The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)



STATE OF MICHIGAN

MIKE COX, ATTORNEY GENERAL

COUNTIES:

RETIREMENT AND PENSIONS:

Payment of pension benefits to reemployed retirants via a deferred retirement option plan (DROP)

Consistent with MCL 46.12a(28), a county may adopt a deferred retirement option plan (DROP) and may, with approval of the affected employee, pay the employee’s retirement or pension benefit into the DROP program if (1) the reemployed retirant works less than 1,000 hours per 12-month period or the position is an elected or appointed position meeting the requirements of MCL 46.12a(b)(i)(B)-(D); (2) the employee is not eligible for any employee benefits other than those required by law or those provided by virtue of being a retirant; and (3) the employee is not a member of the county’s retirement plan and does not receive additional retirement credits during the period of reemployment.

Opinion No. 7122

January 14, 2003

Honorable Alan Sanborn
State Senator
The Capitol
Lansing, Michigan 48913

You have asked whether, consistent with MCL 46.12a(28), a county may adopt a "deferred retirement option plan" (DROP) for retired county employees who become reemployed by the county.

Information supplied with your request indicates that Macomb County is considering adopting a DROP arrangement whereby any county employee eligible to draw a full retirement benefit could elect to participate in the DROP.1 While Macomb County has not finalized the terms of its DROP proposal, under the typical DROP arrangements described in the materials supplied to this office, a DROP participant could continue in county service for up to five years. The employee would earn his or her position's usual salary during the continued service, but would no longer contribute to, and would not earn service credit for, the county pension plan. The employee's retirement allowance would be calculated as of the DROP election date and, during the employee’s continued county service, a percentage (up to 100%) of the allowance would be paid monthly into a DROP account established for the employee. The DROP account would earn interest at a fixed rate.

The employee would not have access to the DROP account until he or she finally leaves county service. At that time, the DROP account money could be (1) paid out in a lump sum, (2) rolled over into an IRA or 401(k) account, (3) converted into monthly payments to supplement the employee’s "frozen" retirement allowance, or (4) drawn out depending on the employee's financial needs and applicable DROP distribution rules.2

A county has only those powers granted to it by the Constitution or the Legislature. Alan v Wayne County, 388 Mich 210, 245; 200 NW2d 628 (1972). A county may not adopt a pension plan that contravenes state law and, in particular, MCL 46.12a. Gray v Wayne County, 148 Mich App 247; 384 NW2d 141, lv den 426 Mich 872 (1986). Thus, for example, a county may not implement a "20 and out" program when MCL 46.12a specifies that employees must have 25 years of service or attain age 60 with at least 5 years of service to retire with full benefits. Gray, supra.3

The authority of a county to provide pension benefits for county employees is set forth in the county pension plan act, MCL 46.12a. Nothing in that act precludes a county, with the consent of the affected employees, from establishing a DROP system for payment of otherwise lawful pension or retirement benefits to retired county employees who become reemployed by the county. The act does, however, impose limitations on the authority of the county to make continued retirement or pension benefit payments to those employees irrespective of whether a DROP program has been adopted. MCL 46.12a(28)4 provides in pertinent part:

(28) One of the following conditions applies to a retirant who is receiving a pension or retirement benefit from a plan under this section if the retirant becomes employed by a county that has established a plan under this section:

(a) Payment of the pension or retirement benefit to the retirant shall be suspended if the retirant is employed by the county from which the retirant retired and the retirant does not meet the requirements of subdivision (b) or (d).

Subdivision (28)(d), MCL 46.12a(28)(d), deals with certain employees of the state judicial council and, thus, is not germane to your question. Subdivision (28)(b), MCL 46.12a(28)(b), is germane. It provides:

(b) Payment of the pension or retirement benefit to the retirant shall continue without change in amount or conditions by reason of employment by the county from which the retirant retired if all of the following requirements are met:

(i) The retirant meets 1 of the following requirements:

(A) For any retirant, is employed by the county for not more than 1,000 hours in any 12-month period.

