Much has been written recently about the controversial DROP program—a voluntary component of the Los Angeles City Fire and Police Pension Plan (LAFPP). The Deferred Retirement Option Plan (DROP) has been in the news and under the spotlight for its high costs and abuses. Here is what you need to know about DROP.
If you are involved in a case in which the subject pension plan is the LAFPP—you need to know about DROP.
DROP was introduced under the LAFPP as a way to retain veteran police officers and firefighters. Generally, safety members who had attained 50 years of age with 25 years of service could elect to participate in DROP for up to five (5) years—during which time they would (a) continue to receive their regular salary and (b) receive their monthly pension which would be deposited into an interest bearing account (guaranteed 5% annual return) that will be distributed in a single lump sum when they actually retire. At retirement, DROP participants therefore receive (i) the lump sum accumulation of their DROP account (which is eligible for IRA rollover); and (ii) their monthly pension for life.
In re Marriage of Davis (2004) 120 Cal. App. 4th 1007, put to rest any question over the proper characterization of DROP funds. The fact that an employee may have entered DROP after the parties’ date of separation has no bearing on the characterization of DROP monies. DROP funds represent the member’s monthly retired pay which is deposited into an account pending the member’s actual retirement/departure from service. The amount deposited is determined under the plan’s retirement benefit formula where years of service are a substantial factor. As such, the time-rule is commonly used to determine the community property percentage of the DROP funds. While the member is enrolled in DROP, he/she is considered retired for benefit computation purposes and therefore no longer earns service credits towards the pension. When the Member enters DROP, the community property percentage is set and that percentage can be applied to both DROP and the future monthly lifetime benefit.
The LAFPP does not permit a former spouse to receive payments of his/her share of benefits before the member spouse retires and commences benefits. As such, this plan is one of the few plans that warrant a Gillmore election whereby the former spouse of a non-retired member compels an “eligible to retire” member spouse to pay him/her directly the amount that he/she would receive on a monthly basis had the member spouse retired and commenced benefits.
Not Yet in DROP.
If the Member is still earning credits but has not yet enrolled in DROP, by electing to receive a monthly payment immediately under Gillmore the former spouse will receive an amount representing his or her portion of funds that may someday be deposited into DROP. The former spouse cannot have it both ways. That is, the former spouse cannot receive his/her marital share of monthly payments directly from the member; then receive the lump sum from the DROP account which represents the monthly pension that is being deposited into an interest bearing account.
Enrolled in DROP.
If the Member has already entered DROP when Gillmore is elected, the former spouse is entitled to his/her community property share of DROP funds through the date of the Gillmore election (plus interest on such funds through the date DROP is distributed—but no new deposits (or earnings thereon)). From the date of the Gillmore election and after, the former spouse is only entitled to his/her Gillmore share paid by the member.
Changes to DROP.
Most of the abuses concerning DROP involved employees who entered DROP and then took questionable injury leaves. Until recently, such individuals would continue to receive deposits into DROP while on injury leave. The most egregious cases involved a few ‘bad apples’ who took leaves—collecting their disability pay and receiving deposits into DROP during which time they were “caught” engaged in activities unbecoming of someone with a disability (e.g., running in marathons and riding horses in Cabo). Effective February 1, 2019, a new ordinance kicks in and suspends the DROP payments while someone is on an injury leave. If DROP payments are suspended, a member can then extend their DROP period up to 30 months.
Will DROP be DROPPED?
Although the LA City Council addressed the recent abuses, there are still greater concerns that the program is too costly and not an effective tool for retaining veteran employees. Both San Diego and San Francisco have done away with their DROP programs due to high costs—and there is pressure on LA City Council to do the same.
The LA City Fire and Police Pension Plan is one of few plans that has no real means to guarantee a former spouse the right to benefits over his/her lifetime. Unlike many other governmental plans, a former spouse may only be awarded his/her share of benefits that may become payable to the member’s eligible surviving spouse—based on the eligible surviving spouse’s lifetime. This means that a former spouse may not receive any benefits following the member’s death (if the member dies without a surviving spouse) and will only receive such benefits for the life of the surviving spouse.
a. DROP benefits are not subject to the above rules concerning survivor benefits which only affect the monthly pension. If a member dies before the DROP funds are distributed, 100% of the DROP account will be disbursed—and the former spouse will receive his/her community property share of the DROP account in a single lump sum—to the extent provided in the court order.
Since DROP is an account with a determinable lump sum, it is ripe for adjusting the Non-member’s award (increased or decreased) to account for an equalization payment. If a member has a DROP account at the time of the Judgment and an equalization payment is required, like a deferred compensation plan, DROP may be used to make such an adjustment.