November 16, 2018
In a recent decision (Wisconsin Central Ltd., et al v. United States), the U.S. Supreme Court ruled that non-qualified stock options granted to railroad employees are not considered compensation under the Railroad Retirement Tax Act of 1937, and are, therefore, not subject to taxation.
As a result, certain railroad employers and employees who previously paid railroad retirement taxes based on the exercise of such stock options may be eligible for tax refunds through the Internal Revenue Service (IRS).
Railroad employees and railroad retirement annuitants considering filing for such a tax refund should know that doing so may reduce the amount of their total creditable railroad compensation. Under the Railroad Retirement Act (RRA), creditable compensation is a factor in the computation of a railroad retirement annuity. A reduction in compensation could cause a reduction in an annuitant’s monthly benefit rate, and may result in an overpayment. For active employees, a change in creditable compensation may impact any estimated annuity amounts they were previously given by the Railroad Retirement Board (RRB).
At this time the RRB is unable to provide guidance to individuals trying to determine if their total creditable railroad compensation will be reduced and/or if their annuity amounts will change as a result of claiming refunds of taxes paid on non-qualified stock options. The agency’s three-member Board (appointed by the President with the advice and consent of the Senate, and representing rail labor, rail management, and the public interest) has the authority to determine what effect, if any, the court’s decision will have on the RRB’s administration of the RRA. However, the position of Chairman of the Board is currently vacant, and the Management Member of the Board must recuse himself from this issue as he previously worked for a railroad and received non-qualified stock options. The Labor Member of the Board alone lacks statutory authority to make a decision, as a two-member quorum is required by law.
It is expected that in the next calendar year the agency will get a three-member Board in place that will be able to make policy decisions related to this matter. We are currently in discussions with the IRS to determine if it is possible to hold open the period for railroad employees and retirees to file claims for tax refunds until such time as we get a three-member Board in place. We would then be better able to provide information regarding the effect on RRB benefits to those needing assistance.
This web page will be updated as more information becomes available.