Understanding FRS DROP for Florida Pension Members

Key Takeaways: Understanding FRS DROP for Florida Pension Members

• DROP allows eligible FRS Pension Plan members to accumulate retirement benefits while continuing to work and earn their regular salary.
• Your monthly pension payments are deposited into the "DROP account" that earns interest, creating a lump sum available when you exit the program. These funds are deposited tax deferred.
• Eligible members can participate in DROP for up to 96 months after entering the program.
• Florida Retirement Resources helps FRS members evaluate whether DROP aligns with their retirement timeline and financial goals.
• Understanding your payout options before exiting DROP can help you avoid unnecessary tax consequences and develop an investment strategy, portfolio, or income stream that is appropriate to your retirement plans and goals.

What Is the FRS Deferred Retirement Option Program (DROP)?

The Deferred Retirement Option Program, commonly called DROP, is a retirement benefit available to eligible Florida Retirement System Pension Plan members. DROP lets you begin collecting your pension benefits without leaving your job.

While you continue working and receiving your regular paycheck, your monthly pension payments are deposited tax deferred into a separate DROP account. These funds earn interest over time. When you finish participating in DROP and leave employment, you receive the accumulated balance as a lump sum, a rollover into a qualified retirement account, or a combination of both.

This program creates a unique opportunity to build a significant nest egg during your final working years. For many FRS members, DROP accounts grow to substantial amounts that can support their retirement goals in meaningful ways.

Who Is Eligible for DROP Participation?

To join DROP, you must meet specific requirements set by the Florida Retirement System. First, you need to be vested in the FRS Pension Plan. For members enrolled before July 1, 2011, vesting requires six years of creditable service. If you enrolled on or after that date, you need eight years of service.

Second, you must have reached your normal retirement date. For regular class employees enrolled before July 1, 2011, this means reaching age 62 or completing 30 years of service. Members in the Special Risk Class qualify at age 55 with 25 years of special risk service.

Third, you must be actively employed by an FRS-participating employer when you apply. Members of the FRS Investment Plan, the Senior Management Service Optional Annuity Program, or the State University System Optional Retirement Program cannot participate in DROP.

Enrollment Timing Matters

Since 2023, eligible members can elect DROP participation at any time after reaching their normal retirement date, for up to 96 calendar months total. This change eliminated the previous 12-month enrollment window that required members to act quickly or lose eligibility. K-12 instructional personnel have additional flexibility. Teachers employed by district school boards, developmental research schools, or the Florida School for the Deaf and the Blind may extend their DROP participation by an additional 24 months with employer authorization and Division approval.

How Does Your Pension Get Calculated When You Enter DROP?

When you begin DROP participation, your pension benefit is calculated and frozen at that point. Your Average Final Compensation, years of creditable service, and applicable benefit percentage all lock in on your DROP begin date. This means you will not earn additional service credit during DROP. Your pension amount stays the same throughout your participation, though your DROP account continues to grow with monthly deposits and interest earnings.

Florida Retirement Resources works with FRS members to project both scenarios before making this decision. Running the numbers on continuing to work without DROP versus entering DROP can reveal which path more appropriately supports your specific retirement goals.

What Interest Rate Does Your DROP Account Earn?

As of July 1, 2023, DROP accounts earn an effective annual interest rate of 4%, compounded monthly on the prior month's accumulated ending balance. This rate applies to all new deposits and the existing account balance.

Your account continues earning interest up until the month your DROP participation ends. After termination, interest stops accruing, and your payout is processed the following month.

*For perspective, a member with a $5,000 monthly pension who participates in DROP for 60 months could accumulate over $300,000, including interest earnings. Your actual accumulation depends on your pension amount and length of participation.

*The examples in this article are hypothetical and for illustrative purposes only.

What Happens to Your Benefits During DROP?

During DROP, your pension benefits are deposited into your DROP account rather than paid directly to you. You continue receiving your regular salary and can still contribute to any supplemental retirement savings plans through your employer.

You maintain your health insurance coverage, annual leave accrual, and other employment benefits. Your employer continues paying the required contributions to the FRS Trust Fund on your behalf.

What Are Your DROP Payout Options?

When you exit DROP, you have three choices for receiving your accumulated funds. Understanding these options in advance helps you make tax-efficient decisions that align with your broader financial picture.

