This article originally ran on July 7, 2014.
By Diane D. Capone
The opportunity with charter schools continues to grow as they are now about 6 percent of the public schools in the country. Charter schools tend to treat their benefits packages in the same way as a typical for-profit employer. Unlike your traditional K-12, you will find that charter schools usually operate with one provider and not the multi-provider model that is found today in the K-12 marketplace. Their benefits/human resources person works with a benefits company for their payroll, HR consulting, health insurance, group life insurance and other benefits.
It is important to know who is working with charter schools in your area and to develop a relationship that will enable you to provide your 403(b) retirement plan. Having a working relationship with third party administrators (TPAs) is essential so that the charter school has the needed help in properly setting up and operating its retirement plan.
If you are an advisor working in K-12 public schools this is an opportunity to broaden your services to charter schools in your area that are also eligible for supplemental 403(b) as well as governmental 457(b) plans. Once it has been confirmed that the charter school operates under the state charter school law, it can begin to allow its employees to contribute from their salary just as do other teachers and school employees in the public schools.
As stated above, it is important when you begin to work with the charter school that you provide it with information on setting up its plans and recommend it hire a TPA to administer and keep its 403(b) plan in compliance. Even though these plans are not covered by the Employee Retirement Income Security Act of 1974 (ERISA), they still must follow all of the IRS requirements such as those concerning written plan documents, timely deposit of elective deferrals, universal availability notice to employees, and loan and hardship review and approval.
Some of the challenges that have been identified by advisors in working with charter schools are:
- One vendor model is typical and the employer decides.
- You are working with two clients — the employer and the employee.
- It may take a couple of years to get the charter school to implement a 403(b) plan.
- Employees are often younger, so they come and go more often.
- The charters of some charter schools are revoked, which results in a school being closed.
The charter school model began in 1991 in Minnesota and has taken off and grown to be a considerable presence. Forty-two states and the District of Columbia have enacted charter school laws. (The eight states that do not have charter school laws are Alabama, Kentucky, Montana, Nebraska, North Dakota, South Dakota, Vermont, and West Virginia.) Under all charter school laws, charter schools are considered public schools.
One of the questions asked is whether or not the teachers and other employees of the charter school are part of the state teachers’ retirement system. The answer depends on how the charter school legislation was written in each state. However, for the most part they are covered; in some cases it is mandatory, and in some it is voluntary if the charter school has another comparable retirement plan that it offers.
For example, in Michigan, charter school employees are required to be members of the Michigan Public School Employees Retirement System if they are direct employees of the charter school board. However if the charter school board contracts with a management company to provide some or all of its teachers and staff, those contracted employees may not be members of the Michigan Public School Employees Retirement System and, as leased employees, they are also not eligible to participate in the 403(b) plan. While this is not often seen, it is important to be aware of it. Another example is Pennsylvania, whose charter school law requires that all employees of a charter school must be enrolled in the Public School Employees Retirement System unless the charter school has an alternate retirement plan that covers the employees.
When charter schools are part of the public education system, the 403(b) plan is exempt from ERISA as is true for all governmental plans. This means, for example, that the plan is exempt from most nondiscrimination rules and reporting and disclosure requirements. They are required, however, to comply with the universal availability requirement of 403(b) applicable to employee elective deferrals. It is important that the charter school verify that it is, in fact, part of the public educational system.
There continues to be some concern with these schools and whether or not they qualify for governmental plan status. The IRS issued an advanced notice of proposed rulemaking concerning the determination of government plan status under Code Section 414(d) in 2012; however, it has not issued the actual proposed regulation at this time. Some commenters on this advance notice have suggested including “safe harbors,” one of which would create a special exemption for state charter schools.
Charter schools that opt-out of the state retirement system most often provide their employees with either a 403(b) or 401(k) retirement plan with an employer match, similar to the private industry retirement plans.
There is a growing trend for charter schools that are permitted by the charter school law to do so to opt out of the state retirement systems to set up their own retirement plans. This is an opportunity for you as a financial professional to offer your expertise and help them set up a comparable retirement plan with 403(b) and/or 457 investment options that will enable the employees to invest toward a secure retirement in the future.
Diane D. Capone, TGPC, is a Senior Retirement Compliance Consultant with Lincoln Investment; she also is a member of the NTSA Communications Committee.