When valuing or dividing Railroad Retirement benefits, the attorney needs a thorough understanding of the plan and what can be valued for property offset purposes.

The Railroad Retirement System, a portion of which is comparable to a traditional defined benefit plan, is comprised of a Tier I benefit and a Tier II retirement benefit. The Tier I benefit represents Social Security which is not divisible by state courts under Section 45 of the United States Code. Entitlement by the former spouse to Tier I benefits are a matter of federal law pursuant to U.S.C. Section 2(c)(d)(4) and 2(d)(1)(v) of 45 U.S.C. section 231a (c)(4). A non participating spouse in the Railroad Retirement Plan may be entitled to a divorced spouse's annuity based on the participant's Tier I portion, depending upon his/her own Social Security earnings. The same is true for Social Security. Whereas one spouse may receive the greater of their own Social Security benefit or 50% of their spouse's Social Security without affecting the spouse with the greater Social Security benefit.

Therefore, for purposes of offsetting the value of a Railroad participant's pension benefit against other marital assets, it would be illogical to value the Tier I benefit since the non-participant will most likely receive Social Security benefits. Awarding one-half of the value of Tier I benefits to the spouse would create a windfall since it could be considered double dipping by the former spouse. That is, valuing the Tier I benefit of the Railroad participant spouse, the spouse of the participant receives assets equal to half the value of the Tier I benefit at divorce, and subsequently receives Social Security. Both the Social security Administration and the Railroad Retirement Board consider Tier I benefits Social Security. In fact, the non-divisible Tier I component of the annuity is calculated using the benefit formula in Section 215 of the Social Security Act.

Therefore, the divisible portion, and the only portion that requires a value and/or can be divided, is the Tier II benefit. This portion of the overall annuity is considered by the Railroad as similar to pension benefits in the private sector. Therefore, it is our opinion that it is not proper to value or divide Railroad Tier I benefits but only the benefit accrued under Tier II, unless the Court for some reason finds it necessary to value all of the retirement benefits including Social Security.

The Railroad Retirement System also has some very unique features not found in traditional type plans. The most important is a cost of living adjustment or COLA. The Plan features an annual percentage increase in Tier I benefit payments to participants based on the Consumer Price Index (CPI) and a relatively small increase in Tier II benefits. The Railroad Retirement Plan is very much similar to an individual in the private sector having accrued Social Security benefits along with a pension benefit.

Keep in mind, however, the participant under this plan cannot collect Tier I benefits separately from Tier II. Social Security is generally not an issue when both parties have their own Social Security earnings.
In addition, the assumed retirement age should be verified since an erroneous assumption made by a CPA, actuary, or other valuation expert not familiar with this plan, or pensions in general, can cost your client possibly thousands of dollars. The normal retirement age varies for Railroad employees depending upon the normal retirement age setforth by the Social Security Administration. That is, the individual's normal retirement age could be as old as 66 and 10 months or 67 if born after 1961 for example. The appropriate retirement age can be verified with the Railroad Retirement Board.

Contacting the Social Security Administration upon or pursuant to a divorce is recommended as well for other individuals when their spouse's may have Social Security benefits greater than their own.

We recently went up against a well known actuary in one of our other office locations who tried to do just that, value a Tier I benefit for property offset purposes. The actuary later conceded that the Tier I does in fact represent Social Security and the value of the Tier I benefit was withdrawn. In his same valuation, the actuary valued the Tier II benefit assuming a 3% COLA, keeping in mind that COLA's can greatly influence the lump-sum present value. However, the fact is that the COLA on a Tier II benefit, if any, is generally 32.5% of the Tier I benefit COLA. For instance, the Tier II COLA for this past year was 4 tenths of 1% well short of the 3% assumed by the actuary. Therefore, caution is advised when reviewing pension valuations specifically regarding the COLA's since a two to three percent COLA could increase the lump-sum present value upwards of 40% to 50%.

Lastly, for the spouse to collect Tier I benefits, much like the requirement under Social Security, the former spouse must have been married to the participant for at least ten (10) years and must not be remarried at the time of application for their portion of the Tier I benefit.

The Railroad retirement plan is exempt from the Employee Retirement Income Security Act of 1974 (ERISA) and the Retirement Equity Act of 1984 under Sections 1003(b)(1) and 1051 of title 29, United States Code because the Plan is a "governmental plan" as defined in Section 1001(23) of title 29, United States Code and requires special considerations when valuing or dividing benefits for divorce. The information contained in this segment is meant to be informative and may not be all encompassing especially with regard to Social Security. The parties individual circumstances may be different in each and every case. It is advisable for the parties to consult with the Railroad Retirement Board or the Social Security Administration for clarification or application to their own particular case.

Tim Voit is a Financial Analyst and founder of Voit Econometrics Group, Inc. As an analyst, as well as being retained in malpractice cases, Tim Voit and his firm have aided attorneys and law firms in the drafting of Qualified Domestic Relations Orders (QDRO's) and other Orders relating to private, governmental, and Military plans. Questions, or general inquiries can be made by contacting Tim Voit at Toll-Free: 1-800-557-8648. © Voit Econometrics Group, Inc.