• Direct Rollover

You can roll your DROP funds directly into a Traditional IRA or another qualified employer retirement plan. This option defers taxes until you withdraw the money later. Most financial professionals recommend this approach because it allows you to control the timing and amount of your withdrawals. That does not mean that is the appropriate choice for your unique situation. As an example, FRS members have the option to rollover their DROP funds into the FRS Investment Plan. The investment plan could potentially have more lenient distribution options when considering tax consequences against a rollover to a traditional IRA. For instance, special risk retirees who reach age 50 or complete 25 years of service before retirement can take distributions from retirement accounts without a 10% early withdrawal penalty, which is not the case for a traditional IRA.

• Lump Sum Payment

You can receive your entire DROP balance as a single payment. The Division of Retirement withholds 20% for federal income taxes from lump sum payments. Depending on the size of your account, this could push you into a higher tax bracket for that year, and you could potentially owe more than the initial 20% withholding.

• Combination Approach

You can split your distribution between a partial lump sum and a direct rollover. This gives you access to some funds immediately while deferring taxes on the remainder.

About three months before your DROP participation ends, you will choose your payout option. If you do not select an option within 60 days after termination, your account is automatically distributed as a lump sum with 20% withheld for taxes.

What Should You Evaluate Before Entering DROP?

The decision to enter DROP involves weighing several factors that vary based on your individual circumstances. Talking through these considerations with a qualified advisor can help clarify a path forward.

• Compare Your Projected Benefits

Request benefit estimates from your HR department showing your projected pension both with and without DROP participation. Compare the long-term value of a larger monthly pension (from additional years of service) against the accumulated DROP balance.

• Consider Your Retirement Timeline

Think about when you realistically plan to stop working. If you intend to work for several more years anyway, DROP may help you build retirement savings during that time. If you might leave sooner than expected, consider how that affects your decision.

• Evaluate Your Other Resources

Look at your complete retirement picture, including Social Security, personal savings, and any other retirement accounts. Understanding how DROP fits with these other resources helps you make a more informed choice.

What Restrictions Apply After You Exit DROP?

After your DROP participation ends and you terminate employment, you must wait at least six calendar months before returning to work with any FRS-participating employer. This waiting period is required by law.

If you return to FRS employment before completing the six-month waiting period, serious consequences follow. Your retirement and DROP participation are voided. You must repay all DROP funds and monthly pension benefits you received. Any amounts you rolled into an IRA or other retirement plan may trigger tax penalties.

Additionally, your new employer becomes responsible for retroactively establishing your FRS membership, including paying all required employer and employee contributions with interest.

How Florida Retirement Resources Helps with DROP Planning

Planning for DROP involves more than just understanding how the program works. You need to evaluate how it fits with your Social Security strategy, tax planning, investment approach, and overall retirement goals.

Florida Retirement Resources has worked with FRS members for years, helping them navigate these decisions. Our team can help you project your benefits under different scenarios, understand the tax implications of your payout options, and develop a strategy for managing your DROP funds after you exit the program.

Whether you are approaching your normal retirement date or already participating in DROP, getting personalized guidance can help you avoid common mistakes and make the most of your benefits.

FAQs about FRS DROP for Florida Pension Members

• Can I enter DROP if I am in the FRS Investment Plan?

No, DROP is only available to FRS Pension Plan members. If you are currently in the Investment Plan, you would need to be eligible to switch to the Pension Plan and meet the vesting and normal retirement requirements before DROP becomes an option for you.

• Does my DROP account balance affect my monthly pension after I retire?

No, your monthly pension benefit and your DROP balance are separate. Your pension amount is calculated when you enter DROP and remains the same throughout retirement (excluding any applicable COLA). The DROP lump sum is an additional benefit you receive when you terminate employment.

• What happens to my DROP account if I pass away during participation?

Your designated beneficiary receives your accumulated DROP balance. Florida Retirement Resources can help you review your beneficiary designations and coordinate your DROP benefits with your broader estate plan to ensure your wishes are documented.

• Can I withdraw money from my DROP account while I am still working?

No, you cannot access your DROP funds until your participation ends and you terminate employment. The program is designed to defer these benefits until you fully retire from FRS-covered employment.

• How do I know if entering DROP is an appropriate choice for me?

The choice depends on your specific situation, including your age, years of service, health, other retirement resources, and career plans. Florida Retirement Resources offers personalized guidance and retirement planning to help you compare the projected outcomes and decide what makes sense for your goals.