A DROP is a retirement plan option offered to employees who are eligible to retire
and receive benefits under the employer's regular defined benefit (DB) retirement
plan while continuing to work. Employers determine the amount of contributions made
to the employee's DROP account, how the account will gain interest, and the amount
of interest the plan earns. Some employers credit the employee's DROP account with
the normal retirement benefits the employee would have received from their DB retirement
plan. Continuing to work does not increase the years of service and compensation used
in the DB payment formula. When the employee eventually retires, the funds in the
DROP account are paid to the employee, in addition to whatever benefit the employee
has acquired under the DB plan, based on earlier years of service.
A DROP may or may not be a pension plan separate from the non-covered employer's DB
plan. WEP may or may not apply to a worker's DROP payment if he or she meets the eligibility-before-1986
exception for that payment, including based on early-out or discontinued service,
as described in RS 00605.362D.1. in this section.
If an individual receives a DROP payment, take the following actions:
Search the legal precedent opinions in PR POMS - Title II Regional Chief Counsel Precedents,
to determine how to treat that particular DROP.
If a legal opinion has not been rendered on the DROP in question, request a regional
Office of General Counsel (OGC) determination on whether the DROP is a separate pension
plan or is part of the DB retirement plan; and
Forward the request and copies of the pertinent material to the Assistant Regional
Commissioner (ARC), Management and Operations Support (MOS) that has jurisdiction
of the state that provides the DROP in question. For additional information about
legal opinions, see GN 01010.815.
b. After the regional OGC renders a determination on how to treat the DROP plan, follow
instructions to apply the eligibility-before-1986 exemption for that payment as follows:
If the DROP is a separate pension plan, the exemption will apply only to the pension
plan that the worker was eligible to receive before 1986.
If the DROP is a part of the DB retirement plan and not separate, payments from both
plans are considered one pension for WEP purposes and the eligibility-before-1986
exemption will apply to the combined payments. To determine the combined pension amount,
see RS 00605.364C.3.
If there is no eligibility to either the DB retirement plan or the DROP prior to 1986,
WEP would apply to the combined payments.
EXAMPLE: If the worker was eligible to receive a retirement or disability payment from the
defined benefit plan before 1986 and eligible to receive the DROP payment after 1985,
WEP would apply based only to the DROP payment.