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137.00.1-10. Administration of Drop Accounts

AR ADC 137.00.1-10Arkansas Administrative Code

West's Arkansas Administrative Code
Title 137. Lopfi-Local Police and Fire Retirement System
Division 00.
Rule 1. Arkansas Fire & Police Pension Review Board Rules and Regulations
Ark. Admin. Code 137.00.1-10
137.00.1-10. Administration of Drop Accounts
Currentness
SECTION 1. Purpose
The purpose of this rule is to describe the administration of the Deferred Retirement Option Plan (DROP) as it affects the benefit levels and funding of the pension funds. Act 757 of 1993 established the DROP for police officers. Act 1004 of 1993 established the DROP for paid firefighters. Both of these Acts were effective on August 13, 1993.
SECTION 2. Authority
This rule is promulgated by the Arkansas Fire and Police Pension Review Board (PRB) by the authority of A.C.A. 24-11-203.
SECTION 3. Effective Date and Applicability
This rule was effective on August 13, 1993 and is applicable to all Local Plans that elect to implement the DROP.
SECTION 4. Local Election of DROP Program
Act 757 and Act 1004 made the DROP a local option. If the local pension board wishes to make it available to its members, the local pension board must vote to do so. If a local pension board does elect to make the DROP an option, a copy of the board resolution to elect the DROP and a copy of the local pension board's rules to administer the DROP must be filed with the PRB. The local pension board's rules must comply with this Board Rule #10.
SECTION 5. Accumulation of DROP Account
Each individual member's DROP account is credited with the following items during the DROP period:
A. DROP Payments. The DROP account is credited each month of the DROP period with the DROP payments. The amount of the DROP payment is equal to the amount of monthly benefit that would have been received by the member if they had elected service retirement on the first day of the individual's DROP period.
B. Employer contributions. For municipalities with a population over 20,000, 1/2 of the employer matching contributions are credited to the DROP account. That is, for firefighter plans and police plans that do not participate in Social Security, 3% of current salary, 2% of current salary is added to the DROP account for police plans that participate in Social Security. Plans that have voluntarily agreed to a rate higher than 6% would contribute 1/2 of that amount.
Effective July 1, 1999, for municipalities with a population under 20,000, and those over 20,000 where the local pension board has agreed, all of the employer matching contributions are credited to the Local Plan, not to the DROP account.
C. Employee Contributions. Effective July 1, 1999, for municipalities with a population under 20,000 and those over 20,000 where the local pension board has agreed, all of the employee contributions will be credited to the DROP account.
D. Interest. Interest is to be credited to the DROP account. The interest rate to be used is defined in section 7 of this rule.
SECTION 6. Employee Contributions
The member continues to make employee contributions during the DROP period. These employee contributions are credited to the Local Plan and not to the individual's DROP account. Effective July 1, 1999, for municipalities with a population under 20,000, and those over 20,000, where the local pension board has agreed, employee contributions are credited to the DROP account and not to the Local Plan.
SECTION 7. Interest Rate Certification
The rate of interest that is to be credited to the DROP account is to be certified by the actuary for the PRB. The PRB will communicate the necessary information from the annual financial reports that are submitted to it to the actuary for the PRB. The actuary will annually issue a list of Local Plans, which have elected participation in the DROP and the certified interest rate for the DROP.
The interest rate credited after the first 5 years of DROP, when a participant has elected to defer receipt of the DROP account, and for continued employment after DROP, has a minimum rate of 0%. Therefore, there will be two interest rates communicated each year.
The first rate will be for the first 5 years of DROP participation. The second rate will be for DROP participation after 5 years, deferred receipt of the DROP account, and continued employment after DROP.
SECTION 8. Conclusion of DROP
A. The DROP period will conclude at the date of termination of employment but no later than 5 years after the date that the individual member began participation in the DROP. Termination of employment means leaving the employment of the department for any reason. The DROP period may be extended to 10 years as defined in section 13 of this rule.
B. At the conclusion of the DROP period the DROP account will be distributed. This distribution is described in section 10 of this rule. Act 1371 of 2003 allows a city to elect to allow participants to defer the receipt of their DROP account after the conclusion of the DROP Period.
C. The monthly benefit that will be received by the member after the DROP period is the retirement benefit as calculated at the date the member began DROP. The monthly benefit does NOT change after the enrollment in DROP, except as described below. This same monthly amount is now paid to the individual member instead of into the DROP account.
The retirement benefit at the end of the DROP period:
Does NOT change with the increase in salary during the DROP period;
Does NOT change with extra service during the DROP period;
Is the SAME amount as was being credited to the DROP account.
There are two exceptions: The age 60 bonus (based on having over 25 years of service earned before the enrollment in DROP starts at age 60; any benefit increases granted to all retirees, or overall benefit increases, may also be given to persons on DROP.
D. Disability Benefits. The provisions of these rules do not restrict a local board's authority to provide for disability retirement benefits of DROP participants pursuant to existing law.
