HOUSTON POLICE OFFICERS PENSION SYSTEM DEFERRED RETIREMENT OPTION PLAN (DROP) POLICY SECTION 1200

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2 TABLE OF CONTENTS SECTION PAGE 1200 INTRODUCTION PURPOSE ELIGIBILITY FOR DROP PARTICIPATION EDUCATION ON DROP APPLICATION FOR DROP PARTICIPATION PARTICIPATING IN DROP TERMINATING ACTIVE EMPLOYMENT DISTRIBUTION OF DROP MONIES DISTRIBUTION OF DROP AFTER MEMBER S DEATH REEMPLOYMENT DROP BENEFICIARY DESIGNATION

3 1200 Introduction The Board of the Houston Police Officers Pension System (HPOPS), pursuant to statutory authority under the provisions of Article 6243g-4, Vernon s Annotated Texas Statutes (VATS) and under Section 67, Article XVI, Texas Constitution, has been given the responsibility for the general administration, management, and operation of the pension system. The applicable laws governing DROP and the Houston Police Officers Pension System (HPOPS) are promulgated in Article 6243g-4, Vernon's Annotated Revised Civil Statutes of Texas, and any agreements pursuant to Section 27, thereof Purpose HPOPS is committed to the efficient and effective fulfillment of the mission of HPOPS, which is to responsibly manage the system in the best interests of the members and beneficiaries so that they may have peace of mind knowing their pension benefits are secure. The purpose of this policy is to provide a documented procedure for applicants electing the Deferred Retirement Option Plan (DROP), and provides a detailed outline to be followed by the Pension Staff when processing applications for the DROP election. This policy may change from time to time as case law and legislation develop Eligibility for DROP Participation Member is as defined under Article 6243g-4 Sec. 2, Vernon s Annotated Texas Statutes To be eligible for DROP, a member must meet both of the following criteria. A. The member must have become an active member before October 9, 2004, and has not had a separation from service after that date except for a member hired before October 9, 2004 and was involuntarily separated from service but was retroactively reinstated under an arbitration, civil service, or court ruling after October 9, B. The member must have 20 or more years of credited pension service with the City of Houston. Service with another department of the City of Houston cannot be used to qualify for benefits. Members may not use service from another City of Houston pension system in the calculation of benefits in more than one system. 3

4 DROP applicants must meet all requirements of the applicable state law and the requirements established by the HPOPS Board of Trustees in this policy statement Education on DROP As a member nears eligibility for DROP, HPOPS staff will notify the member of eligibility and provide a DROP Entrance Request Form. The member will also be notified he or she has the option to attend a DROP seminar presented by HPOPS staff. At the seminar, the member will be provided with an overview of the program including the tax consequences and the fact that the election is irrevocable. The member will be advised to personally seek legal, tax, and financial advice during the DROP application process Application for DROP Participation Once a member is eligible for DROP participation, it is the member s responsibility to notify HPOPS of his or her intent to participate in DROP by completing the DROP Entrance Request Form and delivering it to the HPOPS office The member s DROP entrance effective date will be A. the date the member attained 20 years of service. or B. if the member decides to not enter at 20 years of service, the member can enter at a later date and can be retroactive 30 days Members must complete the necessary paperwork within 30 days from the DROP entrance date. An exception may only be granted when waiting to receive payroll information from the City required to correctly calculate the member s benefit After receipt of a member s DROP Entrance Request Form, HPOPS staff will contact the eligible member to schedule a DROP entrance appointment. The appointment will be subsequent to the DROP entrance effective date in order to allow for adequate time to receive the payroll information required to compute the monthly DROP benefit DROP applicants will be asked to complete and/or sign the following where applicable. A. Whether a member is or is not involved in a common-law marriage, the member will be asked to sign the common-law acknowledgement that he/she understands the HPOPS common-law marriage policy; 4

