Change in Governmental Plan Definition to Affect Charter Schools

February 7, 2012 ( - The National Alliance for Public Charter Schools estimates more than 90,000 charter school employees will be impacted by the Internal Revenue Service’s proposal to change the definition of governmental plan.

The IRS’ Advance Notice of Proposed Rulemaking released in November 2011 (see What the Change to Definition of Governmental Plan Can Mean) and titled “Determination of Government Plan Status,” would force states to prohibit public charter school teachers from participating in state retirement plans. The Alliance said the proposed regulations will negatively affect more than 90% of our country’s charter school workforce – all of whom will be forced to either leave their public charter schools or lose their accrued pension wealth.  

“Moreover, as currently written, the Proposed Regulations would not only jeopardize the retirement security of public charter school teachers already participating in such plans, but the Proposed Regulations also could effectively prevent many public charter schools from recruiting or retaining veteran public school teachers, significantly interfering with public charter schools’ ability to achieve their educational goals,” the statement said. The Alliance added that excluding public charter school teachers from state retirement systems could cause significant funding problems for some state retirement plans.  

According to the Alliance, the proposed regulations should be amended to clearly provide that public charter school employees may continue to participate in state retirement plans without jeopardizing a plan’s “governmental” status. This could be accomplished with a specific rule providing that public charter schools, authorized by state charter statutes and funded with public dollars, shall be considered agencies or instrumentalities of the state for purposes of the Internal Revenue Service’s “governmental plan” definition.   

Alternatively, the Alliance said, the IRS could add an example in the regulations, based on a typical charter school factual scenario, to clarify that the application of the factor-based test in the regulations will result in public charter schools being considered agencies or instrumentalities of the state. Either approach would provide necessary clarity to both states and public charter schools, and would allow public charter school teachers to maintain their participation in state-sponsored retirement plans, as provided by state statute.  

The Alliance’s statement is here.