SECTION 9. Death Benefits
If a member of a fire or police department dies during the period of participation in the DROP, a lump sum payment equal to the balance of the DROP account will be paid pursuant to Act 757 or Act 1004 of 1993. The widow's benefit will be paid pursuant to existing law.
SECTION 10. Distribution of DROP Account
A member who has a DROP account must be allowed to choose to receive his or her DROP account as either a lump sum or a true annuity, as described below. At the option of the local pension board, other forms of distribution may also be offered.
A. Lump Sum. A lump sum amount equal to the accumulation of the DROP account as defined in section 5 of this rule, as of the date of the conclusion of the DROP period.
B. True Annuity. A true annuity is payable monthly during the lifetime of the member only. If the true annuity is not purchased from an insurance company licensed to do business in the State of Arkansas, the monthly amount of the true annuity can be paid out of the Local Plan. In this case, the monthly amount is the actuarial equivalent of the lump sum, as explained in “A” of this section. Actuarial equivalence is defined in Section 11 of this rule.
C. Other Forms. The local pension board may choose to distribute the DROP account in other forms of payment. Any other forms that might be made available must meet the following rules:
1. If the form of payment involves the life expectancy of any individual or individuals, then either,
a) an appropriate annuity must be purchased from an insurance company licensed to do business in the State of Arkansas, or
b) the amount is paid out of the Local Plan, and the amount is the actuarial equivalent of the lump sum in “A” of this section.
2. For all other forms of payment, the amount of payment must be the interest equivalent of the lump sum, as explained in “A” of this section. Interest equivalence is defined in Section 11 of this rule.
D. Deferred Receipt. The local pension board, with the consent of the sponsoring municipality, may allow a participant to defer receipt of their DROP account after the conclusion of the DROP Period. This is a one-time deferral that should be made in writing to the local board. The DROP account must be paid out as a lump sum or converted to an annuity before the participant reaches age 70 ½.
SECTION 11. Actuarial Equivalence and Interest Equivalence
Actuarial equivalence, as used in this rule, means that the amounts produce the same lump sum based on the 1983 Group Annuity Mortality Table with 5% interest. Interest equivalence, as used in this rule means that the amounts produce the same lump sum based on an interest rate or rates of not less than 5%.
SECTION 12. Reporting Requirements
The financial and member information required to be reported annually will be supplemented by a detailed listing of each member currently on DROP and the amount of their DROP account as of the end of the current reporting period. The PRB has the right to request additional information concerning the calculation of the DROP account.
SECTION 13. Ten-Year DROP
The duration of participation in the DROP may be extended to a maximum of 10 years. This extension must apply to all active members and be approved by the local pension board. The extension must also be approved by a majority vote of the governing body of the sponsoring municipality. The following differences exist between the extended DROP period and the preceding sections:
A. Interest Credited. The interest credited to the DROP account has a minimum of 0% instead of the assumed actuarial rate.
B. Forfeiture of certain credits. The interest credited to the DROP account and the employer contributions credited to the DROP account after the first 5 years of participation may be forfeited. The portion forfeited is 80% if terminated in the 6th year, 60% for the 7th year, 40% for the 8th year, and 20% for the 9th year. There is no longer a forfeiture of credits for participants who leave the DROP after August 1, 2003.
C. DROP Payments for Fire Plans. The DROP payments during the second 5 years for fire plans that elect the 10-year DROP is 75% of the DROP payment in the first 5 years. This is described in Act 1369 of 2003.
SECTION 14. Continued Employment After DROP
Act 1372 of 2003 allows the sponsoring municipality and the local pension board to agree to allow participants to work after the conclusion of the DROP period, whether it is 5 years or 10 years. The participant would no longer be able to add to their DROP account during the period of continued employment, except for interest earned. After the period of continued employment, the participant would be able to begin drawing their normal retirement benefit and take a distribution of their DROP Account as described in Section 10.
Attachment 1
RESOLUTION TO AMEND THE ARKANSAS POLICE OFFICER'S DEFERRED RETIREMENT OPTION PLAN PURSUANT TO ACT 1372 OF 2003
Whereas, the governing body of the City of ________________ believes that it is to the advantage of the members of this pension plan and of benefit to our municipality for this option to be made available to our members.
It is therefore resolved, that the governing body of the City of _________________ approves this amendment of the Deferred Retirement Option Plan pursuant to Act 1372 of 2003.
The City of ________________, in electing to amend this plan, agrees to the following:
1. At the conclusion of the Deferred Retirement Option Plan (DROP), a member may continue employment.
2. This continued employment shall be available to all similarly situated members.
3. Once continued employment is elected, a member's monthly DROP payment shall cease.
4. The provisions of Act 1372 regarding interest rate awards will be implemented.
5. The employer and employee contributions of 6% shall cease.
6. A copy of this signed resolution will be filed with the PRB.
This election may be effective on the date of resolution, but no earlier than July 16, 2003.