(B) For a retirant who was not an elected or appointed county official at retirement, is elected or appointed as a county official for a term of office that begins after the retirant's retirement allowance effective date.

(C) For a retirant who was an elected or appointed county official at retirement, is elected or appointed as a county official to a different office from which the retirant retired for a term of office that begins after the retirant's retirement allowance effective date.

(D) For a retirant who was an elected or appointed county official at retirement, is elected or appointed as a county official to the same office from which the retirant retired for a term of office that begins 2 years or more after the retirant's retirement allowance effective date.

(ii) The retirant is not eligible for any benefits from the county other than those required by law or otherwise provided to the retirant by virtue of his or her being a retirant.

(iii) The retirant is not a member of the plan during the period of reemployment, does not receive additional retirement credits during the period of reemployment, and does not receive any increase in pension or retirement benefits because of the employment under this subdivision.

By its plain terms, MCL 46.12a(28) mandates that, if a retired county employee is reemployed by the county, the employee’s pension or retirement benefit may continue to be paid only if each of three specific conditions is met. First, pursuant to subsection (b)(i), unless the position is one of the qualifying elected or appointed positions, the reemployed retirant must work less than 1,000 hours per 12-month period. Second, pursuant to subsection (b)(ii), the employee must not be eligible for any employee benefits other than those required by law5 or those provided by virtue of his or her being a retirant.6 Finally, under subsection (b)(iii), the employee may not be a member of the county’s retirement plan and may not receive additional retirement credits during the period of reemployment. Unless each of these conditions is met, payment of the employee’s pension or retirement benefit "shall be suspended."

It is my opinion, therefore, that consistent with MCL 46.12a(28), a county may adopt a deferred retirement option plan (DROP) and may, with approval of the affected employee, pay the employee’s retirement or pension benefit into the DROP program if (1) the reemployed retirant works less than 1,000 hours per 12-month period or the position is an elected or appointed position meeting the requirements of MCL 46.12a(b)(i)(B)-(D); (2) the employee is not eligible for any employee benefits other than those required by law or those provided by virtue of being a retirant; and (3) the employee is not a member of the county’s retirement plan and does not receive additional retirement credits during the period of reemployment.

 

MIKE COX
Attorney General

1The employee would have to be, for example, at least age 55 with 25 years of service.  MCL 46.12a(1)(b).

2While not precedential, the Internal Revenue Service has ruled favorably on the federal tax treatment of certain lump sum distributions from a DROP account.  Private Letter Ruling 200219042.

3Because your letter makes no reference to any collective bargaining agreement, this opinion does not address what impact, if any, a collective bargaining agreement might have on the question. 1988 PA 499 amended MCL 46.12a to authorize counties to enter into collective bargaining agreements that provide "retirement benefits that are in excess of the retirement benefits otherwise authorized to be provided under this section." See MCL 46.12a(27). Thus, a county could agree to calculate an employee's final average compensation based upon his or her three highest consecutive years of compensation, rather than the five years mandated by MCL 46.12a(2)(a), if part of a collective bargaining agreement reached under the Public Employment Relations Act, MCL 423.201 et seq. Macomb County Professional Deputies Assn v Macomb County, 182 Mich App 724; 452 NW2d 902 (1990).

4Your request letter refers to MCL 46.12a(29). Subsequent to your request, the Legislature enacted 2002 PA 730 which amended MCL 46.12a to remove the requirement for a county pension plan committee. This caused a renumbering of MCL 46.12a’s subsections, so the operative subsection here is now MCL 46.12a(28) rather than (29).

5Among employee benefits "required by law" are worker's compensation coverage pursuant to MCL 418.101 et seq and, for applicable employees, overtime compensation under MCL 408.384a.

6A county pension plan may provide group life, health, accident and hospitalization coverage to retirants. MCL 46.12a(1)(a). Retirant insurance benefits often differ from active employee insurance benefits. For example, health, accident, and hospitalization benefits for retirants are commonly coordinated with Medicare coverage. Group life coverage, if provided for retirants, is often less extensive than that provided active employees.