Deferred Retirement Option Plan (DROP)
Frequently Asked Questions (FAQ)
What is the DROP?
The DROP is the Deferred Retirement Option Plan (DROP) that took effect September 1, 1995 as a retirement option available to firefighters.
How does the DROP work?
The DROP allows you to accumulate a lump-sum cash amount for retirement to be paid in addition to your monthly retirement benefit. Under the DROP, you determine your future monthly pension benefit while continuing to work as an active firefighter.
Here’s how it works. Once you reach the service requirements for a service retirement, you are eligible to enroll in the DROP. When you enroll, you “lock in” your service and benefit levels as of the date your participation in the DROP takes effect. You continue to work as an active firefighter and earn your normal pay. While you work, the Fund credits the value of your monthly retirement benefit (based on your service as of the date you entered the DROP) into a notional DROP account.
You can participate in the DROP for up to 13 years. As long as you participate, the value of the retirement benefit calculated for you upon entry into the DROP and your employee contribution amounts (during the first 10 years) are credited to your account each month, and your account earns interest. When you leave the Fire Department, your DROP account balance will be distributed to you in a lump sum, or you can choose to leave the assets of your DROP account with the Fund to continue earning interest and make withdrawals in accordance with the policies and procedures of the Board. When you leave the department and retire, you will start to receive your monthly pension benefits.
Do I have to decide at the time I enroll in the DROP how long I will participate and keep working for the Fire Department?
No. You can participate from 1 month to 13 years. You can decide to stop working (and end your DROP participation) at any time during the 13 years.
Am I covered by Social Security while I participate in the DROP?
No.
Are my City of Houston active employee benefits affected while I am in the DROP?
No. You continue to accrue sick leave if you are eligible to do so now, and you continue to accrue vacation. Any other time or day accrual for which you are now eligible also continues. Your insurance coverage also continues uninterrupted, unchanged, and at current active rates.
Since you are still a member of the Fire Department, you remain eligible to vote in any pension fund elections. You are also eligible to serve on the Board.
Can I enter the DROP then change my mind?
The decision about whether or not to enter the DROP is entirely yours. You can withdraw your DROP application at any time prior to its being approved by the Pension Benefits Committee. That withdrawal must be in writing. Once acted upon by the Committee, your decision is irrevocable.
Does DROP participation affect disability or line-of-duty death benefits?
A participant in DROP is ineligible for on-duty occupational disability benefits. In the case of on-duty death or on-duty general disability of a participant with a DROP account, the death benefit (100%) or disability benefit (75%) will be calculated as though the participant had not entered the DROP and will be paid to the eligible survivor(s) (in case of on-duty death) or participant (in the case of on-duty general disability). In addition, the DROP account that had accumulated to date will be available to the eligible survivor(s) (on-duty death) or participant (on-duty general disability).
Am I eligible for Cost-Of-Living Adjustments (COLAs) if I am participating in the DROP, and if I am, when do I receive a COLA?
Yes, you are eligible for a COLA in the month of your 48th birthday and each October thereafter.
Does anything else go in my DROP account besides my normal monthly benefit payments?
If you are eligible for Cost-Of-Living Adjustments (COLA’s) that are made during your participation in the DROP, your monthly benefit credit (being made to your DROP account) will be adjusted by the value of the COLA.
Also, since you will still be working as an active firefighter, you will continue to make “pension contributions” which are currently 9.00% of your gross pay. Your contributions will be credited to your DROP account only during your first 10 years of participation.
Your DROP account will be credited with earnings at an annual rate equal to the average annual return earned by the Fund over the previous 5 fiscal years (updated each September 1). The annual rate will not be less than 5%, or more than 10%.
Can I remain active with the Fire Department after my 13 years of DROP participation?
Yes, but you cannot receive any money from your DROP account as long as you are an active employee. If you decide to continue working, credits into your DROP account (for notional monthly benefits and earnings) will end. Your account will be frozen in value, and it will earn no further interest while you are an active employee. Also, you cannot receive monthly pension benefits from the Fund while you are an active firefighter. You will not be entitled to monthly pension payments until you leave active service with the Department. Similarly, if you decide to retire and not participate in the DROP, you cannot later decide to return to active service and begin participating in the DROP.
An important note: If you continue working beyond your 10th year of DROP participation, the 9.0% pension contribution continues to be deducted and goes to the Fund’s general account, not to your DROP account. It does not increase your monthly pension benefit and is not refundable.
How are earnings determined and credited to my DROP account?
Each year that you participate in the DROP, your account is adjusted based on the average rate of return for the Fund for the previous five fiscal years. As of September 1, 2003, the annual earnings rate applied to DROP accounts will be subject to a minimum of 5% and a maximum of 10%. Therefore, if the 5-year average is less than 5%, 5% will be the rate for that DROP year, and if the 5-year average is greater than 10%, the rate will be 10% for that DROP year. If the average calculates between 5% and 10%, then the member will receive that 5-year average calculation (The annual DROP rate is from September 1st through August 31st).