DATE ______________________________
Chairman ______________________________
Secretary/Treasurer _____________________
Member ______________________________
Member ______________________________
Member ______________________________
Member ______________________________
Member ______________________________
RESOLUTION TO AMEND THE ARKANSAS FIREFIGHTER'S DEFERRED RETIREMENT OPTION PLAN PURSUANT TO ACT 1372 OF 2003
Whereas, the governing body of the City of ___________________ believes that it is to the advantage of the members of this pension plan and of benefit to our municipality for this option to be made available to our members.
It is therefore resolved, that the governing body of the City of ______________________ approves amendment of the Deferred Retirement Option Plan pursuant to Act 1372 of 2003.
The City of ____________________, in electing to amend this plan, agrees to the following:
1. At the conclusion of the Deferred Retirement Option Plan (DROP), a member may continue employment.
2. This continued employment shall be available to all similarly situated members.
3. Once continued employment is elected, a member's monthly DROP payment shall cease.
4. The provisions of Act 1372 regarding interest rate awards will be implemented.
5. The employer and employee contribution of 6% shall cease.
6. A copy of this signed resolution will be filed with the PRB.
This election may be effective on the date of resolution, but no earlier than July 16, 2003.
DATE ______________________________
Chairman ____________________________
Secretary/Treasurer _____________________
Member ______________________________
Member ______________________________
Member ______________________________
Member ______________________________
Member ______________________________
Attachment 2
ARKANSAS FIRE AND POLICE LOCAL PLANS DEFERRED RETIREMENT OPTION PLAN (DROP) MEMBER ELECTION FORM
I hereby elect the DROP as my retirement benefit option from the pension plan in place of the normal retirement benefit. I understand that in electing the DROP I have agreed to the following statements:
1. * The amount of the DROP payments will be $ _______ per month. This amount includes all service and age 60 bonuses that I have earned to this date. This amount is the same as if I retired today.
2. * I understand that the monthly benefit that I will receive at the end of the DROP period is the exact same amount stated in item 1, regardless of any pay raises I receive or extra years of accrued service.
3. I understand that at the end of the DROP period I will have the option to receive the DROP account as a lump sum or convert the DROP account to a monthly annuity amount.
4. I understand that the DROP account will remain in the pension fund until I leave the department. I do not have the ability to withdraw from the DROP account until I terminate covered employment.
5. I have elected to begin the DROP on ____________________. The DROP will end at the earlier of when I terminate covered employment or ___________________ (5 years from above date, or 10 years, for eligible pension funds).
6. I understand that neither the pension fund nor the department has given any tax advice concerning the way the DROP account is taxed. I have or will consult my own tax advisor for this information.
* Two exceptions to these rules: Age 60 bonuses (for members with over 25 years of service at the time of enrollment in DROP) begin at age 60 whether still on DROP or not; raises given to retirees that are also given to DROP participants.
___________________________________________
Member Signature
Date __________________________
___________________________________________
Plan Representative
Date __________________________
DESIGNATION OF BENEFICIARY
I hereby designate the following beneficiary to receive any benefits from my DROP account if I die prior to my termination of covered employment:
________________________________________
Signature of Member
Date __________________
Please select one of the following:
_____ I certify that to the best of my knowledge, the above named Member is single or that his spouse cannot be located.
_________________________________
Signature of Plan Representative
Or Notary
Date ___________________
_____ I certify that I have agreed with my spouse on the selection of the above beneficiary or beneficiaries. I understand that if I am not the named beneficiary, I will not be entitled to benefits under the plan.
_________________________________
Signature of Spouse
Date ____________________
I certify that I have witnessed the spouse's signature above.
_________________________________
Signature of Plan Representative
Or Notary
Date ____________________
Attachment 3
ARKANSAS FIRE AND POLICE LOCAL PLANS DEFERRED RETIREMENT OPTION PLAN (DROP)
Actuarial Equivalence Factors for Converting The DROP Account to a True Annuity
Factors for converting to a monthly annuity payable for the life of the member only:
Age nearest Birthday at End of DROP
Multiply DROP Account by this factor
46
0.0053146
47
0.0053846
48
0.0054584
49
0.0055364
50
0.0056188
51
0.0057060
52
0.0057984
53
0.0058965
54
0.0060009
55
0.0061123
56
0.0062314
57
0.0063592
58
0.0064965
59
0.0066443
60
0.0068035
61
0.0069749
62
0.0071594
63
0.0073579
64
0.0075709
65
0.0077992
66
0.0080432
67
0.0083033
68
0.0085802
69
0.0088750
70
0.0091893
Based on 83 Group Annuity Mortality and 5% interest.

Credits

Adopted Sept. 28, 1983; Amended July 13, 1984; Amended Apr. 30, 1987. Amended Jan. 1, 2015.
Current with amendments received through February 15, 2024. Some sections may be more current, see credit for details.
Ark. Admin. Code 137.00.1-10, AR ADC 137.00.1-10
End of Document