luissaha

Extending DROP Period

7 posts in this topic

Governmental defined benefit plan contains a provision that allows certain employees to extend their DROP periods using accrued annual leave.  Employees have the option to cash out leave or use the hours to extend their DROP period.  This looks like a CODA to me because the employees have the option to cash out or us leave hours to extend DROP.  Am I wrong on this?  Any help would be appreciated. 

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I would agree with you.  However, they might consider providing that all accrued annual leave would be contributed to the plan, but that the employee would then have the choice either to take it out immediately (assuming the employee was at least 62), or to have it used to extend the DROP period.  So long as the employee does not have an option concerning whether to have the cash contributed to the plan, there is no objection to giving the employee an immediate right of withdrawal.

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Thank you for the response.  One point of clarification, though.  My understanding is that this is essentially a "cashless" transaction.  The cash value of the annual leave is not contributed to the db plan.  Certain employees can use their "bank" of annual leave hours to extend their DROP period.  For example, if an employee had 320 hours of annual leave in their bank at the time they entered DROP, they could choose to cash out that leave or use it to extend their DROP period by 2 months.  If they choose to extend DROP, the cash value of the leave is not contributed to the db plan.  It is used solely to extend the DROP period.  Does this change your view at all as to whether this is a CODA?     

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On 7/11/2017 at 11:09 AM, luissaha said:

Thank you for the response.  One point of clarification, though.  My understanding is that this is essentially a "cashless" transaction.  The cash value of the annual leave is not contributed to the db plan.  Certain employees can use their "bank" of annual leave hours to extend their DROP period.  For example, if an employee had 320 hours of annual leave in their bank at the time they entered DROP, they could choose to cash out that leave or use it to extend their DROP period by 2 months.  If they choose to extend DROP, the cash value of the leave is not contributed to the db plan.  It is used solely to extend the DROP period.  Does this change your view at all as to whether this is a CODA?     

I'm not sure it does.  The employee is still giving up cash, and getting more in the way of retirement benefits.  In theory, the extra cash is retained by the employer instead of being contributed to the plan.  However, when benefits rise, the employer ends up having to contribute more to the plan, sooner or later.  So the IRS could argue that the employee still has a choice between more cash and a larger contribution to the retirement plan.

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Yes, I still see it as a CODA as well.  The employee has a choice between cash or other benefit under the plan.  The benefit in this case is the ability to extend DROP and increase your DROP account.

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It depends on the underlying employment situation, I think. If you think the employer is saying, "Next week is your term date. You will no longer be employed after Friday. You've got a bunch of accumulated paid leave, though, so you have a choice: Voluntarily extend your annuity starting date by three months, and you will continue to get paid through payroll and get your DROP credits, or take the accumulated leave as cash," then that looks like a CODA. But it probably also is not consistent with the plan doc, because the plan doc probably says the pension starts on the first day of month after retirement, not when your accumulated leave runs out, should you elect to apply that.

The more likely explanation is that if you have accumulated leave and you are close to retiring, you can choose to delay your retirement date by using up the accumulated paid leave as such, i.e., paid leave, and not cashing it in.

Whether what is really going on is the first explanation or the second would depend on a lot of facts and circumstances we don't have, e.g. whether the employee has benefits during the period, etc. In my experience, typically if an employee uses up his/her paid leave at the end of career, their retirement date is pushed off and they are treated as still employed.

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