DROP - FREQUENTLY ASKED QUESTIONS

DEFERRED RETIREMENT OPTION PLAN (DROP) Effective August 9, 2001
A member with 20 or more years of credited service under the System may enter into a DROP program with his employer. Under the DROP program, the member must voluntarily and irrevocably elect to enter into the program with his employer for a period of up to 60 months. During the DROP period, the member remains in the employ of the employer as a full-time paid firefighter or full-time paid certified peace officer but no member or employer contributions are made to the system, therefore no additional years of credited service are accrued on the member's behalf. The member's monthly pension is calculated based upon the years of credited service and average monthly compensation at the beginning of the DROP period. This monthly pension amount is credited to a DROP participation account with interest currently at the rate of 8.5% credited monthly to the account. However, the rate may increase or decrease as determined by the fund manager.  At the end of the DROP period or prior to that time if the member terminates his employment, the monies in the DROP participation account will be either paid to the member in a lump-sum amount or if allowed by the Internal Revenue Service paid in a lump-sum distribution to an eligible retirement plan or individual retirement account. If you fail to terminate employment with your employer at the end of the DROP period, you are not entitled to receive any interest accumulated on the DROP account. All that you would receive at the time of your termination of employment is the monthly amount that was credited to your account. At the time of finally terminating employment the member will then begin receiving his monthly pension amount directly from the System in the same amount as was being credited to the DROP participation account. (A.R.S. §§38-844.02 through 38-844.09).

If I participate in the DROP, do I still earn my regular pay and benefits (seniority, vacation, pay raises, promotions, etc.) like other public safety personnel not in the DROP?  
Yes.  Your employment status with your employer does not change.

Can my employer force me to take the DROP option?
No.  DROP is strictly voluntary on the part of the employee.  The employee can also select the length of DROP participation, from one to sixty months.  Since this is only an alternate method of benefit accrual, an employer cannot prohibit an employee from entering the DROP.  

I am not currently paying into Social Security. Since I am not making pension contributions during the DROP period, will I have to have social security deducted from my regular paycheck during the DROP period?
No. If your employer has previously exempted police officers or firefighters from social security, you are still exempted as a police officer or firefighter since you are still a member of a qualified retirement plan.

What is the rate of interest to be paid the member on his accrued account during the DROP period?
Per A. R. S. § 38-844.05 the interest rate is set at a rate equal to the assumed rate of return determined by the fund manager.  It is currently 8.5% per year, credited monthly. The DROP amount will be calculated at the beginning of the DROP period. Since this amount will not change during the DROP period, a simple spreadsheet can tell you exactly how much money you will have accrued at any time during the DROP period.

What are some tax implications for the individual member?
As a general rule, a lump sum distribution taken directly by the recipient before the age of 55 will result in payment of taxes on that amount at the individual's tax rate plus a 10% penalty tax. If this amount is taken directly by the recipient, the Internal Revenue Service requires us to withhold 20% of the monies distributed that may or may not cover your tax liability.  If you authorize the System to roll over your DROP proceeds directly to an IRA or other qualified retirement plan there are no immediate tax consequences.  You would pay taxes on these funds only when you receive a distribution from your IRA or other qualified retirement plan.   Keep in mind that tax laws can change, and they are complex.  We urge you to seek the advice of a tax professional to determine what is best for you and how you will be affected.

Does the pension escalator still kick in during the DROP period?
No. The rules regarding the pension escalator will apply at the end of the DROP period. Your eligibility for an increase is determined by your status as of July 1. If you are age 55 or more, you must be retired for one year to be eligible. If you are not age 55 as of July 1, you must be retired for two years to be entitled to the increase. Thus, if your DROP period ends on June 30, your effective date of retirement will be July 1. If you are age 55 on July 1 of the following year, you will be entitled to receive any pension escalator that is available payable July 31 of that year. If you are not age 55 on July 1 of the following year, you will need to wait another year before the pension escalator applies (again payable July 31 of that year and assuming there is money available for the pension escalator).

If you are killed in the line of duty during the DROP period, what is your spouse entitled to receive?
Your spouse will be entitled to receive 100% of your average monthly benefit compensation for the duration of his/her life, plus any accumulated DROP money. If you are not killed in the line of duty but pass away during the DROP period, your surviving spouse is entitled to receive 80% of the pension that is calculated at the beginning of the DROP period plus the accumulated DROP money.

If you resign employment after the DROP period begins or after the end of the DROP period, can you become reemployed with a different employer as a police officer or firefighter and re-enter the PSPRS?
You can take a job with a different employer as a police officer or firefighter but you cannot reenter the PSPRS. Your pension would continue to be paid to you.

What if I enter DROP but continue employment with my employer after my DROP period.  Will I receive a higher pension benefit for working longer?
No.  You will receive a lump sum payment of only the pension monies that were credited to you in the DROP participation account at the time of your termination of employment.  You forfeit all interest earned as a penalty for not fulfilling the DROP requirement.  Your pension benefit will not be adjusted.  No additional credited service accrues and no employer and employee contributions are paid into the PSPRS.

I have a certified domestic relation's order on file with the Fund Manager. How does this affect my DROP account?
Any split of a member's pension based upon a certified domestic relation's order will take place at the end of the DROP period when the lump-sum payment or rollover is made. Thereafter, the split as provided in the order will be applied against the member's monthly pension benefit.

What about a job related disability during the DROP period?
You may apply for a job-related disability under the PSPRS during the DROP period.

If I receive discipline (leave without pay) during my DROP period, are my DROP benefits reduced?
No.  Disciplinary sanctions have no bearing on the amounts credited to your DROP participation account.

What if I am fired (terminated) while participating in the DROP?
Your DROP period ends with your separation from employment with your employer.

What if I successfully appeal my termination and I am reinstated?
If your termination is reversed and the court orders that you be reinstated, a member's participation in the deferred retirement option plan, minus any benefits previously distributed pursuant to the PSPRS statutes, shall be reinstated for the duration of the original deferred retirement option plan participation period designated by the member on the appropriate deferred retirement option plan participation form.

May I access my DROP funds in an emergency?
No.  There are no hardship provisions allowed.

How should I go about analyzing whether I should enter into the DROP?
Generally, if you have attained your maximum salary at your position and do not anticipate any additional salary increases, you may want to consider the DROP. Remember that this is an important financial decision and is irrevocable. It cannot be changed even if your personal or family circumstances change dramatically after you begin DROP. Your local board can provide you with an estimate of your benefit for the beginning of the DROP period and can inform you of what the accrual rate (the percentage amount) that will apply at the end of your DROP period.  You will have to make certain assumptions about what your three-year salary would be at the end of the DROP period assuming you did not enter DROP.  The Retirement Estimate spreadsheet under the Members Section to the left also calculates a DROP Estimate.  You should consult with a financial advisor to determine if DROP would be beneficial to you.

If I have 32 or more years of credited service in the system, am I still eligible for DROP?
Yes.

How do I calculate my DROP lump sum amount?
Use the Retirement Estimate spreadsheet or view the Calculating DROP Lump Sum document .

Note to employers and Local Boards:  The Fund Manager has developed a standard application for DROP as well as any supporting forms that are deemed necessary.  We anticipate still using form P11 to calculate the DROP amount.  Click here for the Forms List.

Please submit any questions you have to and we will be glad to add them to this list.