Deferred Retirement Option Plan (“DROP”)

If you are eligible for a service retirement, but not quite ready to leave the workforce, DROP might be for you. DROP is a voluntary program that allows you to continue working for your plan sponsor for up to five years while simultaneously earning a monthly pension benefit. As long as you are still working for your plan sponsor, your monthly pension benefit will accumulate in a separate DROP account and earn interest. Once you actually retire and exit DROP, the money that has accrued in your DROP account will be paid to you, including interest, on top of your monthly pension benefit.

You may only enter DROP if you are:

• A City of San Diego (“City”) Member hired before July 1, 2005;
• A San Diego Unified Port District (“Port”) Member hired before October 1, 2005; OR
• A San Diego County Regional Airport Authority (“Airport”) Member hired on or before October 2, 2006.

Also, before you can enter DROP, you must be age and service-eligible to service retire. Please refer to your Retirement Plan Summary corresponding to your employer, membership classification, and hire date to determine your eligibility requirements.

To enter DROP, you must complete a DROP application and agree to leave employment with your plan sponsor and retire no later than five years (60 months) from the date you enter DROP (although there is an exception for City Firefighters, who may be able to extend their DROP period according to Board Rule 6.50 – see section below on this topic). Generally, your DROP entry date must be on the first day of a pay period. On your DROP entry application, you will select one of several retirement benefit options and designate a beneficiary to receive a lifetime continuance benefit upon your death (if applicable). These elections are irrevocable. See our Retirement Benefit Options Fact Sheet for more information.
 
Once you enter DROP, you may not change your decision to enter the program, nor your agreement to leave employment and retire within five years. Also, your pension benefit amount is fixed when you enter DROP (not including future cost of living adjustments), which means you will not continue earning service credit or be eligible for any changes to your benefit formula between entering and leaving DROP.
 
SDCERS will calculate your pension benefit based on your age, service credit, and Final Compensation at the time you enter DROP. From that point forward, until the time you leave DROP, you will continue to work and receive a salary from your employer.* However, there will be several changes to your status at SDCERS:

• You will no longer accrue service credit;
• You will no longer make retirement contributions to your member contribution account. Instead, you will contribute 3.05% of your pensionable salary to your DROP account every pay period (see below for details on what is deposited into your DROP account); and
• Any salary increases or decreases you receive while in DROP will not affect your monthly pension benefit.

*Note: If you are a City Member and go on Long-Term Disability (LTD) status while you are in DROP, neither you nor the City will contribute to your DROP account while on LTD and your LTD payments may be reduced. Please contact Risk Management for more information.
 

You are encouraged to review this article before you choose your DROP entry date, which discusses several important factors for you to consider before deciding when to enter DROP. 
 

Per Board Rule 6.50, City of San Diego firefighters have the option to extend their five-year DROP participation period by the amount of unused annual leave they have as of the last day of their five-year period. If you are a City firefighter and you want to extend your DROP participation period, you must advise SDCERS of your choice to do so within 90 days of the last day of your five-year DROP participation period – i.e., no earlier than 90 days, but at least one business day before the five-year anniversary of your DROP entry date. Please call the Call Center during normal business hours at (619) 525-3600 for further instructions regarding this notice.  

While in DROP and still working, you are considered an “Active DROP Member.” During this time, your DROP account is called your “DROP Participation Account.” You cannot access these funds until you terminate employment.
 
Remember, your pension benefit is calculated at the time you enter DROP. While you are an Active DROP Member, the following funds are deposited into your DROP Participation Account:

1. Your monthly pension benefit;
2. Your employee contributions, which are deducted from every paycheck you receive while in DROP (equal to 3.05% of your pensionable salary);
3. Your employer (City, Port, or Airport) will also contribute 3.05% of your pensionable salary in matching contributions;
4. Annual cost of living adjustments (“COLA”) to your monthly retirement benefit that occur every July that you are in DROP;
5. The Annual Supplemental Benefit (and any other supplemental benefits) will be deposited into your DROP account, if you are eligible and it is distributed while you are in DROP; and
6. Compounded interest is credited to your DROP account each quarter at a rate determined by the Board. (See the section below titled “DROP Interest” for more information and the current rate listed at the top of this page.)

