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DROP Plan


30Rock
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Is there such a thing as a 401(a) plan that only accepts DROP money - which I believe is rollover money from a state defined benefit plan when an employee retires. I believe a money purchase governmental 401 plan can ACCEPT DROP rollover money. But you still need a written plan and a fixed MPPP contribution correct? Can the plan have a 0% MPPP formula and thereby only accept DROP money?

Not sure of the advantage of this arrangement versus the employee just rolling the DROP to an IRA?

Any thoughts?

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I have more information. This is a forward DROP plan where the employer funds it for 3 years prior to the date the employee actually terminates. The formula for funding is based on the DB plan formula. The contribution is going into a DC plan. My question is - what type of document do you need for this? WHat is this allocation called? Is it money purchase, or fixed nonelective contribution? Or is there legally a contribution type in governmental lingo called a DROP contribution and certain attorneys know how to draft this plan?

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I have more information. This is a forward DROP plan where the employer funds it for 3 years prior to the date the employee actually terminates. The formula for funding is based on the DB plan formula. The contribution is going into a DC plan. My question is - what type of document do you need for this? WHat is this allocation called? Is it money purchase, or fixed nonelective contribution? Or is there legally a contribution type in governmental lingo called a DROP contribution and certain attorneys know how to draft this plan?

The DROP recipient plan can have various forms. For example, it could take the form of a cash balance-style benefit under the DB plan, in which case it would be contained in language in the DB plan itself. The other option is for the DROP amounts to be deposited to some form of defined contribution account, whether under the DB plan document or in a separate DC plan.

Exactly how this is done depends on the detailed circumstances. Does the DROP amount reflect the value of the current year accrual (with a sub-question, whether that value is solely the effect of a service cap, whether that value reflects potential increments in the accrued benefit resulting from changes in compensation, or both)? What actuarial subsides does the DB plan provide for early retirement, and are they to be captured for the employee? Who controls the language of the DB plan vs. who wants to create the DROP? Is the DROP money coming from the DB plan (as could be the case in capturing subsidies in actuarial assumptions) or from the employer (as could be the case if the DROP de facto extends benefit accrual service)?

There are folks who can write the appropriate language. However, this is no trivial task because (1) the entire situation has to be reviewed, and (2) the DROP-recipient plan's language has to integrate tightly with the DB plan.

Tom Geer

Thomas L. Geer, J.D., LL.M.

Benefit Plan Solutions

Blog: http://401k-403b-457-plansblog.blogspot.com/

Email: geertom@gmail.com

Phone & Fax: (888) 315-6720

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I have a similar situation. The DROP program provides that persons electing to participate in the DROP also elect the annuity withdrawal option from the defined benefit plan, the annuity funds will be deposited directly into the person's DROP account. How can a person who has been taken an annuity distribution transfer funds into the DROP plan? Is not the defined benefit feature of an accrued benefit a protected benefit under IRC §411(d)(6), cannot be transferred into a defined contribution plan, unless the transaction is an elective transfer of a lump sum or a distributable event or a rollover transaction, and such transfers would have to be provided under the terms fo the defined benefit plan?

The Drop program ,establsihed through City ordinance, direct the board of trustees to pay the monthly retiremetn benefit to a board-approved defined contribution retirement plan. Would not these contributions be subject to IRS Section 415© annual additions limits?

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I have a similar situation. The DROP program provides that persons electing to participate in the DROP also elect the annuity withdrawal option from the defined benefit plan, the annuity funds will be deposited directly into the person's DROP account. How can a person who has been taken an annuity distribution transfer funds into the DROP plan? Is not the defined benefit feature of an accrued benefit a protected benefit under IRC §411(d)(6), cannot be transferred into a defined contribution plan, unless the transaction is an elective transfer of a lump sum or a distributable event or a rollover transaction, and such transfers would have to be provided under the terms fo the defined benefit plan?

The Drop program ,establsihed through City ordinance, direct the board of trustees to pay the monthly retiremetn benefit to a board-approved defined contribution retirement plan. Would not these contributions be subject to IRS Section 415© annual additions limits?

First, governmental plans are not subject to 411. They are subject to the pre-ERISA rules only.

The 415 question is more complex. When the DB plan transfers to the DC plan, this is not treated as an additional accrual under either plan, but as a plan-to-plan transfer. As a result, there is nothing to which 415 could be applied.

On the detailed mechanics of the election and transfer, it is impossible to provide an answer without actually seeing the documentation. One possibility is that the election is no to have an annuity distribution begin, but to have the transfer made at the cost of an annuity starting later at a rate determined as if the annuity started now. This is then referred to in a kind of slang shortcut as an annuity election. If so, the transfers would be plan-to-plan transfers and eligibility for rollover treatment, etc. would not matter.

Tom

Thomas L. Geer, J.D., LL.M.

Benefit Plan Solutions

Blog: http://401k-403b-457-plansblog.blogspot.com/

Email: geertom@gmail.com

Phone & Fax: (888) 315-6720

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Thanks for the clarification on the plan-to-plan transfer being exempt form 415. Would it be correct to say that the DROP contribution into the DC plan would be subject to 415

The nature and extent of 415 issues depends on the details of the DROP structure, so it is impossible to make general statements. Sometimes there are, and sometimes there aren't, issues.

It is simply not possible to go further in the context of a public bulletin board.

Tom Geer

Thomas L. Geer, J.D., LL.M.

Benefit Plan Solutions

Blog: http://401k-403b-457-plansblog.blogspot.com/

Email: geertom@gmail.com

Phone & Fax: (888) 315-6720

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