RS DAL00605.360 WEP Applicability (RTN 21, 04/2011)
The 1990 regular session of the Louisiana Legislature authorized the Deferred Retirement Option Plan (DROP) for members of several Louisiana Public Retirement Systems (ACT 14). There are several DROP and Back-DROP programs throughout the State of Louisiana, with similarities and differences between each plan.
Generally, the DROP and Back-DROP plans are optional benefit programs of certain Louisiana Public Retirement Systems that provide a mechanism for their members, who are eligible for normal retirement, to elect participation for a period specified by the plan. Once participation in the plan commences, the election to participate is irrevocable and the period of participation may not be extended. Only one period of participation is permitted. Average compensation and election of option, if any, are fixed upon commencement of participation.
In regular DROP, a member who is eligible for normal retirement may elect to participate in DROP and continue working for a specified period. Once participation ends, the member may either continue working or retire. However, with Back-DROP, a member is eligible to elect or “take” the Back-DROP option only upon termination of employment at retirement, provided he or she has more than sufficient service credits for normal retirement.
1. Defining Louisiana DROP and Back-DROP
The regular DROP plan is available for members of certain State, statewide, and local public entities (RS 11:4) who are eligible for normal service retirement. In lieu of terminating employment, members have the option to defer receipt of their monthly retirement benefit while they continue to work and participate in the DROP program. The monthly benefit that would be payable if the member had elected to retire and receive a service retirement allowance is then deposited into an individual DROP account, maintained by the retirement system.
Generally, active membership participation and employee contributions into the regular retirement system cease. Employer contributions into the regular retirement system may or may not cease, depending on the plan administering DROP. When participation ends, the monthly annuity credited into the DROP account ceases. The member may then elect to retire, or continue working and defer retirement. If employment continues, employer and employee contributions into the regular retirement plan resume and in some situations, members may earn additional service credits. While employment continues, DROP funds are not available for distribution.
DROP deposits do not earn interest while a member participates in the program. However, interest income on the DROP account may accrue, as long as the member continues working or if, at retirement, the member elects to defer receipt of all or part of the DROP funds.
When employment terminates and the member retires, a monthly annuity from the regular retirement benefit is payable. DROP funds are also available for distribution either as a lump sum payment or as a benefit structured in an alternate manner, subject to approval by the board of trustees. Some plans allow members to defer receipt of all or part of their DROP funds and roll over the balance into a qualified plan.
The Back-DROP program is available to active members who have accumulated more than sufficient service credits for regular retirement. Any members who have worked past their normal retirement date can “retroactively” elect to receive the benefit of a DROP account as if they had exercised the earlier option. The regular retirement pension benefit is calculated as if the member had previously retired, and the annuity payments are retroactively credited as if the member had paid into the DROP fund. Generally, the duration of the Back-DROP period does not exceed the lesser of three years, or the number of months of creditable service accrued after the member first attained eligibility for normal retirement.
At retirement, a member's total retirement service credit is reduced by the Back-DROP period. Employer contributions, and any interest accrued on employer and employee contributions for the participation period chosen, remain in the retirement fund. However, employee contributions are either refunded or deposited into the Back-DROP fund. In addition to the monthly retirement benefit payable, the member receives a lump sum payment equal to the maximum monthly benefit calculated at the earliest date of retirement eligibility, multiplied by the number of months involved in the Back-DROP period. A member may defer receipt of all or part of the Back-DROP balance, or roll over the balance into a qualified plan.
B. Policy – WEP applicability
The Dallas Region Office of the General Counsel (OGC) rendered opinions for the 13 Louisiana Public Retirement Systems covered under Louisiana Act 154 of 1985. This legislation grants early eligibility retirement to members who accrued at least 10 years of service as of September 1, 1985, regardless of their age (RS DAL00605.361.2).
The opinions state that since the date of their inception, the DROP and Back-DROP plans are not separate plans, but rather part of the overall retirement plans for only these 13 Louisiana Public Retirement Systems. Therefore, members of any of the 13 public pension plans shown below who are exempt from WEP based on Act 154 are also considered exempt from having WEP applied to DROP. For additional details on these legal opinions, see PR 09005.021 - Louisiana.
Louisiana State Employees' Retirement System (LASERS);
Louisiana State Police Retirement System (LSPRS);
Louisiana School Employees' Retirement System (LSERS);
Teachers' Retirement System of Louisiana (TRSL);
Louisiana Assessors' Retirement Fund (ARF);
Louisiana Clerks of Court Retirement and Relief Fund (CCRRF);
District Attorneys' Retirement System (DARS);
Municipal Employees' Retirement System of Louisiana (MERS);
Municipal Police Employees' Retirement System (MPERS);
Firefighters' Retirement System of Louisiana (FRS);
Parochial Employees' Retirement System of Louisiana (PERS),
Registrar of Voters Employees' Retirement System (ROVERS), and
Sheriffs' Pension and Relief Fund (LSPRF).
Since DROP and Back-DROP are considered sub-accounts and not separate retirement plans or supplemental savings plans of the 13 public retirement systems shown above, WEP applies to both DROP/Back-DROP and the regular retirement plan if the member does not meet the early out or discontinued service (Act 154) or any other exception to WEP. For more information on WEP exceptions, refer to RS 00605.362 and RS DAL00605.361.
