If you are preparing to exit DROP, follow the steps below to ensure timely distribution of your DROP account and a smooth transition into retirement!
Meet with your department’s retirement/human resources liaison. Schedule your appointment 90 days prior to your desired DROP exit date. Your liaison will provide you with information regarding the terminating requisites for your department and payment of unused sick, vacation and overtime balances. He/she will also prepare your Letter of Intent (LOI) to terminate participation in DROP. Bring the LOI to your DROP Exit appointment with LAFPP DROP/Service Pensions staff.
Schedule your DROP Exit Appointment. Call the LAFPP DROP/Service Pensions Section to schedule your appointment not less than 45 days prior to your desired DROP exit date. Afterwards, you will be mailed the “DROP Distribution Election Request” forms for you to indicate how you would like to receive your DROP account balance and other forms related to your monthly pension benefit.
You may elect to receive your balance as a lump-sum payment, a rollover to a qualified account or a combination of both. A description of each type is provided below.
If you elect to receive a lump-sum payment of your DROP account balance from LAFPP, you will be taxed. However, a portion of any after-tax pension contributions you made to the Plan, such as those made from July 1, 1982 to December 20, 1996, may be distributed to you tax free.
Note for Tier 4 members: In addition to any applicable tax, if you are not age 50 or older in the year in which you exit DROP, you will also be assessed a 10% “early distribution” penalty by the IRS when you receive your lump-sum payment.
You may defer payment of taxes on the taxable portion of your DROP account balance by rolling it over to one qualified account, such as the City’s Deferred Compensation plan or an Individual Retirement Account (IRA). You will then be subject to the rules of such plan when you take distribution of your funds.
Note: If your DROP account balance includes any non-taxable amount, you may elect to receive a partial lump-sum payment of that portion, tax free. Otherwise, if you elect to roll over your entire balance to a single plan/financial institution, the qualified account you designate must accept non-taxable funds – the City’s Deferred Compensation plan does not. If you roll over any non-taxable portion, you must also roll over your entire taxable portion.
Combination Lump-Sum Payment & Rollover
You have the option to take a portion of your DROP account balance in a lump-sum payment from LAFPP and roll over the remaining balance to a qualified account.
You may wish to consult with your tax and/or financial advisor so that you are aware of any financial consequences that could affect your distribution decision. We cannot advise you regarding your tax liability.
Submit your completed “DROP Distribution Election Request” forms. In order to ensure that payment of your DROP account balance is issued on the last business day of the month in which you exit, submit your completed forms, LOI and any other requested documents (e.g., marriage certificate, dissolution of marriage decree or declaration of domestic partnership) at your DROP Exit appointment or, no later than the first business day of the month in which you exit.
Consider the following before exiting DROP:
- Changes to your DROP distribution election, incomplete/incorrect forms, pending documents or late submission will delay distribution of your funds.
- LAFPP must receive completed forms and documentation requested by DROP/Service Pensions staff no later than 90 calendar days after your DROP exit date. After 90 days, your DROP account balance will be distributed as a lump-sum payment only, subject to a mandatory 20% Federal tax withholding for the entire account balance. Any after-tax contributions will be recoverable solely from your monthly pension payments.
- No interest will be applied to your DROP account after your DROP exit date.
If you have any questions, you may contact the DROP Section at (213) 279-3100 or (844) 88-LAFPP (52377).