Deferred Retirement Option
Plan (DROP)
1.
What is a Deferred Retirement Option Plan (DROP)?
A DROP is a program under which an employee retires, but continues to work as a
regular employee. If an employee elects
into a DROP, the employee
·
retires
with the retirement system, but
·
continues
to work as an active employee with his/her employer for every other purpose.
2.
When employees elect into a DROP do they receive pension benefits while
receiving their regular salary and benefits?
No. When
employees elect into a DROP, they continue to receive their regular salary and
benefits as active employees, however, their pension benefit, or some portion
of their pension benefit, is paid into a DROP account during the period for
which they elected into the DROP. At
the end of their DROP Period, they stop working; begin to receive the lifetime
monthly pension benefit that was calculated at the time they elected into the
DROP; and receive the proceeds that have accumulated in their DROP Account.
3.
Why was a DROP introduced by St. Louis Public Schools
(SLPS) and the Public School Retirement System of the City of St. Louis (PSRS)?
SLPS adopted a DROP in an effort to retain
experienced employees. The DROP was adopted
for a trial period of four years and became effective July 1, 2001. The DROP will be especially attractive to
employees who have thirty years of Credited Service because they are eligible
for the maximum pension benefit, which is 60% of Average Final Compensation.
4.
Who is eligible to participate in the DROP?
Any active SLPS or PSRS employee, certificated or
non-certificated, who is eligible for an unreduced, normal pension is eligible
to participate in the DROP. To be
eligible for an unreduced, normal pension, an employee must be at least age 65
or must satisfy the Rule of 85. The
Rule of 85 means the sum of the employee’s age plus years of Credited Service
with PSRS is equal to at least 85.
5.
Can I use my accumulated sick leave to become eligible
for the DROP?
No. To be
eligible for the DROP, you must attain age 65 or reach the Rule of 85 without
your accumulated sick leave time.
6.
If I elect into the DROP, how long can I continue to
work?
The maximum DROP Period is four years.
7.
What if I elect into the DROP and change my mind?
If you elect into the DROP and select a DROP Period
of four years, you could stop working and begin to receive your monthly pension
benefits and DROP Account sooner, but you must stop working at the end of your
four-year DROP Period.
8.
What would happen to my regular monthly pension benefit
during my DROP Period?
During your DROP Period, 80% of your monthly pension
benefit would be paid into your DROP Account, which would accumulate at 8%
annual interest, compounded monthly.
9.
Would I contribute to PSRS during my DROP Period?
No. Your 5%
contributions to PSRS would stop at the beginning of your DROP Period.
10.
What options would I have for the payment of my DROP
Account?
At your discretion, your DROP Account could be paid
to you in a lump sum, or you could elect to roll it over into an IRA or another
employer's plan, or you could use its value to increase the amount of your
regular monthly PSRS pension benefit.
11.
What if I die during my DROP Period?
If you were to die before the end of your DROP
Period, the value of your DROP Account would be paid to your designated
beneficiary. In addition, your unused
Accumulated Contributions to PSRS, if any, would be paid to your beneficiary(ies)
– or – if you selected one of the survivor Payment Options for your regular
pension benefit, monthly pension benefits would begin to your Option
Beneficiary.
12.
Will the DROP affect teachers who want to participate
in the SLPS four-year return-to-work program?
No. They
could participate in the four-year return-to-work program at the end of their
DROP Period. Teachers who have already
retired and are working in the four-year return-to-work program are not
eligible for the DROP.
13.
How will the DROP affect the SLPS Sick Leave Conversion
Program?
Provided you satisfied the requirements of the Sick
Leave Conversion Program, the DROP would have no affect on your participation
in the Sick Leave Conversion Program.
You would continue to accrue and use sick leave time during your DROP Period,
just as you did before you elected the DROP.
At the end of your DROP Period, if you satisfied the rules of the SLPS
Sick Leave Conversion Program, your unused sick leave would be converted to a
Supplemental Pension Benefit.
That being said, in order to maximize your
participation in the Sick Leave Conversion Program, you would need to
coordinate the end of your DROP Period with the end of a school year and
you would need to file an Intent to Retire Form with the Human Resources
Department at St. Louis Public Schools by January 1st of the year in
which you planned to end your DROP participation.
14.
Can you provide an example of how the DROP would work?
Sure. Let’s
provide a couple of examples.
Example 1: Assumes the Maximum Pension Benefit of 60%
of Covered Compensation
·
Let’s
say Mary is age 59 and has 30 years of Credited Service with PSRS. Mary’s age (59) plus her Credited Service
(30 years) add to more than 85.
Therefore, she is eligible to participate and elects a four-year DROP.
·
Mary’s
Average Final Compensation at the time she elects the DROP is $40,000. Average Final Compensation means the highest
average annual compensation a member received for any three consecutive years
of Credited Service of the member’s last ten years of Credited Service.
·
Mary’s
regular pension benefit would be $2,000 per month (2% x 30 years x $40,000
divided by 12 months). The pension
benefit formula is 2% of a member’s Average Final Compensation for each year of
Credited Service, but not more than 60% of Average Final Compensation. In this example, we divided Mary’s pension
benefit by 12 months to determine the amount of her monthly benefit.
·
During
her 48-month DROP Period, PSRS would credit Mary’s DROP Account with $1,600 per
month (80% of $2,000). Mary would
continue to work as an active employee during her DROP Period. She would earn her regular salary, accrue
vacation and sick time, and keep her health and welfare benefits. The only change in her employment status
would be the elimination of contributions to PSRS.
·
At
the end of 48 months, Mary’s DROP Account would have a value of $89,646.
·
At
the end of her DROP Period Mary would stop working, would begin to receive her
monthly pension benefit in the amount of $2,000 per month, and would decide how
she wanted to receive the value of her DROP Account (lump sum, rollover, or
increased monthly pension benefit).
Example 2: Assumes Less Than the Maximum Pension
Benefit of 60% of Covered Compensation
·
Let’s
say Joe is age 59, but has only 26 years of Credited Service with PSRS. Joe’s age (59) plus his Credited Service (26
years) add to more than 85. Therefore,
he is eligible to participate and elects a four-year DROP.
·
If
we assume that Joe’s Average Final Compensation is also $40,000, Joe’s regular
pension benefit would be $1,733 per month (2% x 26 years x $40,000 divided by
12 months).
·
During
his 48-month DROP Period, PSRS would credit Joe’s DROP Account with $1,387 per
month (80% of $1,733).
·
At
the end of 48 months, Joe’s DROP Account would have a value of $77,693.
·
In this example, because Joe has fewer than the 30 years of Credited
Service necessary for a maximum pension benefit, he would need to decide
whether it would be in his best interest to elect into the DROP – or whether he
would be better off working for the additional four years.
Joe could assume that if he worked another four
years and received average salary increases of 3% per year over that four-year
period, his monthly pension benefit would increase to approximately $2,250 - an
additional $517 per month (the difference between $1,733 and $2,250). Before deciding, Joe would want to compare
the benefit of taking a four-year DROP against the benefit of working an
additional four years to increase his monthly pension.