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Retirement Manual - Deferred Retirement Option Plan (DROP)

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Webster Parish Clerk of Court

Hon Holli Vining

President
Clerks' Association

 

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Deferred Retirement Option Plan – (See R. S. 11:1530)

The Deferred Retirement Option Plan (DROP) is an alternative to regular retirement which allows a member to accrue a lump sum in addition to the monthly, lifetime annuity benefit.  DROP is not the best choice for all members as it may not provide the highest value benefit in all cases.

Members who are eligible for a service retirement allowance under R. S. 11:1521 may elect to participate in DROP and defer the receipt of benefits under these provisions. A member may not use service in another retirement system for which he has a reciprocal agreement in place to meet eligibility to participate in DROP.  Therefore, a member must have at least twelve years of service credit in the Clerks of Court Retirement and Relief Fund and meet the age requirement to enter DROP.

For those who choose to participate in DROP, the system has established a Deferred Retirement Option Plan Account which is a part of the fund.  The system maintains subaccounts within this account reflecting the credits attributed to each participant in the plan, but the monies in the account remain a part of the fund until disbursed to a participant in accordance with the plan provisions.

Eligible members who choose to participate in DROP must specify on their application for DROP entry the desired duration of participation in the plan.  The duration of DROP participation may not exceed three years.  A person may participate in the plan only once.  At the time the member elects to participate in the plan, the member may select an optional benefit, which reduces his benefit at DROP entry in order to provide a survivor benefit (see section titled “Optional Benefit Payments”).  These selections are irrevocable and may not be changed at a later date even if there are unexpected changes in a person’s life situation prior to terminating employment and receiving retirement benefits.

Upon the effective date of commencement of participation in the DROP, active contributing membership in the system terminates even though the participant continues in employment.  Employer contributions continue to be payable by the employer during the DROP participation period, but payment of employee contributions ceases during this period.  For purposes of applying the calculation rules related to DROP, a participant's compensation and creditable service remain as they existed on the effective date of commencement in DROP.  Therefore, retirement credit is not earned during DROP participation.  The monthly retirement benefits that would have been payable had the person elected to terminate employment and receive a service retirement allowance will be paid into the Deferred Retirement Option Plan Fund.

Please note that although a member choosing to enter DROP accrues a lump sum benefit worth up to thirty-six times the monthly benefit accrued at DROP entry, at retirement such individual’s monthly retirement benefit is generally lower than it would have been had they never entered DROP.  In addition, the benefit calculated upon DROP entry cannot be recalculated even if you choose to remain employed after completing your specified DROP period.

A person who participates in this plan will not be eligible to receive a cost-of-living adjustment while participating in DROP, and will not be eligible for a cost-of-living increase until his employment which made him eligible to be a member of the system has been terminated for at least one full calendar year.

Interest is not credited to the DROP account while a member is participating in DROP and accumulating a DROP account balance.  Interest is credited to the DROP account of individuals who remain employed after completing the period specified for participation in the plan. For those who were eligible to participate in DROP prior to January 1, 2004, such interest is credited based on the actual rate of return earned on the account as certified by the custodian of such assets.  The funds in such accounts are invested as directed by the Board.  For those who remain employed after completing the period specified for participation in DROP who became eligible for DROP on or after January 1, 2004, DROP accounts will be placed in liquid asset money market investments at the discretion of the Board of Trustees and the actual rate of return less one-fourth of one percent per annum will be credited to the account unless the Board of Trustees elects to allow members the right to self direct investment of the funds. 

When funds are transferred to the self-directed subaccount for the investment period, the system is authorized to hire a third party provider.  The third party provider acts as an agent of the system for purposes of investing balances in the self-directed subaccounts of the participant as directed by the participant.  The participant is given such options that comply with federal law for self-directed plans. The participant in the self-directed portion of this plan agrees that the benefits payable to the participant are not the obligations of the state or the system, and that any returns and other rights of the plan are the sole liability and responsibility of the participant and the designated provider to which contributions have been made.  Furthermore, each participant in the self directed accounts, expressly waives his rights as set forth in Article X, Section 29(A) and (B) of the Louisiana Constitution as it relates to his subaccount in the self-directed portion of the plan.  By participating in the self-directed portion of the plan, the participant agrees that he and the provider shall be responsible for complying with all applicable provisions of the Internal Revenue Code.  The participant also agrees that if any violation of the Internal Revenue Code occurs as a result of the participant's participation in the self-directed portion of the plan, it shall be the sole responsibility and liability of the participant and the provider, not the state or the system.  Participants in the self directed accounts waive any liability on the part of the state, the system, or its agents or employees, for any action taken by the participant for choices the participant makes in relationship to the funds in which he chooses to place his subaccount balance.

The Deferred Retirement Option Plan Fund will not be subject to any fees, charges, or other similar expenses of any kind for any purpose.

