Charter Schools to Be Included in Governmental Plan Regs

The Internal Revenue Service (IRS) has announced that guidance under consideration about governmental retirement plans would provide that employees of a public charter school may participate in a State or local retirement system if certain conditions are satisfied.

In Notice 2015-07, the agency said it anticipates issuing proposed regulations under Section 414(d) of the Internal Revenue Code (Code) to define the term “governmental plan.” The notice describes specific rules that the IRS and Treasury Department are considering proposing that relate to whether a State or local retirement system that covers employees of a charter school is a governmental plan within the meaning of Section 414(d).

On November 8, 2011, the IRS and Treasury Department published an Advance Notice of Proposed Rulemaking (ANPRM) relating to the definition of a governmental plan. Members of the public charter school community submitted more than 2,000 comments expressing concern that if the guidance described in the ANPRM were published in its current form as a final regulation, it would deter State or local retirement systems from permitting charter school employee participation in their retirement systems in order to retain their governmental plan status. Commenters indicated that this, in turn, would jeopardize the retirement security of charter school employees and adversely affect charter schools’ ability to attract and retain teachers.

The IRS says it is considering proposing regulations specifying that a State or local retirement system that covers employees of a public charter school will not fail to be a governmental plan if the following conditions are satisfied:

• The entity is a nonsectarian independent public school that serves a governmental purpose by providing tuition-free elementary or secondary education, or both;
• The entity is established and operated in accordance with a specific State statute authorizing the granting of charters to create independent public schools or authorizing the establishment of independent public schools;
• Participation in the State or local retirement system by the entity’s employees is expressly required or permitted under applicable law;
• The charter school satisfies either of these requirements:
  • (1) The entity’s governing board or body is controlled by a State, political subdivision of a State, or agency or instrumentality of a State or of a political subdivision of a State; or
  • (2) The primary source of the entity’s funding is from a State, political subdivision of a State, or agency or instrumentality of a State or political subdivision of a State; the rights of the entity’s employees to their accrued benefits under the State or local retirement system are not dependent on whether the entity continues to participate in the system and, in the event the entity ceases participation, a governmental entity has responsibility for the accrued benefits of the entity’s employees, including the continued funding of the accrued benefits; and the entity is part of a local educational agency subject to the significant regulatory control and oversight by a State, political subdivision of a State, or agency or instrumentality of a State or political subdivision of a State;
   
• All financial interests of ownership in the entity are held by a State, political subdivision of a State, or agency or instrumentality of a State or of a political subdivision of a State.

The notice also discusses the potential for broader transition relief for governmental plans once final regulations are issued.