TN 3 (05-13)

PR 09005.028 Missouri

A. PR 13-077 Is the Deferred Retirement Option Plan of the Police Retirement System of St. Louis a separate pension plan?

DATE: May 9, 2013

1. SYLLABUS

When a Deferred Retirement Option Plan (DROP) is determined to be part of the regular retirement plan and not a separate plan, payments from each plan are considered one pension for WEP and GPO purposes. This opinion provides a determination that since the date of its inception in 1995, SSA should treat Deferred Retirement Option Plan of the Police Retirement System of St. Louis as part of the overall Police Retirement System of St. Louis and not as a separate system or plan.

2. OPINION

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