Frequently Asked Questions

DROP is an acronym for deferred retirement option program or a delayed retirement option plan.

A DROP Program is a form of retirement benefit that allows an employee to continue working while accumulating a savings account consisting of the benefits that would have been received had the employee actually retired.  In other words, it is a chance to earn two incomes simultaneously, with one being saved and invested without current tax liability.  From a technical standpoint, a DROP program represents a method of providing for the deferred receipt of retirement benefits from a defined benefit plan.

DROP arrangements first started with several public safety plans in Louisiana during the mid-1980's to:

a.    Encourage personnel who could retire early to continue working.

b.    Allow a partial lump-sum distribution option in the pension plan.

c.    Provide the employer with a predictable turnover picture.

DROP plans now exist in Louisiana, Texas, Arkansas, Ohio, Oklahoma, and Florida on the state and local level, as well as locally in Colorado and California.  Initially popular with police and fire plans, they also exist for teachers and general public employees.

A DROP program is a distribution option within a traditional defined benefit pension plan; it is not a separate qualified retirement plan.

No.  There is no rigid structure that must be followed for DROP programs.  The design of DROP programs varies greatly and can be crafted to meet the needs of the employees, the pension plan, and the plan sponsor.

Yes, a DROP Program is found in Section 46-113 of the Code of the City of Key West.

DROP is designed to allow you to accumulate a lump sum cash amount for retirement without affecting your normal monthly retirement benefit when you become a DROP participant.  Under DROP, you technically “retire" yet continue to work as an active employee.  You will continue to be treated as an active employee for non-pension benefits.  If you become disabled after participating in the DROP, you will NOT be entitled to receive a disability pension since you are already retired.

Here's how it works:  Once you reach the service requirements for early or normal retirement (Normal retirement- either 20 years of credited service regardless of age or age 60 with ten (10) or more years of service. Early retirement- age 55 with ten (10) years of credited service, you can enroll.  When you enroll in DROP, you agree to "lock in" your service and benefit levels as of the effective date of your participation.  From a service and benefit standpoint, it is as if you had retired on this date.  You continue to work as an active employee, though, and the Pension Fund credits your normal monthly retirement benefit (based on your service as of the date you entered DROP) into your DROP account.  You also continue to earn your normal pay as an active employee.  When an employee takes early retirement, the monthly benefit is reduced on an actuarial basis to account for the fact that you will receive benefits over a longer period.

Upon exercising the right to enter the DROP, your creditable service, compensation, and accrued pension benefit will become "locked in." The amount of your pension benefit will be determined based on the average of your highest consecutive five (5) years of service out of the ten (10) years immediately preceding participation in the DROP.

You can participate in DROP for eight (8) years.  The Plan requires that you enter the DROP within the first 33 years of employment.  It also provides that the number of years of active membership in the Plan and the DROP period combined may not exceed 33.  Therefore, to get the full eight (8) years of DROP participation, you must enter the DROP before the end of your 25th year of service with the City.  DROP payments are added to your account each month.  An employee's account in the DROP program earns or loses interest based on the actual earnings of the Plan for the preceding year.  When you leave City employment, you choose how to receive your DROP account balance from available distribution methods.

All members of the Employees Plan (i.e., active members) are eligible to participate in the DROP, provided such members are eligible for early or normal retirement with the City.

Election to participate may be made at any time after a member attains eligibility for early or normal retirement.  An eligible member who wishes to participate in the DROP must notify the Pension Administrator of their election to participate in the DROP. Click here to send an email to the Pension Admin.

An eligible member may participate in the DROP for a maximum of eight (8) years.  However, if a member enters the DROP after they have 25 years of service with the City, the DROP period ends when the member's years of service combined with participation in the DROP totals 33 years.  For example, if a member enters the DROP after 27 years of service with the City, they would only be eligible to participate in the DROP for six (6) years.  A member is required to terminate employment with the City and to terminate their DROP participation upon the completion of the DROP period.

An eligible member may elect to participate in the DROP by complying with the election process and the administrative rules established by the Board of Trustees.  Such requirements shall include, but shall not be limited to the following:

a.    A properly completed DROP application for service retirement.

b.    Selection of DROP participation and retirement dates.  Such retirement date shall be a binding application for retirement, establishing a deferred retirement date.

c.    A written notification advising the City of the date the DROP shall begin for the member.