For example: If you entered the DROP on September 1, 2007, the rate used in determining your earnings credit will be the average of the rates of return for the Fund’s fiscal years ending June 30, 2003, 2004, 2005, 2006, and 2007. The following September, it will be for fiscal years 2004 thru 2008 and so on.
Will I receive statements advising me of the value in my DROP account?
Yes. The law requires that the Fund provide you with an annual accounting of the value of your DROP. However, the Fund will provide each DROP participant with a balance statement quarterly.
Although a separate accounting of its value is maintained, your DROP account is not separated from the assets of the Fund until a distribution payment is made. As such, your DROP account has no loan value and it cannot be used as collateral or guarantee.
What is Back-DROP?
Back-DROP is a provision that gives a DROP participant an option to go back to an earlier DROP date for up to 3 years prior to his/her original DROP election date. The date cannot be prior to September 1, 1995, and the participant must have at least 20 years of pension service on the effective Back-DROP date. The minimum Back-DROP period is 1 month and the maximum is 3 years, but the effective Back-DROP date must be on the first of a month. Under a Back-DROP election, the member’s account balance is equal to the amount that the account would have had if the member had elected to participate in the DROP on an earlier date.
When may I Back-DROP? Can I change my mind after I sign the application?
You may Back-DROP immediately upon your DROP entrance date. This option can be exercised at any time while you are in active service.
A member may revoke the Back-DROP election by notifying the Fund in writing no later than the earlier of the date the member leaves active service or the 10th business day after the date the member signs an application form for a Back-DROP.
How many times can I Back-DROP?
You may only Back-DROP once, unless:
- The Board determines that you have incurred a catastrophic injury or illness that will cause you to leave the Fire Department earlier than previously expected, and
Your previous election was not for the maximum period allowed.
How is my Monthly Benefit increased when I exit DROP and retire?
When you exit DROP and retire, your monthly benefit will be increased by an amount equal to a percentage of the original monthly benefit amount. This is done by multiplying your original monthly benefit by 2% for each full year of participation in DROP, up to a maximum of 10 years. (A full year is considered to be the completion of 12 months starting on your DROP entrance date). For example, if you started DROP February 1st, you will have a full year completed in DROP every January 31st.) If you do not complete a full year in the final year of DROP participation, the 2% will be prorated (.166%) for each month. For example: 5 years, 7 months completed in DROP (5 years x 2% = 10%), (7 months x .166% = 1.162%) therefore, 10% + 1.162% = 11.162%.
The amount determined in the previous paragraph is then added to the monthly benefit that you will receive after exiting DROP. Finally, the Section 4(d) monthly supplemental benefit is added to that amount.
Example:
1) Original Monthly Benefit in DROP = $2,500.00
2) 10 years completed in DROP x 2% per year completed = 20%
3) Original Monthly Benefit ($2,500.00) x 20% = $500.00
4) Benefit on Exit as a result of seven 3% COLA’s ($3,074.69) + $500.00 = $3,574.69
5) $3,574.69 + Section 4(d) benefit ($150.00 per month) = $3,724.69
Therefore, the Total Monthly Retirement Benefit is $3,724.69
How is the DROP account money paid out and distributed?
When you leave the Department, your money will be distributed as you choose in one of the following ways:
A check for the entire amount (less applicable withholding) will be made payable to you, or (if you prefer) electronically transferred to a bank or credit union account in your name, or
The contents of your account will be transferred, in whole or in part, by the Pension Fund to an Individual Retirement Account (IRA) in your name, or
The contents of your account will be transferred, in whole or in part, by the Pension Fund to an IRS qualified retirement plan (such as an employer-sponsored 401(k) plan), or
The contents of your account, in whole or in part, can be left with the Fund. The Fund will account for your assets and you will earn interest at the same rate as normally calculated under the DROP. If you choose to leave your money in the Fund, you can make four withdrawals during the calendar year (January to December). If you make a fifth withdrawal within a calendar year, you would be required to withdraw the entire balance of the account.
How is my DROP distribution taxed?
If you authorize the Fund to roll over your DROP proceeds directly to an IRA or another qualified retirement plan, or if you choose to leave your assets with the Fund, there are no immediate tax consequences. You will pay taxes on these funds only when you receive a distribution from your IRA, qualified retirement plan, or from the Fund.
If you receive the DROP account proceeds, the distribution will be treated as ordinary income to you in the year you receive it. The minimum federal income tax rate that must be withheld is 20%.
If you receive payment and are not at least age 50 by the end of the calendar year in which you leave active service, or if you withdraw money from a rollover account before you reach age 59½, you may be subject to a 10% early distribution tax penalty.
