On March 4, 2019, the United States Supreme Court decided BNSF Railway Co. v. Loos and held that damages paid for an on-the-job injury are taxable under the Railroad Retirement Tax Act (RRTA). Previously, FELA awards were considered payment for an injury, not services rendered, and therefore were not subject to taxation. (The Model Jury Instructions for FELA cases specifically stated that plaintiffs "will not be required to pay any federal or state income taxes on any amount that you award. When calculating lost earnings, if any, you should use after-tax earnings." Fed. Practice and Instructions 5th Ed. Section 155.63.) That rule will now change. Any amounts awarded in FELA verdicts and settlements for past or future lost wages will be subject to taxes imposed by the RRTA.
The Court's decision focused on the word "compensation," which is defined in the RRTA as "any form of remuneration paid to an individual for services rendered as an employee." The Court rejected the lower court's interpretation of "compensation" as only pay for services that an employee actually renders, or pay for active service. Instead, the Court held that the RRTA definition of compensation was equivalent to similar language used outside the railroad industry in IRS regulations. The IRS's reading of the word compensation includes not only "pay for active service but reaches, as well, pay for periods of absence. See 26 CFR Section 410.5 (1938)." In 1994, the IRS further clarified the definition to include "pay for time lost." After looking at cases applying the IRS regulations, the Court concluded that damages awarded for lost wages in FELA cases should also be subject to taxation by the RRTA.
The Loos decision raises many questions about how verdicts and settlements under the FELA will be handled moving forward. Plaintiffs should now be permitted, contrary to the jury instruction cited above, to present evidence at trial of the gross wages of an injured employed. It will also be interesting to see how the taxes paid for lost wages will be applied by the Railroad Retirement Board -- will the injured employee be credited by the RRB with months of credit toward his or her retirement pension for the period of time covered by the verdict or settlement? Or will the RRB allow extra months of credit to employees paying taxes on verdicts or settlements that can be applied to qualification for an occupational disability annuity? Also, there is a cap on the total amount of Tier 1 taxes paid by an employee in a given year under the RRTA. Will this cap on taxes owed in a single year by employees be applied to the amount owed on a verdict or settlement covering many years of loss? These are questions that will be answered as the new law is applied to cases in the future.