Refunds, recalculations and back to basics for DROP
Employers urged to read carefully
As many of our employers are aware, PSPRS is in the process of reversing 2011 changes to state law that impacted deferred retirement (DROP) by effectively creating the Tier 1b DROP benefit structure.
This rollback was ordered by the PSPRS Board of Trustees who, under threat of litigation, wished to avoid a time-consuming and costly lawsuit that would leave PSPRS vulnerable under the Arizona Supreme Court’s guidance in the Fields and Hall cases.
Starting January 1, 2019, all members entering DROP will not contribute towards their DROP balance. This will impact all employers without exception.
Some employers – about 110 of 271 – will also have to assist PSPRS next year in providing refunds and/or applicable interest to reimburse Tier 1b members’ DROP contributions to date. This process will be nearly identical to that used to carry out the Hall-Parker contribution refunds, meaning the expense for employers will be offset through PSPRS contribution credits.
It is also possible that some employers will have to assist PSPRS in providing applicable interest payments to Tier 1b members who have already retired from DROP.
The PSPRS Board of Trustees decision also requires that PSPRS recalculate the interest generated on the accrued pension balances of Tier 1b active and retired members’ DROP accounts. This recalculation will reflect the use of the PSPRS assumed earnings rate (AER), which will replace the use of the average annual return. In most, if not all cases, this process will be conducted by PSPRS and not require employer assistance. PSPRS is also executing changes to service purchasing laws that are not expected to require coordination with employers.
The most immediate action required of PSPRS employers is to stop making employee payroll contributions for Tier 1b members in DROP (Tier 1a members do not contribute towards their DROP balance). The ceasing of these contributions can begin as soon as January 1 but must be completed no later than March 31, 2019. Please inform PSPRS of the date you wish to stop making DROP contributions by emailing email@example.com.
PSPRS will work with all of its impacted employers to ensure a smooth refund and recalculation process. This will include identifying impacted members and retirees, providing guidance on retirement processing for those exiting DROP in early 2019, and addressing any other circumstances that could arise during this complex process.
PSPRS will provide employers with all relevant updates as soon as possible. Your patience and perseverance is greatly appreciated.
Which employers will be impacted?
List of 110 currently identified employers