Section D - Employee Contribution (EEC) Amount
The EEC is the amount of railroad retirement taxes paid by the railroad employee that exceeds the amount that would have been paid in social security taxes if the employee's railroad service had been covered under the Social Security Act.
The amount the employee contributes is also referred to as the employee's "investment" or "cost" in his or her pension "contract."
- EEC Recovery
The NSSEB and tier II payments are taxed as contributory pension payments because employees contribute toward these amounts. The taxability of NSSEB and tier II contributory pension payments depends on the types of annuities being paid and whether the EEC amount has been recovered. An EEC amount is recovered when NSSEB and tier II amounts paid to an employee and all individuals paid on the employee's wage record equals the EEC amount. Portions of NSSEB and tier II amounts paid before EEC recovery are considered nontaxable or "tax-free." Once EEC amounts are fully recovered, any NSSEB and tier II amounts paid are fully taxable.
Minimum retirement age is generally the age at which individuals could retire based on age and service. This is age 60 with 30 or more years of railroad service or age 62 with less than 30 years of railroad service.
- NSSEB and tier II payments to disability annuitants are fully taxable from the annuity beginning date until minimum retirement age is met. When minimum retirement age is met, disabled employees may determine their eligibility to compute tax-free portions of NSSEB and tier II payments.
- NSSEB and tier II components of spouse annuities and NSSEB components of divorced spouse annuities are fully taxable from the annuity beginning date. These annuities are not subject to tax-free calculations using the EEC amount.
- Tier II portions of legal process partition payments are fully taxable from the payment beginning date. Partition payments are not subject to tax-free calculations using the EEC amount.
Note - The RRB does not provide or compute the tax-free amount of railroad retirement annuities.
- EEC Recovery Methods
- Three-Year Rule Recovery
EEC recovery under the Three-Year Rule covers annuitants with annuity beginning dates before July 2, 1986. Under the Three-Year Rule, NSSEB and tier II payments became fully taxable only after the total of these benefits paid to all annuitants on the employee's wage record equaled the EEC amount.
The Three-Year Rule also applied only if the employee's contribution amount could be recovered within a 36 month (or 3 year) period. This method does not apply to individuals filing for annuities at the present time. We do not have any annuitants under the Three-Year Rule currently receiving railroad retirement annuities.
- 1986 General Rule Recovery
EEC recovery under the 1986 General Rule covers annuitants with annuity beginning dates from July 2, 1986, through December 31, 1986. These annuitants were allowed to calculate tax-free portions of NSSEB and tier II payments that apply for the life of the annuities. The tax-free amounts are permanent.
- 1987 General Rule Recovery
EEC recovery under the 1987 General Rule covers annuitants with annuity beginning dates after December 31, 1986. These annuitants are entitled to a temporary tax-free amount. This temporary tax-free amount ends when the employee contributions are fully recovered based on NSSEB and Tier 2 payments made to the employee and/or all individuals drawing on the employee's wage record.
There are two methods of determining the tax-free and taxable portions under the General Rule.
- Nonsimplified Method
The Nonsimplified Method consists of a series of calculations and was initially the only General Rule method available. A description of this method and when to use it is explained in IRS Publication 939, General Rule for Pensions and Annuities.
- Simplified Method
In 1988, the IRS introduced another method of computing taxable and tax-free amounts for General Rule cases called the Simplified General Rule or the Simplified Method. To see if a payee qualifies to use the Simplified Method, refer to IRS Publication 575, Pension and Annuity Income and/or IRS Publication 939, General Rule for Pensions and Annuities.