Important Change in Tax Law Regarding DROP & Your Deferred Compensation Plan Account
Good news! Recent changes to the Internal Revenue Code now provide a waiver of the existing 10% penalty tax on early distributions of Deferred Retirement Option Plan (DROP) funds rolled over to your Deferred Compensation Account.
In June 2015, President Obama signed into law HR 2146 – Defending Public Safety Employees’ Retirement Act. This new law applies to distributions after December 31, 2015.
Currently, after a participant rolls over DROP funds to the City’s Deferred Compensation Plan, there is typically a 10% tax penalty on DROP money you withdraw before age 59 ½, unless you exit DROP in the year in which you turn age 55. This recent legislative change, HR 2146, will allow those who exit DROP at age 50 or older to take distributions of DROP money from their Deferred Compensation accounts before age 59 ½ without being subject to the penalty. Although you will avoid penalties, please keep in mind that you may incur taxes upon distribution.
We recommend that you consult with your tax and/or financial advisor if you have any questions regarding your personal situation.