Yes.  A DROP participant can separate from service at any time before the specified DROP period ends, with notice to the City.  DROP payments would continue as monthly pension payments, and the participant would be entitled to the entire balance in their DROP account.

No.  You must actually separate from service to receive payments from the DROP account.  Receiving a distribution while still an active employee would violate both local and federal law.

Yes.  However, to preserve maximum flexibility, many individuals may find it advantageous to elect to participate for the maximum period of time, even if they feel that their actual DROP participation may end at an earlier date.  You can always terminate employment and retire before the end of your announced DROP participation period; however, once announced, you are not permitted to work beyond your originally stipulated DROP ending date even if such date falls short of the maximum period allowed for DROP participants.

Yes

Yes.  Upon participation in the DROP, the member shall be deemed a retiree of the Pension Fund.

A DROP participant shall be a retiree under the Pension Fund for the accumulation of increased pension benefits, but for purposes of employment with the City, the DROP participant shall be treated as any other active employee with respect to their ability to enjoy the availability of salary increases, promotions, employee benefits, and related programs.

Generally speaking, no.  You continue to accrue sick leave if you are eligible to do so now, and you continue to accrue vacation time.  Any other time or day accrual for which you are eligible also continues.  Your insurance coverage also continues uninterrupted and unchanged at current active rates.  In addition, you may continue to participate in the City's Section 457 Deferred Compensation Program.  Since you are still an employee of the City, the law allows you to vote in any Pension Fund elections.

The decision about when to retire as an employee and whether or not to enter DROP is entirely your decision.  Once made, the election to participate in the DROP carries a simultaneous election to retire that is irrevocable upon approval by the Board of Trustees.  In essence, the DROP participant has contractually agreed to retire as a condition of entering the DROP program.  The retirement election becomes irrevocable once acted upon by the Board of Trustees.

As an active employee participating in the General Employees Retirement Plan, you must make pension contributions of 6% of your salary as defined by the Plan.  Upon DROP participation, your pension contribution requirements will be reduced to 0% contributions of your salary, and your monthly pension check will be paid into the DROP account until you terminate employment.

Once you enroll in DROP, your monthly retirement benefit is calculated based on your years of service and benefit levels as you entered the DROP.  Instead of having this monthly retirement benefit paid directly to you or deposited in your bank, it will be credited into your DROP account, which will be invested and tax-deferred for as long as you participate in the DROP.  Your retirement benefits will be paid into your DROP account monthly on the same schedule as used for retirees.

No.  Once you begin participating in DROP, your retirement is final, and you cannot add service credit unless otherwise agreed to by the City through a future Ordinance change specifically applicable to DROP participants.

When you terminate employment, your DROP account will be paid as you choose in one of the following ways within 45 days following the termination of employment:

a.    Lump Sum - The participant receives the entire account balance less taxes;

b.    Direct Rollover - The funds are paid directly to the custodian of an eligible retirement plan as defined in Section 402(c)(8)(B) of the Internal Revenue Code.

In the event of your death during the DROP period, all DROP and accumulated leave balances shall be payable to your designated beneficiary. If you have not designated your beneficiaries, the DROP and accumulated leave balances will be paid to your estate.

To be a participant in the DROP plan, and to have retirement benefits paid to your DROP account, the employee can no longer be an active member of the Fund.  Since the employee is not an active member of the Fund, the employee is not eligible for a disability pension.  If an employee becomes disabled during the DROP period, the employee will receive his or her normal retirement (at the lower rate) and will also receive the amount of money that has accrued in his or her DROP account.

Like other forms of pension benefits, DROP assets are considered marital property subject to division in a divorce proceeding.  While DROP assets are not subject to distribution until a member terminates employment with the City, a court can determine that upon distribution, a certain percentage of the DROP assets be awarded to a former spouse, like other retirement payments.

Yes.  Under Section 402(a) of the Internal Revenue Code, amounts are taxable only if distributed.  Thus, even though amounts are credited to the DROP account because they could have been paid as retirement benefits, the participant will not be subject to tax until DROP account balances are distributed to the DROP participant.  No withholding taxes will be imposed during the period of DROP participation pursuant to Code Section 3401(a)(12)(A).

