Deferred Retirement Option Plan (DROP)
The DROP provides a way for members who are eligible to retire to continue working while receiving a retirement benefit. Instead of receiving a pension allowance directly, the allowance is deposited in a special DROP account which is held by the Retirement System for the member. Once the member discontinues employment, he/she will begin receiving a monthly retirement allowance directly and may withdraw the money from the DROP account. Members may withdraw the money in a lump sum, in installments or rollover the funds into an IRA or qualified plan. Members may not enter DROP if their retirement is under the Rule of 80.
Advantages of DROP
The DROP offers an excellent opportunity for members to save money before employment ends.Another attractive feature is that DROP account funds, including interest earned, are not subject to federal income tax until the funds are withdrawn.
Disadvantages of DROP
Members no longer earn retirement credit. Retirement benefits are not adjusted due to salary increases, promotions received, or changes in job classification while participating in DROP.
A member must be eligible for a regular retirement option in order to participate in DROP. A member may participate in DROP one time only and for a period of no more than five (5) years. Members with service credit that was transferred to NOMERS may participate in DROP if the combined service credit meets the basic criteria for the regular retirement option selected.
Members should submit a DROP application to the Retirement System at least thirty (30) days and not more than ninety (90) days prior to the effective date of DROP participation. Once a member participates in DROP, he/she becomes a retiree and is no longer an active member of NOMERS.Contributions will not be deducted or accepted by NOMERS and the member will not earn additional service credit.
Members may cancel their DROP applications at any time prior to signing documents to enroll in DROP. Members may also terminate DROP participation at any time.
DROP participants continue employment with City with no break in consecutive service and will have all the rights and responsibilities of other employees except those relating to retirement. The participants will be eligible for promotions and salary adjustments and may transfer to any other City agency which is affiliated with NOMERS. Participants will continue to earn leave as established for the position and any accumulated leave not previously converted to retirement credit may be used in accordance with the policies of the employer.
Annual and sick leave accrued before DROP participation began may be converted to retirement credit when employment terminates.
The DROP account
A member’s DROP account earns interest during the participation period. The Board of Trustees annually specifies the DROP interest rate.
NOMERS will calculate the DROP allowance using the appropriate retirement formula as detailed in Section 114-204 of the City Code. The member must select a retirement option when he/she begins DROP participation. The retirement option selected may not be changed later.
The DROP benefit is calculated using the formula for the selected regular retirement option.
The monthly DROP benefit is credited to the participant’s DROP account during the participation period.DROP participants are eligible for retiree cost of living increases and bonus payments which are granted to retirees during the participation period.
Salary adjustments received during the DROP participation period will not change the Final Average Compensation which was determined at the time the member began DROP participation.
DROP account withdrawals
Drop participants have access to the funds in their DROP accounts when employment with the City ends. The following options are available for the distribution of DROP funds:
- Lump-sum payment;
- Rollover of all or part to an IRA or other qualified plan;
- A series of 119 installment payments with interest earned on the unpaid balance (The payments are eligible for rollover);
- A series of payments other than 119 installment payments. Interest will not accrue on the unpaid balance.
Taxation of DROP funds
Funds deposited in a member’s DROP account are subject to federal withholding when the funds are withdrawn. The State of Louisiana does not currently tax retirement benefits distributed by NOMERS.The Retirement System will withhold 20% of the DROP funds withdrawn as mandated by IRS rules. In addition, withdrawals prior to age 59½ are subject to a 10% early withdrawal penalty. However, under Internal Revenue Code Section 72(t), members who have separated from service are exempt from the penalty when funds are withdrawn during or after the year in which they reach age 55. See Section 72(t) for other possible exemptions. Members may also rollover the funds into an IRA or other qualified plan and avoid the penalty and the mandatory withholding. Members are advised to consult a tax advisor and/or investment professional for information regarding this matter.
Employment after DROP
DROP participants may continue employment with the City or designated agency after DROP participation ends. The member will not receive a monthly retirement allowance and DROP funds may not be withdrawn unless the member terminates employment and is later employed at less than half-time.
Persons working less than half-time (17.5 hours of a thirty-five (35) hour workweek or 20 hours of a forty (40) hour workweek) may not contribute to the Retirement System and are not granted service credit.Persons working more than half-time are required to resume contributions to the Retirement System and are not eligible for a retirement allowance. Anyone employed for at least one month after completing DROP will be eligible for a supplemental retirement benefit when employment is discontinued. Persons employed for less than one month after completing DROP will receive a refund of contributions when employment is discontinued and will not be eligible for a supplemental benefit.
Supplemental Retirement Benefit
A Supplemental Retirement Benefit is based on service credit earned by working after retirement or after DROP participation ends. A supplemental benefit allowance is paid in addition to the regular retirement allowance. The average salary used in the calculation is based on the salary earned during the supplemental period. The DROP participation period is not included in the calculation. Leave accumulated and not converted prior to DROP, during participation in DROP and during the supplemental period may be converted to supplemental retirement credit when employment is terminated.
Death after DROP begins
DROP participants are in a retired status and beneficiaries are not entitled to the death benefit normally allowed to beneficiaries of active employees. In the event of a DROP participant’s death, benefit payments will be paid to any named Retirement Beneficiary in accordance with the retirement option selected by the deceased participant and the laws governing inheritance and estate matters.
The named beneficiary can be changed if a Maximum or Option I retirement is selected and the beneficiary dies. If the named beneficiary of an Option 2 or Option 3 retirement dies while the participant is in DROP status, the participant’ s benefit will revert to the maximum benefit upon receipt of notification by the Retirement System.
The DROP account is subject to Louisiana community property laws. In the case of divorce, death or marriage, the DROP account funds will be distributed in accordance with applicable state laws or judicial decree.