A typical DROP allows the employee to extend employment for up to 5 years. Some plans also include a minimum period, such as 2 years, in order to make the length of the postponed retirement meaningful. Once the minimum period is reached, most plans allow the employee to leave employment at any time during the remainder of the period. However, some plans may require that the employee stay until the date initially chosen by the employee. In other words, a typical plan might require at least 2 but no more than 5 years of employment, but a DROP plan could require a fixed number of years without flexibility.
Most plans pay the monthly annuity into an account that is credited with a fixed rate of interest.
While the advantages of this seem obvious, it presents the risk of suffering investment losses. The pension plan calculates the amount that would have accrued during the period based on the accrued benefit as of the retroactive date and pays it as a lump sum at retirement. However, the amount of the benefit is based on service credit and final average salary as of the retroactive date. The Internal Revenue Service has granted tax qualification to public sector pension plans which have adopted DROP provisions. Private employer plans are subject to much more complicated tax laws, and, therefore, it is unlikely that DROP plans will be offered to members working for private or nonprofit employers.