5 B. A Designation of Beneficiary Form, if applicable; C. The complete DROP Application Form; D. The DROP Application Acknowledgement Form; E. The Release of Liability Form. F. The member will be given copies of all documents The completed application will be reviewed and verified by the HPOPS staff, approved by the HPOPS Executive Director, and submitted to and ratified by the Board of Trustees at the next available board meeting The member can withdraw the DROP application at any time PRIOR to ratification by the Board of Trustees of HPOPS. A request to withdraw must be made in writing and submitted to the HPOPS office prior to the close of business on the day prior to the regular monthly Board meeting where such application was on the agenda The System Staff will notify the member of the Board s ratification of the DROP application, including: A. The monthly amount to be credited to the member's DROP account; B. The effective date of the approved application Participating in DROP The System Staff will provide each DROP participant semiannual statements of DROP account balances The System Staff will answer phone inquiries from the DROP participant regarding their account balance and will encourage such members to access their DROP balance through the HPOPS Web site The DROP account consists of two (2) cash flows: A. the monthly DROP benefit, which equals the monthly service pension amount the member would be receiving if the member had retired on the DROP entrance effective date, less the medical insurance stipend, and, B. the calculated interest. 5

6 Each member's DROP benefit will be accounted for by HPOPS in a separate notional account. The member's assets will not be physically separated from other assets of the Pension System. The monthly benefit and interest earnings attributable to a member will be credited to each member s separate notional DROP account (bookkeeping account) monthly The DROP interest rate will be calculated at the System s compounded average rate of return for a 5-year period ending on June 30 th of each year and multiplied by sixty-five percent (65%). This calculated rate of return will be credited to the individual DROP accounts as of each month-end beginning January 1 of the following year. The interest on the individual's DROP monies is calculated as follows: A. As of June 30 th, determine the compounded average rate of return for the System for the last 5 fiscal years and multiply by sixty-five percent (65%). B. Divide the 5-year average by days to determine the daily interest rate. This daily interest rate is multiplied by the number of days in the given month. The product is then multiplied by account balances that were in the individual accounts for the entire month. C. The DROP interest rate shall not be less than two and a half percent (2.5%) with no ceiling. D. The monthly DROP benefit is credited to the notional DROP accounts on the last day of each month and does not receive interest credit until the first day of the following month. E. The maximum number of years a member may participate in DROP is 20 years. F. After the member has reached the maximum number of years of DROP participation, including members with 20 years or more in DROP on or before the July 1, 2017, the member may not receive the monthly service pension that was credited to a notional DROP account but may receive the DROP interest rate stated in this section Terminating Active Employment A member of HPOPS who is a participant of the DROP program and who terminates employment as a classified police officer with the City of 6

7 Houston Police Department must contact HPOPS Staff and schedule an exit appointment. This appointment must occur prior to the distribution of any retirement pension or DROP lump sum Prior to or during the exit appointment, the member must be prepared to complete the following forms if applicable: A. Retirement Application based on the retirement type; B. Retirement AMS Worksheet; C. Lump Sum Distribution Form; D. PROP Application; E. PROP Acknowledgement Form; F. Common Law Acknowledgement Form; G. Family Information Form; H. Directory Consent Form; I. Insurance Authorization Form; J. Special Tax Notice Receipt Form K. Release of Liability Form; L. Direct Deposit Form; M. Tax Withholding Form The completed forms will be reviewed and verified by HPOPS Staff, approved by the HPOPS Executive Director, submitted to and ratified by the Board of Trustees at the next available board meeting The System Staff will notify the member of the Board s ratification, including: A. The monthly retirement benefit amount; B. The effective date of retirement; C. A PROP award letter, if applicable. 7

8 1207 Distribution of DROP Monies DROP participants can only take a distribution from their DROP account once they have retired DROP distributions can be made to one or any combination of the following: A. Directly to the member (only one account); B. Direct rollover to an IRA or qualified plan (only one account); C. The member may leave the DROP account at HPOPS. In this case, the account will become a Post Retirement Option Plan (PROP) account and the interest credited for any month shall be equal to the DROP interest rate as described in this policy. For more information on PROP, refer to HPOPS policy, Section A distribution made directly to the individual member is subject to certain federal tax laws, including, but not limited to, Federal income tax and applicable withholding, and a 10% (ten percent) penalty if the individual is less than 59 ½ years of age unless an exception applies according to the Internal Revenue Code Allocation of either all or a portion of a member s DROP account, or the $5, lump sum, to PROP will result in a decrease in the amount of these lump sum distributions that may be recovered tax free upon termination If the member becomes involved in a divorce proceeding and a Domestic Relations Order submitted to HPOPS is determined to be a Qualified Domestic Relations Order (QDRO), the portion of the DROP account that is awarded to the alternate payee shall be credited with the same hypothetical earnings rate that the member is entitled to receive on his/her account. Distribution of the awarded portion of the DROP account will be made to the alternate payee in a lump sum at the time that the member is eligible to commence the distribution of monthly pension benefits Any distribution taken at retirement will not earn interest after the member s termination date Distribution of DROP after Member s Death The DROP election is irrevocable