The tax law states that rollovers must be paid directly to the custodian of an eligible retirement plan as defined in Section 402(c)(8)(B) of the Internal Revenue Code (IRC).  Eligible retirement plans include an individual retirement account (IRA) as described in Section 408(a), Internal Revenue Code (IRC); an individual retirement annuity [Section 408(b), IRC, except an endowment contract]; a qualified trust; and an annuity plan as described in Section 403(a), IRC.  If you die, your spouse will only be eligible to rollover your DROP benefits into an individual retirement account or retirement annuity as described in Section 402(c)(9), IRC.

If you authorize the Pension Fund to transfer the lump sum value of your DROP account directly to an IRA or qualified retirement plan, there will be no immediate recognition of income for purposes of federal income taxation.  You would only pay taxes on these funds as funds are received from your IRA or qualified retirement plan.

However, if you do not choose a direct rollover of any portion of your DROP account that is an “eligible rollover distribution," the payment is taxed in the year you receive it.  If you forego the rollover option and elect to receive the DROP account proceeds, the following rules may apply:

a.    The distribution will be treated as a source of ordinary income to you (and taxed accordingly) in the year you receive it.

b.    You will be subject to the 10% “early distribution” tax penalty rules if you are less than 55 years old.

c.    You may be subject to a 15% "excess distribution" tax penalty if your total retirement proceeds (from the DROP account, any IRA, or qualified retirement plans) exceed the IRS maximum distribution amount for the year you receive the distribution.

This is our understanding of the current tax issues that you may wish to consider.  We may not be correct.  We are not allowed to give tax advice in any way.  Keep in mind that tax laws can change, and they are complex.  We recommend and encourage you to seek the advice of a tax professional to determine what is best for you and how you will be impacted.

A DROP program can benefit employees interested in assembling a "nest egg" for themselves and their families and providing a "jump-start” into retirement.  This "nest egg" can allow the employee to start a business, purchase a home, travel, etc., upon retirement.

The DROP participant will see the required pension contribution reduced from a rate of 6% to 0% of pay.  The employee's take-home pay will be increased by reducing such contributions.

The DROP program allows the employee to select an option that would effectively accelerate a portion of the retirement benefits that would otherwise have been received over an extended period of time. If the employee has reason to believe that his life expectancy will be less than average, the DROP could be viewed as a practical response to this outlook.

One disadvantage of participating in a DROP plan is that the monthly pension an employee receives will be substantially lower than the amount the employee would receive had the employee retired under a normal retirement calculation performed at the end of the DROP period.  If the Plan benefits change after you DROP, those benefits may not be available to you.  If you get a raise or a promotion after you enter the DROP, that salary increase will not count toward your pension.  Once you enter the DROP, your retirement benefits are calculated under the Plan and are fixed as of the date of entry into the DROP.

Another disadvantage is that the decision to enter the DROP is irrevocable.  Sometimes, employees change their minds about continuing to work, but once they have entered the DROP, they cannot reverse the decision to retire.  A retiree experiencing the birth of a child, a new marriage, divorce, or other significant life event may have no choice but to retire at the end of the DROP period.

Lump sum payments may not be used judiciously, placing financial pressures upon retirees at a point in their lives where they can ill afford to effectively respond to such pressures.  Lump sum payouts are subject to the mandatory 20% withholding requirements which would materially impact the funds available under the DROP.  DROP participants may address this issue by electing a direct rollover to an eligible retirement plan or an IRA.

If a DROP participant becomes injured after entering the DROP, they will not be eligible to receive a disability pension since DROP participants are already "retired."

One of the most important decisions you will have to make is whether you should join DROP or remain an active contributor to the Pension Fund.  To assist in this decision, the Pension Administrator will provide upon request, e-mail preferred, an estimate of the benefits you will receive if you elect to join DROP.  Upon receipt of these estimates, you should meet with your accountant, CPA, financial planner, etc., to review your total financial situation, including pension and/or DROP benefits, personal investments, and Social Security benefits, to determine which choice will be the best decision for your future.

Entering the DROP is a big decision.  Once made, it is FINAL.  Before entering the DROP, you are encouraged to contact the Plan Administrator with your questions.  The DROP is a valuable benefit, but like anything, it does not meet everyone's needs similarly.  Before you DROP, be sure of your rights and make careful plans for your future.  It would be wise to consult your financial adviser concerning the choices most advantageous for your circumstances.  For more information, you may contact the Pension Administrator by e-mailing  GeneralPension@cityofkeywest-fl.gov