Upon termination of employment prior to or at the end of the specified period of participation, a participant in the DROP may apply for and begin receiving payment of their monthly benefit that was being paid into the DROP Account along with payment of their DROP Account Balance according to the options outlined in the following section, titled “Deferred Retirement Option Plan Account Payment Options – (See R. S. 11:1530)”.

If the participant dies during the period of participation in DROP, a lump sum payment equal to his DROP account balance will be paid to his designated beneficiary or, if none, to his estate.  In order to receive such a payment, the system must receive a properly executed application.  If the member chose a reduced benefit at DROP entry in order to provide a survivor benefit, the survivor benefit as chosen may be payable to the beneficiary named to receive such benefit on the DROP application.

If employment is not terminated at the end of the period specified for participation in the plan, payments into the DROP fund will cease and the person will resume active contributing membership in the system.  Distributions from the DROP Account will not be made until employment is terminated, nor will the monthly benefits which were being paid into the DROP Account during the period of participation be payable to the person until he terminates employment and applies for such benefits. 

Upon termination of employment, the person may receive his DROP Account Balance according to the options outlined in the following section, titled “Deferred Retirement Option Plan Account Payment Options – (See R. S. 11:1530)”.  In addition, the monthly benefit payments that were being paid into the Deferred Retirement Option Plan Fund will begin to be paid to the retiree and he will receive an additional benefit based on his additional service rendered since termination of participation in the fund, using the normal method of computation of benefits, subject to the following:

  1. For members who enter DROP before January 1, 2011, the average final compensation used to calculate the additional benefit will be determined as follows:
    1. If his period of additional service is less than thirty-six months, the monthly average final compensation figure used to calculate the additional benefit will be equal to the average final compensation used to calculate his original benefit.
    2. If his period of additional service is thirty-six months or more, the monthly average final compensation figure used to calculate the additional benefit will be based on his compensation during the period of additional service.
  2. For members who enter DROP on or after January 1, 2011, the average final compensation used to calculate the additional benefit will be determined as follows:
    1. If his period of additional service is less than the number of months used to calculate the average final compensation for the DROP benefit, the monthly average final compensation figure used to calculate the additional benefit will be equal to the lesser of the average final compensation used to calculate his original benefit or his total salary during the period of additional service divided by the number of months of such service.
    2. If his period of additional service is at least the number of months used to calculate the average final compensation for the DROP benefit, the monthly average final compensation figure used to calculate the additional benefit will be based on his compensation during the period of additional service.

In no event will the monthly post-DROP retirement benefit that a member receives exceed an amount which, when combined with the original service retirement benefit, equals one hundred percent of the monthly average final compensation figure used to compute the additional benefit.

If a person dies or becomes disabled during the period of additional service, he will be considered as having retired on the date of death or commencement of disability.

Deferred Retirement Option Plan Account Payment Options –(See R. S. 11:1530)

Payment of the Deferred Retirement Option Plan Account Balance can be requested under the following options:

  1. Lump sum payment equal to the balance in the Deferred Retirement Option Plan Account.
  2. Partial lump sum payment together with a true life annuity based upon the remaining balance in the Deferred Retirement Option Plan Account.
  3. True life annuity based upon the entire account balance in the Deferred Retirement Option Plan Account. 

If a true life annuity is elected, the terms of the annuity must be approved by the Board of Trustees.

Deferred Retirement Option Plan Account Payment – Tax Considerations

Lump sum and periodic distributions (annual or monthly) which will result in distribution of the retiree’s DROP account in less than ten years are eligible for rollover into an Individual Retirement Account (IRA) or other qualified retirement plan.  If a lump-sum or eligible periodic DROP distribution is rolled-over into an IRA or other qualified retirement plan, the distribution by the retirement system is a non-taxable distribution, with federal tax being deferred until later distribution from the IRA or qualified plan; if such distributions are not rolled-over, then they are a taxable distribution and will be reported to the Internal Revenue Service as such.

If a lump sum DROP distribution is paid directly to the retiree by the retirement system, under most circumstances, the system is required by federal law to withhold 20% of the distribution for federal income taxes.  Such a distribution is a taxable event in the calendar year the distribution is paid and will be reported to the IRS as such; the distribution may also be subject to a 10% tax penalty if the retiree is under the age of 59 ½ years.  If a retiree elects to withdraw (and not rollover) a certain dollar amount from the DROP account on an annual or monthly basis, which will result in distribution of the retiree’s DROP account in less than ten years, the system must also withhold 20% of each annual or monthly withdrawal for federal taxes and report each distribution to the IRS.

DROP distributions received by a retiree on the basis of life expectancy, or periodic distributions that will result in distribution of the retiree’s account in ten or more years, are not eligible to be rolled over.  Such distributions are still subject to ordinary federal income tax, but the 10% tax penalty may not apply even if the retiree is under the age of 59 ½ years.

If a retiree reaches the age of 70 ½ years and still has funds in the DROP account, then mandatory minimum distributions must commence over the retiree’s remaining life expectancy.  These minimum distributions are not eligible to be rolled over and ordinary federal income taxes are payable, but the 10% tax penalty does not apply.

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