Deferred Retirement Option Program (DROP)Jan 23, 2020
By Glenn J. Downing, MBA, CFP®
The Deferred Retirement Option Program (DROP) is available to Florida Retirement System (FRS) pension plan participants. As a DROP participant, you earn your salary while your monthly pension is paid into the FRS Trust Fund. You earn interest at the rate of 1.3% on those DROP funds. This money adds up quickly. If your pension payment is $5000/month, your ultimate DROP payment will approximate $310,000!
This is a rich retirement – there’s nothing remotely like it that we’ve see in private industry.
Before you participate in DROP, you earn one month of retirement service credit for each month you work. When you enter DROP, you are considered to be retired and your pension is frozen at that level. You will still benefit from the cost of living increases, however.
Who is Eligible to Join DROP?
To participate in DROP, you must be vested and eligible for normal retirement (based on your years of service or age). You must be an active member of the FRS Pension Plan, TRS, or SCOERS. The Teachers’ Retirement System (TRS) and the State and County Officers and Employees’ Retirement System (SCOERS) are retirement plans that are closed to new participants, but they are still active and functioning for current participants.
Who Cannot Participate in DROP?
- A participant in the FRS Investment Plan.
- You are part of one of the state’s Optional Retirement Programs
- A latecomer – you were otherwise eligible but tried to sign up after the 12-month window closed.
When Am I Eligible?
You begin DROP participation in the month you reach your normal retirement date based upon your age or the month after the month you reach your normal retirement date based upon your years of service. For regular employees, this is age 62 or 30 years of service, whichever occurs first. For members of the special risk class, this is age 55 and 25 years of special risk service.
If you’ve joined FRS after July of 2011, the service requirements increase to age 65 and 33 years of service, or for special risk service, age 60 and 30 years of service.
You also need to be fully vested. If your FRS participation began before July 1, 2011, you must have six years of service to be vested. If you are initially enrolled in the FRS on or after July 1, 2011, you need eight years of service to be vested.
For grades K-12 teachers, you may choose to enter DROP at any time after reaching your normal retirement date and still participate for up to 60 months.
For everyone else, there is a 12-month window in which to elect DROP. If you do not apply when eligible, then for each month of delay DROP participation decreases by one month. After 12 months eligibility ceases completely.
If you are a teacher, you may be permitted to extend your DROP participation up to 8 years in total. This extension needs authorization from your employer and approval by the Division.
What Do I Do With My Accumulated Paid Days?
You may choose to receive a lump-sum payment of your accumulated paid time, either at the time you enter DROP or after your DROP participation ends. Based on your employer’s policy, up to 500 hours can be reported.
If your accumulated paid time is paid to you at the time you enter DROP that amount will be included in your retirement benefit calculation. If, however, you receive a lump-sum annual leave payment after your DROP participation begins, it will not be included in your retirement benefit calculation.
Your DROP accumulation stops earning interest the month in which your participation ends, and your DROP payout is made the following month.
What Are the DROP Payout Options?
Your DROP account is paid to you in one of three ways:
- as a lump-sum payment, with 20 percent withheld for federal income taxes;
- as a direct rollover to an eligible retirement plan or Traditional IRA; or
- as a combined partial lump-sum payment and direct rollover.
Generally, choice #1 will never be a good one. Increasing your taxable income by a potential few hundred thousand will run you right up through the tax brackets, and you’ll likely lose 40% off the top. Instead, choice #2 is generally recommended. That is, roll the funds over to an IRA or to another employer’s qualified plan. In this way taxes are managed by the amount and timing of distributions.
If you made any personal contributions prior to 1975, such as payments to purchase optional service credits, then these funds will be paid directly to you. This portion of your benefit represents your after-tax contributions that cannot be rolled over into a tax-deferred account.
3 months before your DROP ends you’ll choose your payout option. Within 60 days after your DROP participation ends, your account is distributed according to your choice. If you do not choose a distribution method within that 60-day period, the account is fully distributed. In other words, a lump-sum payment is made less 20 percent withholding for taxes.
Should you participate in DROP, knowing that I’ll cap your pension benefit? Is it better to continue working and earning service credit and then retire with a larger pension?
You can go to HR and request an estimate under both scenarios, and then make a wise decision.
What if I’d like to continue working after DROP? Can I take a new job with an FRS employer?
No! A t least not for the first 6 months after retirement. If you do, here’s what happens:
- You void your retirement and DROP participation.
- You must repay your DROP payout and any monthly benefits you received since your DROP participation ended.
- If you rolled over to an IRA or another employer’s qualified plan, you may be subject to tax penalties and surrender charges from that account.
- Your new employer is required to pay all required employer and employee contributions, plus interest, to retroactively establish your membership and service credit with FRS.
The time to begin thinking about DROP is 6 months before eligibility – because that is when you can first sign up. You need to go to HR to get projections of your benefits both with and without DROP, and compare the two. This is where a professional financial planner adds tremendous value. You make the DROP decision considering the other retirement resources in your household: IRAs, 401Ks, 403(b)s, 457s, and Social Security. When I as your planner have all these data, then we can work together to design and fund the retirement of your dreams!
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Check out Glenn's piece on FRS Pension Option. Questions? Feel free to get in touch with us at [email protected] Also follow us LinkedIn, Facebook, Instagram, and YouTube for more personal financial information relevant to you!
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