9 HOUSTON POLICE OFFICERS PENSION SYSTEM If a member who has entered DROP subsequently dies, the survivor will receive the DROP balance and pension annuity If an active member is killed or dies from any cause growing out of or in consequence of the performance of the member s duty, the member s surviving spouse, dependent child or children, or dependent parent or parents are eligible to receive the DROP balance and pension annuity equal to 100 percent of the member s final average pay based on the last 78 biweekly pay periods ending before the member s date of death.a surviving spouse has the option to receive the DROP balance: in one or any combination of the lump sum distribution options listed in , or in the form of a life annuity If no one is eligible for the survivor's benefit then the member s designated beneficiary or the member's estate in absence of a designated beneficiary, is generally entitled to benefits determined by looking at otherwise applicable provisions of Article 6243g-4. A. The designated beneficiary or the estate will receive the DROP lump sum benefit B. Member s who were in compliance with the provisions of Article 6243g-4 concerning common-law marriage prior to September 1, 2003 are considered to continue to have a common-law marriage for HPOPS benefit purposes until such time as they obtain a divorce Reemployment If a retired member who is or was a DROP participant is rehired as a classified employee of the police department any pension or DROP distribution that was being paid shall be suspended. Any future benefit accrual will be based upon the benefits available to members hired at the time the member is rehired If the member's DROP account has been completely distributed, a new notional account may not be created. 9

10 1210 DROP Beneficiary Designation In accordance with Article 6243g-4 Sec. 16A, Vernon s Annotated Texas Statutes, only members may designate beneficiaries to receive their DROP account in the event of the member s death A member who is married at death is considered to have designated the member s spouse to receive the DROP account For purposes of DROP beneficiary designation, HPOPS will recognize the member s marriage to the spouse in accordance with HPOPS Proof of Marriage Policy, Section A member s DROP account may be distributed to designated beneficiaries other than the member s spouse if either of the following occurs: A. The member did not have a spouse at the time of his/her death. This will happen if the member s spouse predeceases the member, if the member and spouse are divorced after the member designated the spouse, or if the member was not married at the time of his/her death. B. The member s spouse consents in a notarized writing to the distribution to other beneficiaries The member must submit a DROP Designation of Beneficiary Form issued by HPOPS in order to designate his/her beneficiaries In general, the member may designate any person or persons s/he wishes to receive the DROP account provided the designation makes a distribution of 100% of the DROP account In making the beneficiary designation, the member can choose to designate both primary and contingent beneficiaries. A. Primary beneficiaries are entitled to the member s DROP account at the member s death. If more than one primary beneficiary is designated and one or more of these beneficiaries do not survive the member, the percentage of the deceased beneficiary s designated share shall be divided equally among the remaining primary beneficiary(ies). B. Contingent beneficiaries are entitled to the member s DROP account only if all primary beneficiaries are deceased at the time of the member s death. If any of the named contingent beneficiaries do not survive the primary beneficiary(ies), the percentage of the deceased contingent beneficiary s designated share shall be divided equally among the remaining contingent beneficiaries. 10

11 A DROP Designation of Beneficiary Form will be ineffective and not used if: A. The member does not designate a distribution that disposes of 100% of his/her DROP account in either of the primary or contingent beneficiary selections respectively. B. The member has a spouse at the time of his/her death and the spouse has not properly consented to the distribution to the designated beneficiaries. C. The member listed contingent beneficiaries but no primary beneficiaries. D. The member did not properly answer any of the required questions on the DROP Designation of Beneficiary Form If the member has not designated a beneficiary, either because a DROP Designation of Beneficiary Form was not completed or the form that was completed is defective, the member s DROP account will be distributed according to the following order: A. To the member s spouse; B. To the member s children in equal shares if the member has no spouse. C. To the member s parents in equal shares if the member has no spouse and no children. D. To the member s estate if the member has no spouse, children, and parents at the time of his/her death A member s executed DROP Designation of Beneficiary Form will be valid once HPOPS Staff has reviewed and approved the designation. HPOPS Staff will notify the member if his/her designation was approved or the reason it was declined Members must submit a new DROP Designation of Beneficiary Form in order to modify or revoke a previous beneficiary designation that HPOPS has approved Electronically submitted DROP beneficiary designations are subject to the above described policies and procedures. 11