December 12, 2018
What’s next with the contributory DROP rollback?
Refunds, recalculations and back to basics for DROP
Q: Why did the Board of Trustees choose to roll back the Contributory DROP program?
A: Based on the outcome of previous lawsuits surrounding Senate Bill 1609, passed by the state Legislature in 2011, the PSPRS Board of Trustees reached the conclusion that the creation of a Tier 1b member class with different benefits almost certainly would be found unconstitutional if challenged in court.
Q: Who is affected by this rollback?
A: All Tier 1b members are being affected by this rollback. Tier 1b members are defined as Tier 1 members who did not have 20 years of credited service prior to January 1, 2012.
All members entering DROP beginning January 1, 2019, or later will have the same DROP benefits applied to their account based on the original DROP program. Additionally, those who have already entered or exited from Contributory DROP will have their accounts adjusted to the same benefit level accordingly. No other member tiers are affected.
PSPRS has produced informational videos about the 401a Defined Contribution benefit created for Tier 2 members and the Tier 3 member benefit options.
Q: What exactly is being adjusted?
A: Beginning after April 1, 2019, most active Tier 1b members in Contributory DROP will receive a full refund of their paycheck contributions made during DROP. Further, the interest generated on the monthly pension amount in these members’ DROP accounts will also be recalculated with the appropriate PSPRS assumed earnings rate. This will provide for greater DROP payments upon retirement than balances based on the previous rates set under statute in 2011 for Tier 1b members.
For those Tier 1b members who have already retired from DROP, they will receive a retroactive increase to their DROP interest balance (already received upon retirement) to reflect this change to the assumed earnings rate. These payments will be deposited into a Nationwide account. Retired members have already received their contributions back and thus are not subject to additional refunds of contributions.
Additionally, there is a possibility that both active and retired Tier 1b DROP members may be eligible for additional interest payments similar to the pre-judgment interest awarded during the Hall-Parker excess contribution settlement process. PSPRS will update those affected of any developments.
Q: When and how can members and retirees expect to receive refunds?
A: It will vary by employer although PSPRS hopes to conclude its part of the process by June 30, 2019. Refunds and applicable interest will be distributed by the employers as taxable wages in the same manner and method that the Hall-Parker refund process was carried out.
PSPRS will work with more than 100 employers to ensure accurate refunds are provided to more than 1,300 Tier 1b DROP members and retirees. PSPRS staff thanks its members in advance for their patience as we address this logistical challenge.
Q: Do impacted members and retirees need to do anything to ensure they receive payment?
A: No. Members and retirees, along with all affected parties, will be notified of any substantive developments.
Q: I am a Tier 1b member who will exit Contributory DROP between January 1, 2019, and June 30, 2019. How will I be impacted?
A: Other than stopping their contributions, those Tier 1b members exiting Contributory DROP during this rollback period will be allowed to finish in the exact same manner as it is for those exiting Contributory DROP now before the rollback. Members exiting Contributory DROP from January 1 to July 1 will have their entire exit payment, including readjusted interest earnings, transferred to the tax deferred 401a account managed by Nationwide Retirement Systems.
If additional interest similar to the pre-Hall-Parker judgment is awarded it will also be distributed to retiring members by their employers for which a 1099 will be issued.
Q: I am a Tier 1b member getting ready to enter DROP in 2019. How will I be impacted?
A: Members entering DROP beginning in January 2019 will not be required to continue their contributions and their monthly pension installments will earn interest based on the assumed earnings rate set by the Board of Trustees. The current rate is 7.3 percent.
Q: Where can I learn more about DROP?
A: The PSPRS deferred retirement webpage is a good place to start. PSPRS has also produced a video explaining DROP that is on YouTube.
Q: Are there going to be changes to service purchase statutes as well?
A: Yes. The PSPRS Board of Trustees has also ordered staff to develop steps to roll back the effects of previous changes to service purchase statutes that increased purchasing costs and necessary conditions for purchasing. PSPRS is working on addressing these issues and will communicate all developments as soon as possible to its members.