One of the most common questions we receive from clients who are teachers or state employees revolves around the PLOP.
The PLOP, or Partial Lump Sum Option, provides qualified Virginia Retirement System employees with the flexibility to take a portion of their benefit as a lump-sum cash payment at the time they retire. This option allows retirees to receive a cash payment while they retain nearly the same monthly benefit they would receive qualifying for an unreduced benefit.
PLOP benefits the employer by encouraging experienced employees to stay on the job longer. With PLOP they can also keep employer paid fringe benefits longer by working beyond unreduced benefit eligibility. With PLOP can earn additional years of salary and service, usually at a time when their salary is at its highest level. PLOP allows eligible employees to receive a cash payment and select a survivor option, if desired.
Let’s look at an example:
If you are a VRS member who is eligible for unreduced retirement and you remain in VRS-covered service for one year, you may receive a lump-sum distribution equal to one year of your basic annual retirement benefit.
If you remain in service for two years after you first become eligible for an unreduced service retirement benefit, you may receive a lump-sum distribution equal to two years of your basic annual benefit. And, if you remain in service for at least three years after you become eligible for full retirement, you may receive a lump-sum distribution equal to three years of your basic annual retirement benefit.
However, if you choose to receive the lump-sum distribution, your monthly retirement benefit will be reduced on an actuarially equivalent basis to reflect the payment of the lump-sum distribution. The lump-sum distribution is paid to you at the same time as your first monthly retirement payment. You receive the same amount of money over your life expectancy. PLOP changes the way VRS pays your benefit payment to you, not the value of your benefit.
You can choose the Partial Lump-Sum Option when you apply for retirement. VRS calculates your monthly retirement benefit, based on your years of service, your age and the average of your 36 consecutive months of highest salary, and then adjusts the monthly benefit to reflect your decision to receive a portion of the benefit in a lump sum. The amount of the lump-sum payment is based on the time you work in your VRS-covered position beyond the date you are eligible for an unreduced retirement benefit as shown below:
• the lump-sum payment would be equal to one year of your annual benefit if you work at least one year beyond the date you are first eligible for an unreduced retirement benefit;
• the lump-sum payment would be your choice of one or two years of your annual benefit if you work at least two years beyond eligibility for unreduced retirement; and
• the lump-sum payment would be your choice of one, two or three years of your annual benefit if you work at least three years past your eligibility for unreduced retirement.
With all that being said, what’s the best choice? Unfortunately there is no answer that applies to everyone. Taxes are an issue. The partial lump-sum payment is subject to taxes (20 percent federal and 4 percent state) at the time you receive the payment. If you are younger than 55, you must also pay a 10 percent penalty on the amount of the lump-sum payout for early distribution from a pension plan. If part of the lump-sum amount is member contributions on which you have already paid taxes, that portion is not taxed again. You may delay paying taxes on your lump-sum payment by rolling the taxable amount into an IRA.
Ideally you should take the PLOP in conjunction with a thorough tax and financial planning analysis. If you need the money to pay off bills, the PLOP may be an answer. If you want to rollover the PLOP into an IRA for your heirs, that may also work. The devil is always in the details. Make sure you see a Financial Planner (not stock broker) and CPA for an unbiased opinion on what works best for your situation.
If you’d like us to provide a complementary analysis, just let us know. As financial planners and tax experts we’re here to help.