Overview
The Deferred Retirement Option Plan (DROP) in Los Angeles is a retirement program designed to allow eligible city employees, particularly public safety personnel such as police officers and firefighters, to “retire on paper” while continuing to work. Under this plan, employees’ monthly pension benefits are frozen at the entry date and credited to a DROP account, which accrues interest or investment growth according to the rules of the Los Angeles City Employees’ Retirement System (LACERS).
DROP is structured to retain experienced employees while enabling them to accumulate additional retirement savings without sacrificing their current salary. It provides a bridge between active employment and retirement, giving participants both a lump-sum benefit and ongoing pension payments after actual retirement.
Eligibility
Eligibility requirements for the Los Angeles DROP include:
| Eligibility Factor | Requirement |
|---|---|
| Service Requirement | Typically, 20 years of service for police or firefighter classifications, or the minimum service for full retirement under LACERS rules. |
| Age Requirement | Varies by classification: generally 50–55 for public safety employees, 62 for general employees. |
| Employment Status | Must remain in active employment with the City of Los Angeles during DROP participation. |
| Election Window | Must elect DROP prior to starting pension payments. |
| Maximum Participation | Usually capped at 5 years; extensions are generally not permitted. |
How Los Angeles DROP Works
When an employee elects DROP:
- Pension Freeze – The retirement benefit is calculated and locked based on service and salary at the time of DROP entry.
- Account Accumulation – Monthly pension payments that would have been issued are credited to the DROP account, which earns interest or investment returns according to LACERS policies.
- Continued Salary – The employee continues to receive their regular salary while participating in DROP.
- Mandatory Retirement – At the conclusion of the DROP participation period, the employee must retire from their eligible position. Accumulated DROP funds may then be withdrawn, rolled over into a qualified plan, or distributed over time.
Key Features
| Feature | Description |
|---|---|
| Pension Freeze | Pension benefit locked at DROP entry date |
| Account Growth | Earns interest based on LACERS policies |
| Participation Period | Typically 3–5 years |
| Salary Continuation | Full salary continues during DROP |
| Payout Options | Lump sum, periodic payments, partial distributions, or rollover into qualified retirement plans |
Example: DROP Account Accumulation
Assume an LAPD officer has a monthly pension of $6,000 and enters a 5-year DROP with an interest rate of 3.5% annually, compounded monthly.
The future value of the DROP account is calculated using the annuity formula:
A = PMT \times \frac{(1 + r/n)^{nt} - 1}{r/n}Where:
PMT = 6,000 r = 0.035 n = 12 t = 5 A = 6,000 \times \frac{(1 + 0.035/12)^{60} - 1}{0.035/12} \approx 6,000 \times 66.03 = 396,180At the end of five years, the officer would have approximately $396,180 in their DROP account, in addition to beginning their regular pension payments.
Advantages of Los Angeles DROP
1. Continued Income
Employees continue to receive full salary while pension benefits accrue in the DROP account.
2. Substantial Lump-Sum Accumulation
The DROP account allows for a significant lump sum that can be used for investment, debt repayment, or supplemental retirement income.
3. Predictable Growth
Interest or growth is often guaranteed by LACERS, providing stability in the account balance.
4. Tax-Deferred Growth
Funds accumulate tax-deferred until withdrawn or rolled over, enabling strategic tax planning.
5. Structured Retirement Transition
DROP facilitates a gradual transition from active employment to retirement while maximizing overall retirement benefits.
Limitations and Considerations
1. Pension Freeze
The pension is frozen upon DROP entry, and additional years of service do not increase the pension calculation.
2. Mandatory Retirement
Participants must retire at the end of the DROP period.
3. Tax Implications
Lump-sum distributions are subject to federal and state taxes unless rolled into a qualified retirement plan.
Example:
For a DROP balance of $396,180 in the 24% federal tax bracket:
The participant would receive approximately $301,097 after federal taxes, excluding California state taxes.
4. Interest and Inflation Risk
Fixed or guaranteed interest may underperform during periods of high inflation.
5. Plan-Specific Rules
Participation limits, interest rates, and eligibility are dictated by LACERS and applicable collective bargaining agreements.
Distribution Options
DROP participants in Los Angeles have multiple distribution options:
| Option | Description | Considerations |
|---|---|---|
| Lump Sum | Full account balance withdrawn | Immediate liquidity; taxable as ordinary income |
| Direct Rollover | Transfer to IRA or qualified plan | Tax-deferred growth; continued investment potential |
| Partial Lump Sum + Rollover | Combination of cash and rollover | Balances liquidity with tax deferral |
| Periodic Payments | Spread distributions over several years | Provides steady cash flow; spreads tax liability |
Strategic Considerations
- Tax Planning – Rolling DROP funds into an IRA or qualified plan can defer taxes and maximize retirement income.
- Timing of Distributions – Coordinate withdrawals with other income sources to minimize taxes.
- Integration with Other Retirement Accounts – Align DROP distributions with Social Security, 401(k)/403(b), and other pension income.
- Investment Strategy – Post-rollover investment planning can enhance long-term growth.
- Estate Planning – Ensure DROP account beneficiaries are designated to manage inheritance and tax implications.
DROP vs. Immediate Retirement
| Feature | Los Angeles DROP | Immediate Retirement |
|---|---|---|
| Salary | Continues during DROP | Ends at retirement |
| Pension Payments | Accumulate in DROP account | Paid directly to retiree |
| Lump-Sum Option | Yes | No |
| Benefit Growth | Frozen at entry | May increase with additional service |
| Retirement Transition | Gradual | Immediate |
Best Practices
- Confirm Eligibility – Verify service years, age, and position classification.
- Estimate DROP Balance – Project account growth using interest rates and participation period.
- Plan Tax Strategy – Consider rollovers to minimize immediate tax liability.
- Coordinate with Other Retirement Assets – Ensure DROP participation complements other retirement accounts.
- Consult a Financial Advisor – Optimize timing, distribution method, and overall retirement strategy.
Conclusion
The Deferred Retirement Option Plan in Los Angeles provides eligible city employees, particularly public safety personnel, with the opportunity to maximize retirement benefits while continuing active service. By freezing pension benefits and depositing them into a DROP account, employees can accumulate a significant lump sum in addition to ongoing salary.
Strategic planning regarding pension freezes, mandatory retirement rules, tax implications, and post-retirement distributions ensures that DROP participants in Los Angeles can enhance financial security, achieve a smooth retirement transition, and optimize long-term retirement outcomes.
