ISSUES PRESENTED
You asked whether the Police Retirement System of St. Louis’s Deferred Retirement
Option Plan is a separate pension plan, or just one part of the overall pension system.
If a deferred retirement option plan (DROP) is a part of an overall pension plan,
then all pension payments are treated as a single pension for purposes of administering
the Windfall Elimination Provision. Because we see no reason to treat the Police Retirement
System of St. Louis’s DROP as a separate pension plan, we advise you to treat it as
part of the overall pension system.
BACKGROUND
1. DROPs
Some employees who are eligible to retire with defined-benefit pensions can choose
instead to enroll in DROPs.[1] These plans permit employees to keep working while saving for retirement. [2] The retirement system does not consider the additional work when determining the
employee’s defined-benefit amount; rather, the retirement system adds money to the
employee’s individual DROP account. [3]
DROP payments may be subject to the Windfall Elimination Provision, which reduces
a claimant’s Social Security benefits if the claimant receives a pension from work
that was not covered by Social Security. [4] If an employee’s defined-benefit pension is not subject to the Windfall Elimination
Provision because of the “early-out exception,” [5] and the employee receives DROP payments, then the agency must decide whether the
DROP is separate from the pension. [6] If the DROP represents “a separate pension plan,” then the Windfall Elimination Provision
applies to DROP payments. [7] But if the DROP “is part of the defined benefit retirement plan,” then the agency
treats the DROP and the defined-benefit plan as a single pension, and the Windfall
Elimination Provision does not apply to payments from either source. [8]
2. Police Retirement System of St. Louis
The Police Retirement System of St. Louis is a defined-benefit pension system for
St. Louis’s police officers. [9] A Board of Trustees administers the system. [10] Beginning in 1995, the Board was authorized to establish a DROP for members of the
retirement system who are eligible to retire. [11] Under the law, the Board is responsible for maintaining DROP participants’ accounts.
[12] Funds held in DROP accounts earn interest “at the investment rate earned by the assets
of the retirement system.” [13] The DROP is known as the “Deferred Retirement Option Plan of The Police Retirement
System of St. Louis.” [14]
Analysis
The Police Retirement System of St. Louis’s DROP is closely connected to its defined-benefit
pension. First, the same Board of Trustees administers the DROP and the defined-benefit
pension. Second, funds held in DROP accounts earn interest at the same rate as assets
held for the defined-benefit pension. Third, the DROP is tied to the defined-benefit
pension in terms of membership, since an employee cannot participate in the DROP unless
he is eligible for the pension. Finally, the DROP is known as the “the Deferred Retirement
Option Plan of The Police Retirement System of St. Louis,” which suggests that the
DROP is seen as one facet of the overall retirement system. [15]
The DROP is separate from the defined-benefit pension only in the sense that benefits
are calculated differently. Because this distinction would hold true whenever one
compares a DROP to a defined-benefit pension, we do not believe that this distinction
makes the DROP a “separate pension plan” under agency policy.
CONCLUSION
We believe that the agency should consider the DROP as part of the overall Police
Retirement System of St. Louis, and not as a separate pension plan. Accordingly, payments
made under the DROP and the defined-benefit pension should be treated as a single
pension.
Kristi A. Schmidt
Chief Counsel, Region VII
By _____________
John P. Fox
Assistant Regional Counsel