A Member participating in DROP may exit DROP and fully retire at any time during their designated DROP participation period by voluntarily terminating employment with their plan sponsor. SDCERS will terminate a Member’s participation in DROP when:

• The Member’s designated DROP participation period ends;
• The Member’s employment is terminated (either voluntarily or for cause);
• The Member dies; or
• The Member is granted a disability retirement.

Upon exiting DROP, Members may take a lump sum distribution of their entire DROP account, take a partial lump sum and annuitize the remaining balance, or annuitize the entire amount and begin receiving equal monthly payments annuitized over either their life expectancy (according to the uniform life expectancy table) or 240 months (not to exceed the Member's life expectancy).

Please review this article, which describes in detail your options regarding what you can do with your DROP account when you exit.

Your DROP benefit is the value of your DROP account at the end of your participation period, including interest. You are required to begin receiving the funds in your DROP account when you exit DROP, at which time you will submit paperwork to SDCERS indicating how you would like your DROP funds to be distributed. The distribution may be made in one of the following ways:

1. As a single lump sum (including a rollover to a qualified plan, such as a 401(k) or an IRA);
2. Paid in 240 equal payments over 20 years (as long as this does not exceed your life expectancy at the time you exit DROP); 
3. Paid as an annuity over your life expectancy; or
4. A combination of a partial lump sum and an annuity.

If you choose any distribution option other than a lump sum payment at retirement, you may at any time elect to receive the present day value of any remaining monthly payments in a lump sum, with no additional interest.

The Board of Administration determines the interest rates for DROP Participation Accounts and DROP Annuity Accounts. You can see past and current interest rates by looking at Board Rules 6.10 and 6.40, which can be found in SDCERS' Board Charters, Policies, & Rules, located on this page. The current interest rates are also listed at the top of this page.

At the January 2022 Board meeting, SDCERS' CEO presented information regarding how the DROP rates are currently calculated and why SDCERS uses these calculation methods. You can read more about this topic in the staff report that accompanied this presentation, here. 

PLEASE NOTE: You must be an active DROP participant (i.e., you have not exited DROP yet) on the last day of the quarter in order to receive interest for that quarter. Any funds posted to your DROP account, as shown on your Member Portal, following your DROP retirement date will be removed when your DROP account is finalized.
 

When you exit DROP, the taxes that will apply to the funds in your DROP account depend on how you choose to receive them:

Lump Sum
If you take a lump sum distribution, SDCERS will be required to withhold 20% federal income taxes and 2% for California residents. If you are not a California resident on the date your DROP payment is processed, then you may not be subject to the 2% California tax. However, you must ensure that your out-of-state address is updated in SDCERS' records before your DROP account is processed; otherwise, the 2% state tax will likely be automatically applied and you will have to file a California state income tax return for that tax year in order to seek a refund. Please note that SDCERS cannot withhold state taxes for any state other than California, so you may owe state taxes in your new state of residence. 

Also, if you are under age 59 ½ on the day your account is paid to you, then you may be subject to the 10% early withdrawal penalty according to IRS rules. Please consult a tax professional for any additional tax-related questions. 

Rollover
If you choose to rollover your DROP account to a qualified plan (e.g., 401(k), IRA), then SDCERS will not withhold any taxes. However, if you elect a direct rollover to a Roth account, no withholding will be deducted, but you will owe taxes on the rollover amount at the end of the year.

Annuity
If you choose to annuitize your DROP account, your account will be paid to you in monthly increments and taxed as regular retirement income. You can choose your tax withholding preferences and update them at any time in your Member Portal. As the DROP annuity is actually a separate payment from your regular monthly pension payment (although paid simultaneously), the tax withholding for your annuity does not have to be the same as the tax withholding for your pension payments.