenue Code.

P Reimbursements for moving expenses that are deductible under Section 

217 of the Internal Revenue Code.

Q Sick pay paid by the RRB under the Railroad Unemployment Insurance 

Act for an on the job injury.

R Sick pay paid in the year after the employee died.
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S Non-Qualified Stock Option-Per the Supreme Court decision in Wisconsin 

Central Ltd, et al., vs. the United States on June 21, 2018, a stock option 

not qualifying under section 422 or 423 of the Internal Revenue Code also 

does not result in compensation to the employee. For additional 

information on the June 2018 SCOTUS decision on Stock Options, please 

see RCM 5.3.88. 

208.2 When Maximum Compensation in a Calendar Month is 

Used

The tier I computation for all annuitants and the lump-sum death benefit 

computation for an employee who acquires his 120th month after 12-1974 are 

based on primary insurance amount formulas and are subject to a yearly 

maximum only. 

Both a monthly maximum and a yearly maximum are applicable for the following 

computations: 

Retirement annuity tier II; 

Survivor annuity tier II when based on employee's tier II; 

Average monthly remuneration for lump-sum death payment basic amount when 

120th service month acquired before 1975; 

Residual lump-sum; 

All 1937 Railroad Retirement Act computations.

208.3 Maximum Compensation in a Calendar Month

208.3.1 General

The maximum compensation that may be credited to a tier II benefit, an average 

monthly remuneration, a residual lump-sum or to computations under the 1937 

Railroad Retirement Act for any calendar month is as follows:

Amount From Through Amount From Through

300

350

400

450

550

--

07-1-1954

06-1-1959

11-1-1963

01-1-1966

06-30-1954

05-31-1959

10-31-1963

12-31-1965

12-31-1967

 650

 750

 900

1,100

1-1-1968

1-1-1972

1-1-1973

1-1-1974

12-31-1971

12-31-1972

12-31-1973

12-31-1974
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208.3.2 Earnings Years 1975 Through 1978

The basic amount computation and the residual lump-sum computation do not 

include earnings after 12-1974. Therefore, beginning with 1975 or later, the 

monthly maximum only applies to a tier II benefit computation.

 

Amount From Through

1,175

1,275

1,375

1,475

1-1-1975

1-1-1976

1-1-1977

1-1-1978

12-31-1975

12-31-1976

12-31-1977

12-31-1978

208.3.3 Earnings years 1979 Through 1984

Beginning with 1979, the tier II monthly maximum schedule is based on the 

yearly maximum that would have applied if the 1977 Social Security Act 

amendments had not been enacted.

 

Amount From Through

1,575

1,700

1,850

2,025

2,225

2,350

1-1-1979

1-1-1980

1-1-1981

1-1-1982

1-1-1983

1-1-1984

12-31-1979

12-31-1980

12-31-1981

12-31-1982

12-31-1983

12-31-1984

208.3.4 Earnings years 1985 or Later

Effective January 1985 or later, the employee's compensation for tier II is 

deemed paid in equal amounts to all months in which the employee performed 

railroad service. However, the monthly amount credited cannot exceed the 

amount listed below. When the employee has compensation in excess of the tier 

II monthly maximum times the number of actual service months, the employee 

may be entitled to "deemed service months" as explained in FOM 207.5.
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Click here for a chart of Tier II monthly maximum creditable earnings by year.

208.4 Maximum Compensation in a Calendar Year

The following charts show the maximum compensation that may be credited for 

any calendar year. 

208.4.1 Years In Which Compensation Maximum and Wage Maximum Differ 

A Compensation Maximums For Years Before 1966

 

Maximum Amount From Through

3,600

3,900*

4,200

4,550*

4,800

4,900* 

5,400*

--

1-1-1954

1-1-1955

1-1-1959

1-1-1960

1-1-1963

1-1-1964

12-31-1953

12-31-1954

12-31-1958

12-31-1959

12-31-1962

12-31-1963

12-31-1965

*These figures apply to compensation only. The yearly wage maximums under 

the Social Security Act (SS Act) for these years are shown in the chart below. 

B Wage Maximums For Years Before 1966 - The SS Act wage maximums are 

used instead of the Railroad Retirement Act compensation maximums for the 

computation of the tier I primary insurance amount (PIA 1), the residual lumpsum PIA (PIA 3), and the overall minimum guaranty PIA (PIA 9).

