The DROP basics for Civilian Participants

Since public sector employees may find it difficult to accumulate significant wealth on their often moderate salaries and have had little chance to accumulate wealth in a retirement plan (outside of IRAs or Deferred Comp), the DROP was initially very attractive. It was the only real way to get a decent pension, AND a nice lump sum of money.

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The DROP basics for Civilian Participants

DROP is an acronym for Deferred Retirement Option Program. FRS added the DROP program to the Pension in 1998 as a way to induce employees to work longer, in an attempt to keep employees from retiring as soon as they are first eligible. Agencies realized that it cost far less to provide a DROP benefit for a current employee than it would cost to recruit and train a NEW employee. So, in 1998 the Florida Retirement System (FRS) instituted a program that could entice experienced employees to continue to work for up to five more years and at the same time allow them to accumulate a lump sum of money that would be available at retirement – the DROP.

Since public sector employees may find it difficult to accumulate significant wealth on their often moderate salaries and have had little chance to accumulate wealth in a retirement plan (outside of IRAs or Deferred Comp), the DROP was initially very attractive. It was the only real way to get a decent pension, AND a nice lump sum of money.  If your only retirement benefit is your pension, can be a wonderful, benefit, but if you DROP, keep in mind you effectively retire! You will get no future credit for years of service or higher pay, and give up additional benefits like HIS credit, or line of duty benefits..  Instead, you accept a significantly lower pension amount in exchange for the potential lump sum. Consider carefully if that is a trade that is in your best financial interest

FOR CIVILIAN PARTICIPANTS, (Special Risk participants get enhanced amounts.  See the Special Risk Section

ELIGIBILITY

You are eligible to participate in DROP when you are vested (after 6 years) and have reached your normal retirement date. Your normal retirement date is the earliest date at which you are entitled for unreduced benefits based upon your age and/or service credits. For FRS Civilian participants, that is 30 years of creditable service, OR, you are age 62 regardless of years of service. If you are over62, you must work at least 6 years to be vested.

HOW TO DROP

To participate in DROP, You must make the election within a 12-month period starting when you reach normal retirement age (30 yrs of service or age 62).  You may make your election up to six months in advance of your normal retirement date, and no later than the month you are to begin DROP.  If you do not apply within the required window, you will lose your eligibility to DROP.

LIMITS

You may participate in DROP for a maximum of 60 months from when you are first eligible. Your eligibility begins the first month you reach your normal retirement age after 30 full years of service or reaching age 62. If you apply for DROP after your DROP eligibility period has begun, your maximum 60-month DROP participation period will be reduced for each month your application is delayed. To simplify, you can only WORK for a maximum of 60 months from the first eligible DROP date if you choose to DROP, and that 60 month period starts from your eligibility date, not your selection date. If you attain 30 years of service, but do not elect DROP for 3 months of your 31th year, then you are only eligible to DROP for 57 months. Once you elect to DROP, you must terminate employment by the 60th month after your first eligibility date, and the election can not be reversed!

THE BENEFIT

There is no financial magic, nor smoke or mirrors, to the DROP.  For all intents and pension purposes, you have retired, and you have started to collect your pension.  Because you are retired, your Pension is capped, and you will not benefit from any promotions or pay rises going forward. Your DROP benefit is simply your normal pension benefit paid monthly, but instead of the check being paid to you, it is deposited into your DROP account, where it earns interest (currently 6.5%). It is simple math. The DROP period allows you to work for a longer period, and your pension is paid into a special account until you must quit working (maximum of 60 months).  At 30 years of service, that amount is 48% of your average final compensation (your average pay for your highest five fiscal years). Please refer to MyFRS.com for the DROP calculator, or see the chart below. Because you are retired, we want to emphasize, your Pension is capped and you get no additional retirement benefit for additional years of service or raises and promotions!

The DROP benefit is also increased by a 3% cost-of-living adjustment each July first.  The first COLA will be prorated based on the number of months you were in DROP prior to July 1 if less than 12 months. Example: If your Average Final Compensation is $50,000, your monthly pension would be $2,000.  Each month $2000 is deposited to your account, and earns 6.5% interest.  On July 1 of each year, your monthly deposit is increased by 3%.

The chart below can help you calculate what your total DROP account would be worth after each year in the program, based on the monthly benefit on the left.  In our example above, the DROP value at the end of 5 years would be approximately $148,812.

Monthly

Years of Participation in DROP

Benefit

1

2

3

4

5


$100

$1,235

$2,588

$4,067

$5,681

$7,441

$500

$6,177

$12,940

$20,334

$28,405

$37,203

$800

$9,883

$20,704

$32,534

$45,448

$59,525

$1,000

$12,353

$25,880

$40,668

$56,810

$74,406

$1,500

$18,530

$38,820

$61,002

$85,215

$111,609

$2,000

$24,707

$51,760

$81,336

$113,620

$148,812

$2,500

$30,883

$64,701

$101,670

$142,025

$186,015

$3,000

$37,060

$77,641

$122,004

$170,430

$223,218

$3,500

$43,237

$90,581

$142,338

$198,835

$260,421

$4,000

$49,414

$103,521

$162,672

$227,240

$297,624

$5,000

$61,767

$129,402

$203,342

$284,054

$372,037

After 5 years in the DROP, you would receive your monthly benefit of $2000 plus cola, AND you would have approximately $148,812 in your DROP account.


COLLECTING YOUR DROP BENEFIT

When you quit working, the proceeds of your DROP account may be distributed to you in one of three ways. You may take a lump sum payment of the entire amount, a direct rollover into an IRA or other qualified retirement account, or a combined partial lump sum payment and rollover. You must make your election with 60 days of your employment termination date. If you don’t select another option, you will automatically receive a lump sum payment for the entire amount, less 20% mandatory tax withholding, and the balance of taxes due will be payable by you to the IRS the following April 15th. The amount taken as a lump sum will be added to your other income for that year, and will be taxable at the tax rate due for your other income PLUS the entire lump sum amount. If you take a lump sum DROP benefit of $148,000, and you have $40,000 of other income that year, your tax bracket for that year will be based on the entire $188,000.  Most likely you will be in a 30% tax bracket for that year.

By rolling the money into an IRA, you can continue to defer the taxes, and the money will continue to grow tax deferred, based on how you invest it.  You will only be taxed on any amount you withdraw.

An Example of Potential TAX CONSEQUENCES

DROP value of $148,000

If you withdraw the lump sum, $29,600 will be withheld automatically, leaving you $118,400.

The full $148,000 will be included as income on your tax return for the year you take the lump sum distribution, putting you in a tax bracket somewhere around 30%.  The balance of your taxes will be due on April 15 of the following year.  Assuming 30% tax rate, you will owe another $14,800 on Tax day, leaving you with a net benefit of just $103,600.

Depending on your age, you may also have to pay a 10% tax penalty for a premature distribution, which could further lower the amount by another $14,800 to leave you with only $88,800 of your original $148,000!

Obviously, rolling the money into an IRA, investing it wisely, and only taking distributions as needed, will allow you to not only preserve the money, but allow it to grow to better provide for your future.  In addition to expanding your wealth, an IRA provides you with some control over your future, and the future of your spouse and children.

  • Clint

    Very good information, thanks for posting it!

  • Clint

    Very good information, thanks for posting it!