Reply To: UP Court Case Victory

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Kaye Thomas

I moved this post from Other Tax Topics to this forum, as it pertains to equity compensation.

The ruling you mention applies only to payments made under the Railroad Retirement Tax Act, which applies only to people who work for railroads. Your payments were under the Federal Insurance Contributions Act, which collects Social Security tax and Medicare tax from the rest of us. FICA applies to “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.” It is undisputed that this definition includes compensation in stock and options, except the compensation element in incentive stock options and employee stock purchase plans. RRTA contains different statutory language, and applies to “any form of money remuneration.” Union Pacific was able to persuade the court that compensation in stock and options is not “money remuneration,” so RRTA does not apply to those forms of compensation.

The upshot is that people who work for railroads and receive compensation in stock and options don’t have to pay tax under RRTA (at least in states covered by the Court of Appeals for the Eighth Circuit), which may sound like a good deal, though I’m guessing it also means they receive a smaller benefit when they retire. The decision does not in any way affect the vast majority of workers who pay tax under FICA rather than RRTA.