Deferred Retirement Option Plan (DROP)
Deferred Retirement Option Plan (DROP) |
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Explanation of DROP Explanation of DROPThe Deferred Retirement Option Plan (DROP) is an optional benefit program of the Teacher Retirement System of Texas (TRS) which offers qualified active members a way to continue to work while accumulating funds in a special DROP account to be distributed at retirement. Participating members may elect distribution either as one lump sum payment or in periodic installments. The DROP has been discontinued for new participation, effective December 31, 2005. Determining a Standard Annuity for DROPThe monthly deposit to a member’s DROP account is 60 percent of the calculated monthly standard annuity. The standard annuity is determined by multiplying a member’s total years of service credit by 2.3 percent and then multiplying that amount by the average of the member’s three highest salaries (creditable compensation). This results in an annual standard annuity which is divided by 12 to determine the monthly standard annuity. The standard annuity determined for DROP is also the standard annuity upon which the member’s future retirement benefits will be based. Both earned salary and service credit are important factors in determining a member’s DROP deposits and future retirement benefits. Members participating in DROP had their standard annuity calculated using only the three highest years’ salaries earned through the last day of the month immediately preceding the DROP participation date. Years of service credit are determined as of the last day of the month immediately preceding the DROP participation date. TRS relied on information from employers in making these determinations. Earned SalaryEarned salary for the school year in which the member began DROP participation was determined as of the last day of the month immediately preceding the DROP participation date. Consider the following examples: • If the effective date of participation was February 1, only salary earned through January 31 was considered for that school year. It is not likely that six months of salary would produce one of the three highest annual salaries to be included in the calculation. • If the effective date of participation was June 1, only salary earned through May 31 was considered in determining the three years of highest salary. If members complete their required number of contract days by May 31 and have elected to have their salaries spread over 12 months, their "earned" salary for that school year would include all remaining amounts due to be paid after May 31. Service CreditA member earns a year of TRS service credit for each school year in which the member works in an eligible position or is on paid leave for at least four and one-half months, a full semester of more than four calendar months, or at least 90 work days. For example:
Special Service CreditMembers may increase their years of service by purchasing any eligible special service credit. The most common types of special service are active military duty, out-of-state public education, withdrawn TRS service, service credit purchase, and substitute service. An election to participate in the DROP constitutes a deadline for the purchase of special service credit. Special service credit cannot be purchased after the effective date of a DROP election. Note: Service credit in the Employees Retirement System of Texas (ERS) is not eligible for transfer to TRS for the purpose of determining DROP eligibility or deposits. Important Considerations for DROP ParticipantsA DROP Election is IrrevocableTRS law specifies that when members enroll in DROP, they do so as an irrevocable, one-time election. A DROP election cannot, therefore, be revoked or terminated by a member, except as provided by law (see below). Participation PeriodMembers were given the opportunity to participate in DROP for a period of one to five years, in yearly increments. Only three events can terminate DROP participation: (1) retirement, (2) expiration of the participation period, or (3) the member’s death. Member Contributions During DROPMembers participating in DROP continue to make monthly contributions as required by law to TRS during their employment, and this includes DROP participation. However, they no longer earn further service or salary credits for their retirement annuities while participating in DROP. Interest Earned and AppliedInterest at the rate of five percent per annum is credited to members’ DROP accounts until final distributions are made. The first DROP distribution is due and payable at the same time as the member’s first retirement annuity payment. From that point on, monthly distributions, if selected, are paid on the first of each succeeding month until the DROP account has been fully distributed. Yearly distributions, if selected, occur on the anniversary due date of the first payment. Member contributions made during DROP participation are not refundable. Contributions made by a member while participating in DROP are not deposited into either the member’s contribution account or DROP account. Rather, these contributions are deposited into the retirement reserve account. This account is used to pay all retirement annuities and all death or survivor benefits, including post-retirement benefit increases and other annuity adjustments. Working After DROPA member may continue to work after the end of the DROP participation period if desired. Any additional service credit rendered after the end of DROP participation will be used to calculate a second component to the retirement annuity. This additional component will be based only on the years of service credit and eligible salaries earned after DROP participation ends. This second component of the annuity is calculated using the same formula as all other TRS retirement annuities. If a member has fewer than three years of service credit after the end of the DROP participation period, the average salary will be the average for the number of years credited. Post-DROP employment continuation does not require new vesting for benefit purposes. Distribution MethodsUpon retirement, TRS distributes the accumulated amount in the member’s DROP account. The member may select one of the following methods of distribution:
A retiree who first elects a monthly or yearly distribution may later make a one-time election to accelerate installment payments to a lump sum amount representing the remaining DROP account balance. Designating a DROP BeneficiaryTRS members participating in DROP must separately designate one or more beneficiaries to receive any DROP benefits due upon the member’s death. Form TRS 11D, "Designation of Beneficiary for Deferred Retirement Option Plan (DROP) Benefits," is available by calling or writing TRS. DROP beneficiaries do not need to be the same person(s) named to receive other TRS payments upon the death of the member or annuitant. However, in the absence of a designated DROP beneficiary, DROP distributions will be made according to Texas law (Section 824.103 of the Texas Government Code). Death Before RetirementIn the event of the death of a member participating in DROP who has not yet retired, the DROP beneficiary is entitled to receive the accumulated lump sum amount in the DROP account including credited interest. The payment may be eligible for roll over to another retirement plan, such as an IRA. Death After RetirementUpon the death of an annuitant who is receiving a DROP distribution in installments, an amount equal to the member’s distribution will continue to be made to the DROP beneficiary until the DROP account is fully distributed. As an alternative, the DROP beneficiary may make a one-time election to accelerate payments to a lump sum amount representing the remaining DROP account balance. Federal Income TaxParticipating in the DROP may have federal income tax consequences. All DROP distributions, except for benefits paid monthly over a 10-year period, have been determined to be "rollover eligible." Members who do not elect to roll over an eligible distribution will have 20 percent federal income tax withheld from the distribution, as required by federal tax law. More than 20 percent may be withheld at the request of the member. Also, if the member retires before age 59½, a 10 percent early distribution tax may apply to any amounts not rolled over during the period when these distributions are being made. Internal Revenue Service Publication 575, "Pensions and Annuity Income," provides additional information. For additional information, visit the Internal Revenue Service. If a member elects the 120-month payout, TRS will withhold according to the member’s tax withholding preference filed with the system. There still may be a 10 percent tax penalty if the member retires prior to age 59½. Members over age 70½ may have additional tax considerations. The determination of the tax consequences of distributions is a complex matter. Therefore, questions concerning a member’s specific tax situation should be referred to a tax professional or financial adviser. |