Issue Presented
You asked whether the Deferred Retirement Option Plan (“DROP”) offered by the Indiana
Public Retirement System is a separate pension plan or just one part of an overall
defined benefit retirement plan. Notably, if a DROP is a part of an overall pension
plan, then the Social Security Administration (“SSA”) treats all pension payments
as a single pension for purposes of administering the Windfall Elimination Provision
(“WEP”) and Government Pension Offset (“GPO”). Because we see no reason to treat the
Indiana Public Retirement System’s DROP as a separate pension plan, we advise you
to treat it as part of the overall pension system.
Background
1. DROP
Some employees who are eligible to retire and receive benefits under a government
employer’s defined benefit retirement plan can choose instead to continue working
and enroll in a DROP. P OMS RS 00605.362.C.2, GN 02608.102.B.3.a. The employee’s additional years of service and continued compensation are
not taken into account for purposes of the defined benefit formula; rather, the retirement
system adds money to the employee’s individual DROP account. POMS RS 00605.362.C.2, GN 02608.102.B.3.a.
The DROP can be either a separate plan or part of the defined benefit plan. POMS RS 00605.362.C.2, GN 02608.102.B.3.b. DROP payments may be subject to the WEP. Beginning in 1986, the WEP eliminates
“windfall” Social Security benefits for individuals eligible for retirement or disability
insurance benefits and also a pension from employment not covered by Social Security.
POMS RS 00605.360.A. However, under the early-out or discontinued service exception, the WEP does not
affect individuals eligible for a pension before 1986 under an early-out option. POMS
RS 00605.362.C.1.
The early-out or discontinued service exception is applied to the DROP as follows:
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If the DROP is a separate pension plan, the early-out or discontinued service exception
will apply only to the pension plan that the worker was eligible to receive before
1986 if all of the requirements in POMS RS 00605.362.C.1 are met.
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If the DROP is a part of the defined benefit retirement plan, payments from both plans
are considered one pension for WEP purposes and the early-out or discontinued service
exception will apply to the combined payments if all of the requirements in POMS RS 00605.362.C.1 are met.
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If there was no eligibility for either the defined benefit retirement plan or the
DROP prior to 1986, the WEP would apply to the combined payments.
POMS RS 00605.362.C.2.
Similarly, DROP payments may be subject to the GPO, which reduces “the Social Security
spouse’s benefit of workers who receive a federal, state, or local pension based on
earnings from non-covered government employment.” POMS GN 02608.100.A. However, there is a “last day” exemption from the GPO if an individual’s last
day of employment was in a position that was covered by both Social Security and a
state or local government pension system. POMS GN 02608.102.A. In order for the “last day” exemption to apply, the last day of employment must
be before July 1, 2004, or the individual must have filed for spouse’s benefits before
April 1, 2004, and be entitled to those benefits based on that filing. See id. The
“last day” exemption is applied to the DROP as follows:
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•
If the DROP is a separate pension plan, the “last day” exemption will apply only to
the pension plan that the individual was participating in on the last day of government
service if all the requirements in POMS GN 02608.102.B.1 are met.
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•
If the DROP is a part of the defined benefit retirement plan, payments from both plans
are considered one pension for GPO purposes and the “last day” exemption will apply
to the combined payments if all the requirements in POMS GN 02608.102.B.1 are met.
POMS GN 02608.102.B.3.b.
2. Indiana Public Retirement System
The Indiana Public Retirement System (INPRS) was established on July 1, 2011. Ind.
Code § 5-10.5-2-1. Through its board of trustees, INPRS administers eleven Indiana
public employee retirement plans consisting of eight defined benefit and three defined
contribution plans. INPRS, INPRS,
Board Governance Manual ; 5-6 (last restated Oct. 26, 2018, Ind. Code §§ 5-10.5-2-2, 5-10.5-2-5, 5-10.5-3-1.
Despite the creation of the INPRS board of trustees, each retirement fund continues
as a separate fund under the oversight of the board. Board Governance Manual, supra,
at 6; Ind. Code § 5-10.5-2-6.
INPRS offers the DROP in connection with two of its retirement funds. The Indiana
General Assembly made the DROP available to members of the 1977 Police Officers’ and
Firefighters’ Pension and Disability Fund (’77 Fund) after January 1, 2003, and to
members of the State Excise Police, Gaming Agent, Gaming Control Officer and Conservation
Enforcement Officers’ Retirement Plan (EG&C Plan) effective July 1, 2008. INPRS, About
the DROP, https://www.in.gov/inprs/aboutthedrop.htm (last visited Sept. 10, 2019); INPRS, 1977 Police Officers’ and Firefighters’ Retirement
Fund Member Handbook 21, http://online.flipbuilder.com/kaxi/zqxw/ (last visited Sept. 10, 2019); INPRS, Excise, Gaming & Conservation Officers’ Retirement
Fund Member Handbook 19, http://online.flipbuilder.com/kaxi/rdee/ (last visited Sept. 10, 2019). The DROP is an optional benefit that allows eligible
members of both retirement plans to continue working and accumulate a DROP benefit
payable in a lump sum or three annual installments. About the Drop, supra. An employee
eligible to retire and immediately begin drawing unreduced benefits may enter the
DROP and declare a retirement date. Id. The DROP retirement benefit will be calculated
as if the employee had retired on the date the DROP period begins. Id. An employee
who chooses the DROP will continue employment in his/her current status for the DROP
period. Id. During this time, the DROP benefit is accrued. Id. An employee who terminates
employment on the retirement date at the end of the DROP period may choose between:
(1) a lump-sum/installment payment of the accrued amounts in the DROP account and
a monthly pension calculated based on salary and service at the time the member entered
the DROP, or (2) a monthly pension calculated based on salary and service at the time
the member exits from the DROP, with no lump-sum or installment amount. Id.
Analysis
The DROP is administered by INPRS and is closely connected to its associated defined
benefit retirement plans (’77 Fund and EG&C Plan). Indeed, on its website INPRS states
unequivocally that the DROP is not a separate retirement system but “is just a new
benefit option within the existing retirement plan.” INPRS, Is the DROP a separate
retirement plan?, https://inprs-ingov.zendesk.com/hc/en-us/articles/115005164608-Is-the-DROP-a-separate-retirement-plan- (last visited Sept. 10, 2019). This statement is supported by many aspects of the
DROP. For example, the DROP is tied to the two defined benefit retirement plans in
terms of membership, since an employee cannot participate in the DROP unless s/he
is eligible for the pension. And eligible members of the ’77 Fund and EG&C Plan enroll
in the DROP by submitting an application form to INPRS, which, as noted above, administers
the ’77 Fund and EG&C Plan. See 1977 Police Officers’ and Firefighters’ Retirement
Fund Member Handbook, supra, at 21; Excise, Gaming & Conservation Officers’ Retirement
Fund Member Handbook, supra, at 19. In addition, information regarding the DROP is
contained in each plan’s Member Handbook as part of its description of retirement
options within the plan. See 1977 Police Officers’ and Firefighters’ Retirement Fund
Member Handbook, supra, at 3, 20; Excise, Gaming & Conservation Officers’ Retirement
Fund Member Handbook, supra, at 3, 18. The DROP is separate from the defined benefit
retirement plans only in the sense that benefits are calculated differently. Because
this distinction would hold true whenever one compares a DROP to a defined benefit
retirement plan, 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 offered by INPRS as part of the
overall defined benefit retirement plan (’77 Fund and EG&C Plan) and not as a separate
pension plan. Accordingly, payments made under the DROP and the defined benefit retirement
plan should be treated as a single pension, for WEP and GPO purposes.