 

Wage Maximum 

Amount

From Through

3,600

3,600

4,200

--

1-1-1954

1-1-1955

12-31-1953

12-31-1954

12-31-1958
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4,800

4,800

4,800

4,800

1-1-1959

1-1-1960

1-1-1963

1-1-1964

12-31-1959

12-31-1962

12-31-1963

12-31-1965

208.4.2 Wages and Compensation Maximums from 1966 through 1978

 

Comp. & Wage

Maximum Amount

From Through

 6,600

 7,800

 9,000

10,800

13,200

14,100

15,300

16,500

17,700

1-1-1966

1-1-1968

1-1-1972

1-1-1973

1-1-1974

1-1-1975

1-1-1976

1-1-1977

1-1-1978

12-31-1967

12-31-1971

12-31-1972

12-31-1973

12-31-1974

12-31-1975

12-31-1976

12-31-1977

12-31-1978

208.4.3 Tier I and Tier II Annual Compensation Maximums from 1979

Beginning with 1979, two annual compensation maximums are required: one for 

the tier I benefits and the other for the tier II benefits. The SS Act amendments 

of 1977 provided the annual maximum amount for tier I through 1981; after 1981, 

the maximum is automatically increased with the rise in the cost of living. The 

schedule of increases in the tier II amount is based on the maximum that would 

have applied if the 1977 SS Act amendments had not been enacted; the 

maximum automatically increases with the rise in the cost of living.

Click here for a chart of Tier I and Tier II annual compensation maximums since 

1979.
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208.5 Crediting Compensation on an Annual Basis

Beginning with 1985, an employee may receive credit for tier I purposes up to the 

tier I annual maximum regardless of when the compensation was earned and 

regardless of the number of service months. 

Also beginning in 1985, an employee may receive credit for tier II purposes up to 

the tier II monthly maximum times the number of service months, including 

deemed service months, regardless of when the compensation was earned. 

If an employee receives compensation of less than the tier II monthly maximum 

times the number of actual service months, including gift months, the employee 

is deemed to be paid in equal proportions in each service month. 

Example 1

The employee was in service throughout all of 1985. However, he was 

furloughed during the months of March and April. 

 

Actual Earnings Actual Earnings Actual Earnings

JAN $ 6,600 MAY $ 1,650 SEP $ 2,000

FEB 1,650 JUN 6,600 OCT 2,000

MAR 0 JUL 6,600 NOV 2,000

APR 0 AUG 6,600 DEC 3,000

TOTAL $ 38,700

In determining the tier I compensation, the employee would be given credit for 

$38,700.00, $900.00 less than the tier I annual maximum. For tier II purposes, 

the employee would be given credit for $29,700.00 (the tier II maximum) spread 

evenly over 12 months. He would have 10 actual service months and 2 deemed 

service months. 

Example 2 

The employee retired effective July 1, 1985, after earning more than the tier I 

annual maximum during the first 6 months of 1985. 

 
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Actual Earnings Actual Earnings

JAN $ 6,600 APR $ 6,900

FEB 6,700 MAY 7,000

MAR 6,800 JUN 6,100

TOTAL $ 40,100

In determining the tier I compensation, the employee would be given credit for 

$39,600.00, the tier I annual maximum. 

In computing the tier II, the employee would be given credit for $14,850.00, 6 

months at the tier II maximum of $2,475.00. 

Example 3

The employee retired effective July 1, 1985, after earning $12,000.00 during the 

first 6 months of 1985. He was furloughed during the months of February and 

April. 

 

Actual Earnings Actual Earnings

JAN $ 3,000 APR $ 0

FEB 0 MAY 3,000

MAR 3,000 JUN 3,000

TOTAL $ 12,000

In determining the tier I compensation, the employee would be given credit for 

$12,000.00. The 1985 compensation cannot be used in the primary insurance 

amount computation until the employee is eligible for a recomputation. 

In computing the tier II, the employee would be given credit for $12,000.00 and 5 

service months (12,000.00/2,475.00 = 4.848 (rounded to 5)). The employee 

would be deemed to have earned $2,400.00 in each month (12,000.00/5 = 

2,400.00). 
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208.6 Service Months Credited when Earned; Compensation 

Credited when Paid or Earned 

Service months are credited only for months in which an employment relation is 

maintained (see FOM 206.2). Service months are reported for the month in 

which the employee performed the service regardless of when the employee was 

paid even if the employee is not paid compensation for that service until a later 

month.

For example, if an employee worked in December 2000 but was not paid until 

January 2001, the employee would receive a service month in December 2000. 

No service months are reported for miscellaneous compensation. Miscellaneous 

compensation is any payment which is subject to Tier I taxes and is creditable as 

Tier I compensation only, but cannot be credited as regular compensation. In 

order to be creditable as miscellaneous compensation, it must meet several 

requirements. Please refer to the Part IV, Chapter 2 of the Reporting Instructions 

to Employers to get a more complete explanation of miscellaneous 

compensation. The Reporting Instructions to Employers are in rrb.gov under the 

link, "Rail Employer Information." 

When reporting compensation under the Railroad Retirement Act (RRA), 

employers may choose to report compensation one of two ways: on an earned 

basis or on a paid basis: 

• If employers report on an earned basis, compensation is reported when 

the employee performed the service even if the employer did not issue a 

payroll check to the employee until a later time.

• If employers report on a paid basis, compensation is reported based on 

when the employee received payment for the service regardless of when 

the service was performed.

