ANSWER: Before I respond, I must first ask if you would believe the information if it came from the late-tour custodian at Fire Department headquarters? Anyone can post a statement on the net under an assumed name. Having read some of those postings, I’ve found some accurate pension information, but others that range from being partially wrong to totally unbelievable. All members with pension questions should write to the Police Pension Fund for a written response or do what you’ve done — contact the PBA and ask for me, Joe Maccone.

In response to your question, the Variable Supplement Fund deferred retirement option program (VSF DROP), which was introduced by the police-fire coalition headed by the PBA and became law in 2002, is treated as an eligible rollover distribution (ERD) as covered in the Internal Revenue Code section 402 (c) (4). That sounds complicated but what it means is that it provides a huge tax benefit for most of our members.

Before passage of the VSF DROP, when members retired after their 20th anniversary they would lose all VSF payments they would have received from their 20th year on and collect only for the years in which they are actually retired. Now, in the month of December following their retirement, they will receive a VSF DROP lump payment for all the years between their 20th anniversary and their retirement date.

More specifically, for these members, their first VSF payment will consist of the monetary benefit deferred from their 20th anniversary or January 1, 2002, whichever is later, through the effective date of retirement, plus the monetary benefit accrued from their retirement date through December 31 of the year of retirement. Only that portion of the first VSF payment that represents monies deferred as an active member is eligible for rollover to a qualified retirement plan.

The procedure for this rollover will allow members who wish to take advantage of this opportunity to elect a trustee-to-trustee transfer of the DROP amount to a qualified retirement system, IRA or tax-deferred annuity program, as designated by the member. When the member is at the Pension Fund filing to retire, the retirement counselor will provide a letter delineating the total VSF benefit along with a breakdown of the amount into monies deferred as an active member (eligible for rollover) and monies accrued as a retired member (not eligible for a rollover). If the member decides not to roll over the DROP amount directly, the Pension Fund will withhold 20% for federal taxes. Also, if the member is under 55, this amount will be subject to a 10% penalty from the IRS.

Who does the 10% penalty affect?

Most of our members retire for service at their 20th anniversary and therefore will not receive a VSF DROP payment, so they are not affected.

Those who stay past 20 years and retire at age 55 or older are also not affected by the 10% penalty. Members who retire with more than 20 years and are under age 55 and roll over the VSF DROP monies to a qualified account are also not affected by the 10% penalty. (You should realize that rolling the money over provides the benefit of not having to combine this benefit with your current year’s income and more than likely having to pay at a higher tax rate.) The only members who will have to pay the 10% penalty are those who stay past 20 years, retire before the age of 55 and decide not to roll over the DROP amount into a qualified plan.

Final Thoughts

Only service retirees are eligible for the VSF DROP. If you stay past 20 years and retire on a disability or are terminated, you will not receive this benefit. The 10% penalty is an IRS matter. The city of New York does not benefit in any way.

PBA Pension Consultant Joseph Maccone will answer your retirement and pension questions in print. Write or email at the PBA, 40 Fulton St., NY, NY 10038, or jmaccone@nycpba.org.