To determine the combined monthly total amount subject to WEP, take the following action:
Determine the lump sum amount from the DROP funds available when employment terminates and the member actually retires;
Refer to RS 00605.364C.5.b. to convert the lump sum total into a monthly amount by applying the procedures as stated for the lifetime or unspecified period only; and
Add the prorated DROP amount to the monthly compensation from the regular retirement system.
NOTE: Any other Louisiana Public Retirement Pension with DROP/Back-DROP involvement not listed in PR 09005.021 requires a regional OGC legal opinion to determine if DROP is separate or part of the non-covered regular retirement plan (RS 00605.362C.2.).
Mr. Smith worked for the State of Louisiana under non-covered employment from 01/1986 to 02/2009. He was a member of LASERS and eligible to retire effective 01/2006. Instead of retiring, he continued working and enrolled in DROP. He participated in DROP from 02/2006 through 02/2009. Mr. Smith retired from the State of Louisiana immediately after he completed his DROP period in 02/2009.
In 08/2010, Mr. Smith filed an application for Social Security retirement insurance benefits (RIB). Since Mr. Smith was not eligible to retire prior to 1986, WEP applies to his regular retirement plan and DROP. A LASERS statement shows his monthly annuity of $3,000, participation in DROP from 02/2006 through 02/2009, and a DROP balance of $100,000 as of his retirement date. Mr. Smith elected a partial lump sum amount of $50,000 at retirement and rolled over the remaining $50,000 into an IRA account.
WEP offset applies to Mr. Smith's monthly annuity of $3,000 and to the DROP balance of $100,000. Per RS 00605.364C.5.b., calculate the DROP funds of $100,000 to obtain the monthly DROP amount based on a lifetime or unspecified period. Add the monthly rate from DROP to the LASERS monthly retirement benefit and impose WEP based on the combined total amount.
Mrs. Smith worked as a teacher in the State of Louisiana from 02/1974 to 02/2004 and did not pay into Social Security. At age 55 in 02/1999, Mrs. Smith was eligible for a normal retirement benefit from the Teachers' Retirement System of Louisiana (TRSL). She decided to continue working and enrolled in the DROP program from 03/1999 to 03/2002. Upon completion of her DROP participation, she continued working until 02/2004, when she finally retired. Her DROP balance as of 02/2004 was $200,000.
In 10/2005, Mrs. Smith filed for RIB. She submitted a statement from TRSL stating she was first eligible to retire effective 09/01/85 based on the early out or discontinued service (Louisiana Act 154). Based on a legal opinion rendered by OGC stating DROP is part of the overall TRSL plan, Mrs. Smith meets an exception to WEP from both plans.
Mr. Jones worked for the Parish of Orleans Sheriff's Department from 03/1978 to 03/2010. He retired at age 62 with 32 years of creditable service. Because he had more than sufficient service credits for normal retirement, he was eligible to participate in the Back-DROP plan for a period of 3 years, from 03/2007 through 03/2010.
In June 2010, Mr. Jones filed for RIB and submitted a statement from the Sheriffs' Pension and Relief Fund (SPRF) stating his earliest retirement eligibility date was 03/2000, and his monthly annuity benefit would be $4,000. The Back-DROP total amount was $200,000. Mr. Jones deferred receipt of his Back-DROP funds and requested to roll over the entire amount into a qualified plan.
Since Mr. Jones does not meet an exception to WEP based on the above facts, WEP offset applies to his monthly annuity of $4,000 and to the Back-DROP balance of $200,000. Prorate the $200,000 into a monthly amount based on a lifetime or unspecified period, per RS 00605.364C.5.b. Add the monthly rate from the Back-DROP proceeds to the SPRF monthly retirement benefit and impose WEP on the combined total amount.
Mrs. Jones worked for the City of Baton Rouge, LA from 10/1973 to 10/2006. As a member of the City of Baton Rouge-Parish of East Baton Rouge Employees' Retirement System, she was eligible for normal retirement in 09/2003 and opted to enroll in the DROP program. The DROP participation period was from 10/2003 through 10/2006. She retired immediately after the DROP period ended and decided to withdraw her DROP balance of 75,000 in a single lump-sum payment. Her regular monthly retirement benefit as of 11/2006 was $2,000.
In 01/2007, she filed for RIB alleging an exception to WEP based on an early-out eligibility date of 10/1983. She submitted a statement from the retirement system stating an eligibility date of 10/1983 based on Act 132 of 1995.
As a member of the City of Baton Rouge-Parish of East Baton Rouge Employees' Retirement System (CPERS), Mrs. Jones is not exempt from WEP because this plan is not one of the 13 Louisiana Public Retirement Systems granted early retirement eligibility based on Louisiana Act 154 of 1985. Further, SSA's OGC opinion rendered on 11/07/1995 determined that Louisiana Act 132, enacted in 1995, is not binding to SSA's determination of WEP. SSA does not recognize the retroactive early retirement eligibility created by Act 132. An OGC opinion is required to determine if DROP should be treated as part of CPERS or as a separate plan for WEP purposes.