State, Local Retirement Plans May Be Open to Charter School Employees

State and local retirement plans will be able to cover qualifying public charter school employees without adverse consequences if regulations the IRS proposed on Jan. 23 are adopted.

IRS Notice 2015-7 would change the definition of governmental plan under Internal Revenue Code Section 414(d) so that employees of a public charter school may participate in a state or local retirement system as long as certain conditions are satisfied. This would have an appreciable effect: 42 states and Washington, D.C. allow charter schools. In general, they either require or permit public charter school employees to participate in their retirement systems.

On Nov. 8, 2011, the IRS and Treasury Department published an Advance Notice of Proposed Rulemaking (ANPRM) (REG-157714-06), relating to the definition of a governmental plan under Section 414(d). In the more than 2,000 public comments submitted about the ANPRM, members of the public charter school community expressed concern that if the guidance was permanent, state or local retirement systems could jeopardize their status as governmental plans if they allowed charter school employees to participate. This, they argued, would jeopardize the retirement security of charter school employees and adversely affect charter schools’ ability to attract and retain teachers.

The regulations proposed Jan. 23 say that a state or local retirement system that covers public charter school employees will remain a governmental plan under Section 414(d) if the following conditions are satisfied:

1. The charter school is a nonsectarian independent public school that provides tuition-free elementary or secondary education, or both.

2. The charter school is established and operated under a specific state law authorizing the granting of charters to create independent public schools or authorizing the establishment of independent public schools.

3. Participation in the state or local retirement system by the charter school’s employees is expressly required or permitted.

4. The charter school:

• has a governing board or body controlled by a state, political subdivision or agency;
• receives its primary funding from a state or a political subdivision or agency;
• does not accord its employees their right to their accrued benefits under the state or local    retirement system based on whether it continues to participate in the system, and the governmental entity has responsibility for the accrued benefits of the charter school’s employees; and
• the charter school is part of a local educational agency subject to significant regulatory control and oversight by a state or its political subdivision or agency.

 

5. All financial interests of ownership in the charter school are held by a state or its political subdivision or agency.

Notice 2015-7 says that the IRS and Treasury Department expect the final regulations under Section 414(d) to apply prospectively and will include a delayed effective date.

The IRS will accept public comment on the proposed regulation through May 11, 2015. Written submissions should be sent to CC:PA:LPD:PR, (Notice 2015-07), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. Comments may also be hand delivered Monday through Friday between 8:00 a.m. and 4:00 p.m. to: Internal Revenue Service, CC:PA:LPD:PR, (Notice 2015-07), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington DC. Comments also may be submitted electronically at [email protected] (Notice 2015-07).