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Charter Schools: A Growing Market

This article originally ran on October 31, 2014.

By Ellie Lowder

According to the National Alliance for Public Charter Schools (NAPCS), there were 6,400 charter schools scattered in the 42 states that have enacted a law permitting them, with some 2.5 million charter school students, an increase of 12.6% from the year before. Many of our NTSA members do include charter schools in their target market, and call with questions specific to those schools. The eight states that lack state statutes authorizing charter schools are Kentucky, Montana, Nebraska, North Dakota, South Dakota, Vermont, Washington and West Virginia (although members should check to be sure that new legislation does not newly authorize charter schools in those states). Even though the report from NAPCS is current, it is always important to familiarize yourself with current state statutes regarding charter schools, to be sure you have at hand the most current state legislation. 

In working with charter schools, it is important to be on the look out for unusual situations. In most cases, members will find that, under current guidance, charter schools are authorized as public schools (many of which are chartered through the state's department of education, or a public university, or a local school district); however, this author has encountered a few situations of which members should be aware:

  • A charter school is a public school, however, its employees are leased through a leasing company formed to provide staff for the charter schools. Only the head of school is a common law employee. Since 403(b) guidance does not speak to the inclusion of leased employees in the 403(b) plan, only the head of school is eligible to participate.
  • Many charter schools are given the option to opt out of the state retirement system plan for public employees, and often do that to avoid the payment of high employer contributions to the state system. Generally, charter schools that have opted out of the state system are looking for a retirement plan for their employees, and most often, 403(b) is chosen as that retirement plan. Members will discover that the employers want to make matching contributions in the 403(b) plan. As public schools, there are no nondiscrimination rules applicable for employer contributions, and, of course, public education employers are exempt from Title I of ERISA.
  • Charter schools generally are authorized for a limited period (e.g., five years); and, there is always a possibility that a specific charter school would not be re-authorized. That would mean that the 403(b) plan would need to be frozen. If the charter school no longer exists, this could be treated as a severance of employment where distributions eligible for rollover treatment could be made. The NAPCS report tells us, for example, that California established 104 new charter schools last year, but closed 39 schools, while Arizona added 87 and closed 16. Generally, a charter school is closed due to low enrollment, low academic performance, or financial concerns.
  • Some charter schools, in addition to being public schools, have received the 501(c)(3) designation. Under current law, the public charter school is treated as a governmental plan — not subject to ERISA, and not subject to nondiscrimination rules for employer contributions. Caution should be exercised, however, in light of the notice of proposed rulemaking posted by the IRS, to redefine the definition of governmental plans. Proposed regulations on that topic do appear in the IRS business plan for the fiscal year ending in June of 2015. While ASPPA/NTSA have filed a comment letter (along with many others) to ask that the regulations not change the status of charter schools, we will be on the lookout for those regulations, and keep our members informed of any potential impacts on charter schools.
There is much opportunity in establishing 403(b) plans for charter schools, in particular because members will often find that employer contributions are also being made to the plan.