Pay For Time Lost 

Pay for time lost can only be reported on an earned basis. Pay for time lost is 

the only type of compensation that cannot be reported based on when the 

employer made the payment. Pay for time lost is a type of creditable 

compensation that is for wages lost for an identifiable period of absence from 

active service. Pay for time lost must be credited to the period for which time 

was lost. Pay for time lost includes: 

• Personal injury settlements that allocate part of the damages as lost 

wages for a specific period following the injury.

• Dismissal allowances.
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• Guaranteed pay.

• Displacement allowances paid for loss of earnings resulting from 

displacement to a less remunerative position. 

Since the reporting of compensation under the RRA and the taxing of that 

compensation under the Railroad Retirement Tax Act (RRTA) are governed by 

two separate and distinct laws, the same pay could be treated differently yet 

properly under both laws. 

EXAMPLE 1: An employee earned $1,000.00 in the last pay period of the year 

that ran from 12/17/2000 to 12/31/2000. He relinquished his rights to railroad 

employment on December 31, 2000. He received his paycheck on 1/5/2001, the 

first Friday following the end of the pay period. The employer must post the 

service month the month service was performed, December 2000, if reporting on 

an earned basis. The employer can either report the compensation as being 

regular compensation creditable in December 2000 or as miscellaneous 

compensation in January 2001 if the other requirements are met. Under the 

RRTA, the $1,000.00 is taxable in 2001 because that is the date of the payment. 

EXAMPLE 2: An employee received $5,000.00 on 2/21/00 as pay for time lost in 

March and April 1998 as a result of a personal injury. The employer must post 

the service months for the period time was lost, March and April 1998. Under the 

RRA, the employer must report the $5,000.00 in 1998 as regular compensation. 

Under the RRTA, the $5,000.00 is taxable in 2000, the year of payment. 

208.7 Railroad Retirement Compensation Tax Rates 

Before October 1, 1973, employers and employees paid the same percentage of 

tax on compensation under the RRTA. Effective October 1, 1973, the tax rate, 

including the share of the hospital insurance (HI) tax, to be paid by railroad 

employees was made equal to the rates paid by employees under the Social 

Security Act (SS Act). The railroad employer tax rate was increased to make up 

the difference between the employee tax rate and the total tax due. 

The changes in the rates did not become applicable to steel company 

subsidiaries, some railway labor organizations, and dock companies under 

collective bargaining agreements until a date later than October 1, 1973. The 

effective date depended on when the labor contracts in effect on October 1, 1973 

expired, or earlier if the parties to the labor contracts agreed. 

The 1981 Railroad Retirement Act amendments increased the tier II tax for 

employers and initiated a new tier II tax for employees. 

Beginning with 1985, the tax rates are applied to compensation on an annual 

basis instead of a monthly basis. Tier I taxes are withheld beginning in January 

until the employee's compensation for the year reaches the annual tier I 
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maximum. Tier II taxes are withheld beginning in January until the employee's 

compensation for the year reaches the annual tier II maximum. 

Please refer to the RRB’s web site, http://www.rrb.gov, to obtain the railroad 

retirement compensation tax rates. Under the heading "News and Publications" 

select "Statistical Information." On the "Index of Statistical Information" select 

"Tax Rate and Maximum Earnings Base Information" and double click on "PDF 

Version." This will bring you to the "Tax Rates and Maximum Taxable Earnings 

under Social Security, Railroad Retirement and Railroad Unemployment 

Insurance Programs." Be sure to obtain the tax rate information under the 

"Railroad Retirement Tax rate (percent)" heading. The URL (Uniform Resource 

Locator) is http://www.rrb.gov/pdf/taxrate.pdf. The document also has the Social 

Security Tax rates. 

There is no direct relationship between the deduction of taxes and the crediting 

of compensation. An employee, who retires or is separated during the year, may 

pay tier II taxes on an amount which exceeds the amount of tier II credits that he 

receives, because of the tier II monthly maximum. However, the excess tier II tax 

just escheats to the RRB. There is no refund of this type of excess tier II tax. 

EXAMPLE: An employee earns $7,920.00 per month during the first 6 months of 

1985 and retires effective 7-1-85. Tier I taxes are deducted from his paychecks 

for the first 5 months of 1985. No tier I tax is deducted from his paycheck for 

June as his compensation for the previous 5 months equaled $39,600.00. Tier II 

taxes are deducted from his paychecks for the first 3 months and for part of April, 

ending when the employee has earned $29,700.00. No tier II taxes are deducted 

from his paychecks for May and June. 

The employee receives tier I credit for $39,600.00 and tier II credit, subject to the 

tier II maximum, for $14,850.00 ($2,475.00 x 6 months). 

EXAMPLE: An employee who earns $10,000.00 per month retires effective 7-1-

96. Tier II taxes are deducted from the first $46,500.00 of compensation. 

However, he receives tier II credit for $23,250.00 ($3,875.00 x 6 months).