What is a DROP?
DROP stands for Deferred Retirement Option Plan. DROP is a form of retirement benefit that allows an eligible employee to choose a retirement date, then to continue earning a salary while accumulating a "nest-egg" that is payable in a lump sum or in three equal annual payments. If you meet the requirements for eligibility, the DROP gives you another benefit option that you may choose upon retirement. You must decide whether the DROP election is in your best interest.
How is the DROP different from a normal retirement?
A normal retirement provides a lifetime monthly benefit check. A DROP provides a smaller lifetime monthly benefit check after retirement, but also pays you a lump sum when you retire at the end of your DROP period. You earn the DROP payment during the months while you are employed that you are in the DROP and it is paid to you either in a single payment or in three equal annual payments when you retire at the end of your DROP period. In exchange, being in the DROP reduces your lifetime monthly pension benefit slightly. Use the DROP calculator on this Web site to see how your particular DROP choice differs from your regular retirement options.
Do all pension plans have a DROP?
Not all the funds managed by Indiana’s PERF, including the Public Employees’ Retirement Plan, offer a DROP. However, the State Excise Police, Gaming Agent, Gaming Control Officer, and Conservation Enforcement Officers' Retirement Plan (Excise, Gaming and Conservation Plan) and the 1977 Police Officers' and Firefighters' Pension and Disability Fund (1977 Fund) offer a DROP.
Are all DROPs the same?
No. DROP is a generic term that means different things for different pension plans. Other states and other pension plans may have a DROP, but each plan's DROP is unique to that retirement plan. Consult the rest of this document for a more complete explanation of how Indiana's DROP would affect you. You may also contact the 1977 Fund or the Excise, Gaming and Conservation Plan at (888) 526-1687.
Your decision to participate in the DROP or elect DROP benefits is optional and should be based on your facts and circumstances and your family situation. Each member's facts and circumstances and family situation are different. If you elect DROP benefits, there are tax consequences (as there are with all benefits) that you should consider. You should consult with financial or tax advisors whom you trust in order to determine whether taking a DROP benefit makes sense for you and your family, taking into account both tax consequences and your family's financial planning.
Does DROP offer advantages to employers?
Yes, employers gain the advantage of having more predictability as to retirements. Many employers have a high percentage of their police and/or fire department and law enforcement staff eligible to retire at any time. This creates uncertainty for future staffing and budgeting. As members elect into the DROP and declare retirement dates, employers can begin planning and budgeting to fill upcoming vacancies.
This DROP was designed to be actuarially neutral. That means it is designed to pay the same total benefits to those who live a statistically determined number of years no matter which option they choose.
Who is eligible to participate in the DROP?
To participate, on the date you enter the DROP, you must be eligible to retire and immediately begin receiving unreduced retirement benefits if you choose to do so.
Must my employer take action to authorize participation in the DROP?
No. All members of the 1977 Fund and Excise, Gaming and Conservation Plan who are eligible for the DROP may participate in the DROP without any action by their employer.
How long can I participate in the DROP?
A member who participates in the DROP must participate for at least 12 months and not more than 36 months. You may elect any number of whole months between 12 and 36 months, and your election period may begin on any day of the month.
How do I begin participating in the DROP?
In order to begin participating in the DROP, you must file an election form before your DROP entry date. You may download the form from this Web site or obtain a form from your pension secretary or PERF. A copy of the form must be filed with:
Excise, Gaming and Conservation Plan
What information must I supply on the DROP election form?
You must state the date on which you will enter the DROP (your "DROP entry date") and the date on which you will retire (your "DROP retirement date"). Your DROP retirement date cannot be beyond your mandatory retirement age, if one exists. The retirement date must be at least 12 months and not more than 36 months after you enter the DROP. Please contact your employer, the 1977 Fund or the Excise, Gaming and Conservation Plan as to any additional information needed.
What happens if I become disabled while I am in the DROP?
If you retire because of a disability less than 12 months after the date you enter the DROP, your benefits will be calculated as if you never entered the DROP. If you retire because of a disability at least 12 months after the date you enter the DROP, your benefits will be calculated under the DROP and your retirement date will be your disability retirement date.
The DROP will not affect the benefits that are payable to your survivors. If you die while in the DROP, your survivor benefits will be determined under the applicable law of your pension fund as if you had never entered the DROP. Those survivor benefits will be calculated based on salary and service as of the date of death, just as they are under current law. This applies to both deaths in the line of duty and to deaths that are not duty-related.
Excise, Gaming and Conservation Plan
If you die in the line of duty, or not in the line of duty, prior to receiving your retirement allowance, a benefit will be paid on the DROP frozen benefit under the terms of the plan. In addition, your surviving spouse, or surviving children if you do not have a surviving spouse, will receive a lump sum payment based on the number of months you were in the DROP prior to your death.
Can I change my mind while in the DROP and decide to retire earlier than or later than the retirement date I elected at the time I entered the DROP?
Yes, you may always retire earlier than or later than the DROP retirement date you elected at the time you entered the DROP. However, if you choose to do so, your retirement benefits will be determined under the applicable provisions of your pension fund as if you had never entered the DROP, and you will not be eligible to elect any lump sum DROP benefit. Also, it is important to note that you may make only one DROP election in your lifetime. If you make a DROP election and then later decide that you do not wish to retire on your DROP retirement date, you will not be able to enter the DROP again. Once you are in the DROP, you may not change the duration of your DROP period and you may not pick a new DROP retirement date.
If I enter the DROP, can my employer force me to retire on my DROP date?
No. You can choose to retire earlier or later than your DROP retirement date; however, you will not be eligible to choose DROP benefits when you retire on another date. Additionally, your employment status is not affected by participating in the DROP. You may quit your job or your employer may terminate you in the same manner as before your participation in the DROP.
