You asked for our advice on how the Texas teachers DROP plan should be treated for
purposes of the Windfall Elimination Provision (WEP) and Government Pension Offset
(GPO). We believe that the DROP plan should be treated as part of the overall Texas
Teachers Retirement System (TRS), and not as a separate system or plan.
We have reviewed the provisions of Texas law establishing the DROP plan for Texas
teachers and have consulted our Regional Chief Counsel’s Office in Dallas. We briefly
describe the salient features of the DROP plan. In 1997, the Texas Legislature added
the DROP as an option under the TRS. See Acts 1997, 75th Leg., Ch. 1416, § 21, Vernon’s Texas Statutes and Codes Annotated
(VTCA) § 824.801. According to Texas Government Code, section 824.801-807 (http://www.statutes.legis.state.tx.us/Docs/GV/htm/GV.824.htm), a teacher (or other member of the TRS) who is eligible to retire and receive a
“standard service retirement annuity” (hereafter referred to as an “annuity”), and
who has at least 25 years of service credit in the TRS, may elect to participate in
the DROP if the teacher remains an employee. The period of participation is a minimum
of 12 months and a maximum of 60 months.
A teacher who participates in the DROP remains a member of the TRS but does not accrue
additional service credit toward the annuity while in the DROP. The filing of an election
to participate in the DROP is not considered an application for retirement. See VTCA § 824.802(b). The teacher and employer continue to pay contributions to the
TRS, which are deposited in the retired reserve account. The statute specifically
provides that assets in the DROP account are assets of the TRS. See VTCA § 825.306. On the date the teacher begins participating in the DROP, his (or
her) annuity is computed as if he had retired. The amount of the annuity is deposited
in the retired reserve account. The TRS transfers 60 percent of the amount of the
annuity to the DROP account each month.
Participation in the DROP plan ends when the teacher retires, dies, or the term of
the DROP expires. When the teacher retires, he is entitled to the amount in the DROP
account, plus interest. That amount may be taken as a lump sum or in periodic installments.
Payment of the DROP funds is in addition to the regular annuity.
We note that courts in Texas, Louisiana, and Maryland have treated DROP plans as part
of the public employee’s retirement plan. Those rulings were made in the context of
dividing retirement benefits at divorce. The main issue in those cases was not whether
DROP plans are part of the overall retirement system. Nonetheless, they shed some
light on how State courts view DROP plans in relation to the overall retirement plans
of public employees. Texas has ruled that a division of the retirement benefits of
a Houston firefighter includes a division of DROP benefits. Gainous v. Gainous, 219 S.W.3d 97, 108-109 (Tex. App. 2006). The DROP plan in that case was described
by the court as part of the firefighters’ retirement fund (“the Fund’s Deferred Retirement
Option Plan”). Gainous, at 102. The court said that the wife had an interest in the husband’s “Fund benefits
like the DROP funds.” Gainous, at 109. The firefighters’ retirement system is a separate retirement system from
the TRS. See Texas Rev. Civ. Stat. Ann., art. 6243e.2(1). Its terms are somewhat different and
more generous than those of the TRS DROP plan, but that is not significant for the
The Louisiana Supreme Court noted that employees in the Louisiana State Employees
Retirement System (LASERS) are treated as if they retired when they join a DROP. Bailey v. Bailey, 708 So.2d 354 (La. 1998). The court calls it a “fictitious retirement”, as the employees
continue working. They can receive additional service credit if they continue working
after their DROP participation ends. When the employee “actually retires”, he receives
an annuity plus DROP funds. The court twice referred to the “LASERS’ DROP program.”
Bailey, at 355. The court ruled that DROP funds are to be apportioned, like other retirement
benefits, at divorce. Another court in Louisiana observed that DROP funds are “derived
from the retirement benefits” and are apportioned like the other retirement benefits
at divorce. Sullivan v. Sullivan, 801 So.2d 1093, 1096 (La.App. 2001). The court reversed a lower court ruling which
held that DROP funds are not part of an employee’s retirement package but are a “separate
and voluntary program.” Sullivan, at 1094.
The Maryland Court of Appeals ruled that the DROP provision of the Baltimore City
Fire and Police Employees’ Retirement System is part of that system and not a separate
plan. Dennis v. Fire & Police Employees’ Retirement System, 890 A.2d 737, 749-750 (Md. 2006). The court relied on a determination by the IRS that
the overall plan, including the DROP provisions, was a qualified pension plan under
section 401 of the Internal Revenue Code (IRC). The court noted that section 414(d)
of the IRC defines a “government plan” as “a plan established and maintained for its
employees by the Government of the United States, by the government of any State or
political subdivision thereof, or by any agency or instrumentality of any of the foregoing.”
The court pointed out that the statutory provisions governing the DROP plan are included
in the same section of the statutory code as the overall Baltimore retirement system
in question. The court concluded that DROP benefits were part of the pensions of divorced
former police officers.
Informal discussions we have had with IRS attorneys indicate that DROP plans most
likely are part of an overall retirement plan. However, they said they have no written
guidance on this point and suggest that SSA could ask for a ruling if it wishes.
Although we have discussed cases from several States, we do not offer an opinion here
on whether the DROP plans in States other than Texas are part of the overall retirement
system. A more detailed analysis of a particular plan and State law, as well as consultation
with our Regional Chief Counsel’s Office, would be necessary for that purpose.
We are not aware of any legal authority stating that the Texas teachers’ DROP plan
is a separate retirement system or plan apart from the overall retirement system in
which it is an option. Therefore, it appears that if an employee satisfies the GPO
“last day” test when he retires from public service, the pension payments, including
DROP payments, would be exempt from the GPO. There seems to be no basis for treating
the last day under a DROP plan as a separate, legally significant event, apart from
the last day of public service, for GPO purposes.
We express no view as to whether POMS GN 02608.102.B.3, stating that DROP plans are separate pension plans, could be valid with regard
to some DROP plan other than that of the TRS. That would depend on the terms of the
individual retirement plan and an examination of each plan would be necessary. However,
our brief review of several DROP plans indicates general similarity in design, and
we have not found any authority for saying that any DROP plan is a separate retirement
system or plan. Our Regional Chief Counsel’s Office informed us that they would want
to revisit their 1991 opinion, concerning Louisiana’s public employees’ DROP plan,
and which was mentioned at a recent inter-component meeting, before saying whether
it reflects the law today. That opinion raised the possibility that the Louisiana
DROP plan is not part of LASERS. The opinion did not address the DROP for GPO purposes
but, instead, for purposes of coverage under section 218.