Keep in mind that tax laws can change, and they are complex. We urge you to seek the advice of a tax professional to determine what is best for you and how you will be affected.
What happens to my DROP account proceeds in the event of my death while in the DROP?
In accordance with Section 5(j) of Article 6243e.2(1), the following apply:
(1) If there is an eligible spouse who you were married to on your DROP effective date (and there are no eligible children), your entire DROP account balance is paid to the eligible spouse or, the eligible spouse may elect to keep the balance in the Fund.
(2) If you die and are survived by an eligible spouse (as described above) and one or more eligible children, one-half of your DROP account balance is paid to the eligible spouse (or the spouse may elect to keep the balance in the Fund), and the remaining one-half is divided equally among the eligible children. (Note: Only the eligible spouse’s portion may be kept in the Fund. An eligible spouse or eligible child may choose to rollover their portion of the DROP balance to an IRA or other qualified plan.)
(3) If there are one or more eligible children but no eligible spouse, your DROP account balance is divided equally among the eligible children, which, for this purpose, includes children who are less than 23 years of age, unmarried, and full-time students;
(4) If there is not an eligible spouse and there are not any eligible children, your DROP account balance can be paid to a dependent parent; and
(5) If there is not an eligible spouse, eligible children, or an eligible parent, your DROP account balance is distributed in accordance with your beneficiary designation as filed with the Board, or to your estate if there is no beneficiary.
Notes: You may elect to extend survivor benefit payments to children through age 22, unmarried, and full-time college students when there is an eligible spouse. You must complete the appropriate forms in order to notify the Fund of your desire to extend survivor benefits to a child that meets these criteria. Otherwise, survivor benefits would be extended as outlined in the Statute.
You may also elect to designate an adult child (or children) as an eligible child (or children) for the DROP proceeds. "Beneficiary adult child" is a child of a member by birth or adoption who is not an eligible child; and is designated as a beneficiary of a member's DROP account by valid designation under Section 5(j-1) of the Statute.
If I marry or re-marry after entering the DROP, does my new spouse qualify as an eligible survivor for my DROP account benefits?
After the effective date of your participation in the DROP, any person that subsequently becomes your spouse will be eligible for a reduced portion of your DROP account, based on the percentage of time this spouse was married to you between the date of your DROP election and your last day of active service. The remainder of your DROP account would be distributed to other eligible survivors, as provided for in the Statute. After leaving active service, any person that subsequently becomes your spouse will not be considered an “eligible spouse”. You may designate such spouse on a “Beneficiary Designation Form”. In the event of your death, your DROP account would be distributed to eligible survivors, if any. If there are no eligible survivors, the DROP account would be distributed to the designated beneficiary or beneficiaries.
If I have a Qualified Domestic Relations Order (QDRO) in place before entering the DROP, does it affect the value of my DROP?
No.
What happens if I’m divorced but there has been no QDRO letter ruling from the Fund?
The fund will not distribute DROP benefits or monthly pension benefits to alternate payees without a QDRO.
If a portion of my DROP is awarded to my ex-spouse through a QDRO, how will the Fund administer it?
The full value of your monthly benefit is credited to your DROP account. If a QDRO is in place and is specifically attached to the proceeds of your pension either before or after you enter the DROP, payments to an alternate payee will not commence until you actually leave the Fire Department.
What do I need to do when I’m ready to leave the Department and exit the DROP?
The timing of your departure is your responsibility, but when you start thinking about your retirement (and in order to maximize your retirement benefits), contact the Fund at (281) 372-5100 or (800) 666-9737 and ask for Member Services. The Fund offers a “one-stop” retirement shop for our members.
To ensure that all members considering retirement are fully informed regarding their pension options and retirement benefits, you are required (HFD Bulletin No. 36) to attend a personal pre-retirement counseling meeting with a Fund Member Services Representative to discuss your pension options prior to applying for retirement.
Once you are ready to retire, contact the Fund and ask for a Member Service Representative to apply for Phase Down, Lump Sum, Disability, or Service Retirement. The HFD Human Resource Department no longer processes retirement applications for classified members of HFD.
Firefighters wishing to retire have only two options regarding compensation for leave balances:
1. Phase Down Program (PDP) - “Ride out” all eligible leave balances (vacation, holidays, and compensatory time) or,
2. Lump Sum - Not enter PDP and elect to get paid for all eligible accrued leave.
Be sure and work closely with a Fund Member Services Representative if you plan on “riding out” your eligible leave time balances. Once you enter PDP, you must ride out all eligible accrued leave, not just a portion of it. The option of selling back leave is eliminated once you enter PDP.
If you elect to withdraw any portion of your DROP account, the completed Distribution Election Form will be processed the later of the Fund receiving of the form or the date you leave active service.
Revised 08/08