Am I required to make contributions to my pension fund while I am in the DROP?
You are required to make the employee pension contributions to your retirement fund while you are in the DROP plan, just as you would if you were not in the DROP. If your employer picks up any part of your employee contribution, then that pick up continues while you are in the DROP.
If I enter the DROP, am I guaranteed continued employment?
No. Your employment rights and status are not changed by participation in the DROP. You may quit your job or your employer may terminate you in the same manner as before your participation in the DROP.
If I wish to retire on my DROP retirement date, how do I file for benefits?
You must file for your retirement benefits separately with the 1977 Fund or the Excise, Gaming and Conservation Plan. Completing the DROP entry form is not an election to retire on your DROP retirement date. You must file for retirement benefits well in advance of your DROP retirement date in order to minimize any interruption between your final paycheck and the commencement of your retirement benefits.
If I retire on my chosen DROP retirement date, what retirement benefit options do I have?
You can choose either: (a) a DROP benefit payable in a lump sum or three equal annual installments, and a monthly retirement benefit determined under the DROP (see below for details on how these amounts are calculated); or (b) a retirement benefit based on your service and the salary of a first-class officer at the time you retire, without a lump-sum or installment DROP benefit (that is, the monthly retirement benefit you would have received if you had never entered the DROP).
If I participate in the DROP, retire on my chosen DROP retirement date, and choose the DROP benefit, how will the DROP benefit and my monthly retirement benefit be calculated?
You must retire on the DROP retirement date you declared when you entered the DROP in order to be able to elect this benefit option. If you retire on any other date, regardless of the reason, you will not be eligible to elect the benefit option described below.
At the time you enter the DROP, a "DROP frozen benefit" will be calculated. This DROP frozen benefit is equal to your monthly retirement benefit (calculated under the provisions of your pension fund).
When you retire on your DROP retirement date, your DROP benefit is equal to the amount of your DROP frozen benefit (i.e., your monthly retirement benefit as determined at the time you entered the DROP) multiplied by the number of months you participated in the DROP. There is no interest or earnings applied to the DROP benefit.
You may receive this DROP benefit either in a lump sum or in three equal annual payments. Interest does not accrue on the unpaid portion of the annual installments.
In addition to the DROP benefit (taken in a lump sum or in three equal annual payments) you are also entitled to a monthly retirement benefit. This monthly retirement benefit is equal to the monthly DROP frozen benefit determined at the time you enter the DROP.
DROP Benefit Estimation Worksheet
Even if I participate in the DROP, may I still choose the retirement benefit I would have received if I had never participated in the DROP while I was working?
Yes. Prior to your DROP retirement date, you will always have the option of receiving a monthly retirement benefit that is figured in the "normal" manner as if you had never participated in the DROP, and you would not receive a lump sum DROP benefit.
If I retire from the DROP and choose the DROP benefits, how will survivor benefits be calculated in the event of my death?
Survivor benefits are paid under the terms of your retirement plan. If you elected to have your DROP benefit paid in three equal annual installments and die before all three payments are made, the unpaid installments will be paid in a lump sum to your eligible survivors.
If I elect to participate in the DROP and at retirement I choose the benefits under the DROP, will there be a cost-of-living adjustment?
There are no cost-of-living adjustments while you are in the DROP. Any cost-of-living adjustments that occur while you are in the DROP will not affect your benefit. However, once you begin receiving monthly benefits, your monthly benefit may be adjusted pursuant to the terms of your retirement plan.
What if I do not participate in the DROP, or if I participate but do not elect the DROP benefit and instead choose to receive the non-DROP choice of benefits under my pension fund - how will my post retirement benefits be adjusted?
Post-retirement benefit adjustments will be the same as if you had not elected to participate in the DROP.
When I retire, how will the lump sum or installment DROP benefits be taxed?
If you elect to have your lump sum or installment DROP benefits rolled over to an eligible retirement plan or an IRA (a "direct rollover"), there will be no taxes due on your DROP benefits until you begin to withdraw these funds from the eligible retirement plan or IRA. At that point, your taxes will be based upon the amount withdrawn each year and the IRS requirements for the eligible retirement plan or IRA you selected. Monthly pension benefit payments are not eligible for direct rollovers.
If you elect to receive the lump-sum payment or installments paid directly to you, the payments will be taxed as ordinary income in the year you receive them, with a pro-rata recovery of the amount of your contributions (tax basis) under the applicable IRS regulations. Additionally, if you take these payments directly, we are required to withhold 20 percent of this amount for federal taxes when payment is made to you. You should carefully consider what taxes you will owe on the DROP benefits.
NOTE: If (1) you are under age 55 at the time you retire from the DROP, and (2) you elect the lump sum or installment benefits from the DROP to be paid directly to you, a 10 percent federal "early distribution" penalty tax may also be assessed. Certain exceptions apply to this penalty and you should consult an accountant or personal tax advisor to determine if you personally may qualify for any exclusions if you are considering retiring before you have reached age 55 and electing a lump sum or installment benefit under the DROP.
The 1977 Fund and Excise, Gaming and Conservation Plan retirement applications include a detailed special tax notice prepared by the IRS describing your rights to make a direct rollover, and the types of eligible retirement plans or IRAs that can accept a direct rollover.
If I enter the DROP but elect to receive only monthly pension benefits (that is, as if I had never entered the DROP), how will the monthly benefits be taxed?
Entering the DROP but not electing the DROP benefit will not change the rules that apply to the taxation of monthly pension benefits.
If I have any additional questions, whom should I contact?
If you are a member of the 1977 Fund or Excise, Gaming and Conservation Plan and have any additional questions, you can call (888) 526-1687. You may also print copies of this FAQ page.