Effective February 1, 2023, Employers have a new option to financially support their employees when they enter the Deferred Retirement Option Plan (DROP). Under the DROP affiliation process, Employers can now make monthly contributions of any amount into a Deferred Compensation account, similar to the way they submit contributions for active Members.
Quick Refresher: What is DROP?
The Deferred Retirement Option Plan allows FPPA Members to build up a cash account during their final working years. It is a very popular feature of FPPA’s defined benefit plans.
When a Member enters DROP, they technically retire and their future pension benefit is finalized, but they will continue to work for any amount of time up to five years. During that period, the Member’s pension benefit, plus their Member contributions into the Plan are deposited into a self-directed investment account each month. The Member controls how the funds are invested in their individual DROP account, and when they stop working, they begin receiving their monthly pension benefit and can begin withdrawing funds from their DROP account.
DROP Affiliation: A New Retirement Savings Method for Members
As noted above, when a Member enters DROP, only their defined benefit payments and their Member contributions are deposited into their DROP account. Before this change to FPPA rules, Members in DROP could not accept monthly contributions from their Employer.
Effective immediately, Employers can now elect to submit contributions to the Statewide Money Purchase Plan for FPPA Members while they are in DROP. There are, of course, a few details to consider, including:
- Because of IRS regulations and limitations in FPPA’s Plan rules, Employer contributions during a Member’s DROP period cannot be made to the same account as the Member contributions or the monthly pension check. Employer contributions will go into another FPPA Deferred Compensation plan, the Statewide Money Purchase Plan, on behalf of the Member
- After affiliation, Employers must make contributions for all department employees who enter DROP
- The contribution rate can be any amount (within Plan limitations), and is set by the Employer at the time of affiliation, and must be equal for all Members of the department
- Contributions to the Statewide Money Purchase Plan do not impact the annual contribution limits for the Statewide Retirement Plan or 457 Plan
- Participation is optional
Employers complete the DROP affiliation process by submitting a resolution to FPPA. This means that the exact process will vary by department. To ask questions, or to get started on a resolution, contact FPPA’s Relationship Management Team at FieldEd@FPPAco.org or (303) 770-3772, ext. 6450.
Ryan Woodhouse is the Content and Publications Manager for the Fire & Police Pension Association of Colorado. When not creating content for FPPA, Ryan can be found fly fishing in the Colorado high country or shouting at the TV during University of Wisconsin football and basketball games.