Charter Schools: Origin, Growth and Employer-Sponsored Plans

Charter schools are the fastest-growing school choice option in the U.S public education system. Following is a discussion of their origin, growth and how retirement plans are handled for their employees. How charter schools are organized and structured determines the type of employer-sponsored plan that can be offered their employees.

Charter School Growth and Momentum

Over the past five years, student enrollment in public charter schools has grown by 70%, according to the National Alliance for Public Charters report (December, 2014)*. In 42 states and the District of Columbia, approximately 2.7 million students attend more than 6,700 public charter schools. This accounts for more than 5% of the total number enrolled in public schools.

After hurricane Katrina, the New Orleans public school system was rebuilt into almost an entirely public charter school system, with more than 90% of public school students now attending charter schools. Two Michigan districts, Detroit and Flint, also have seen enormous growth in an alternative to their traditional public schools, with 55% and 44% of public school students attending charters. In 2013-2014, Los Angeles Unified had the highest number of students enrolled in public charter schools at more than 139,000, a 15% increase over the previous year.

Due to a successful track record of meeting students’ specific needs, parental demand for public charter schools is at an all-time high, and charter school enrollment continues to grow in communities across the nation. Charter schools have led innovation and education reform efforts to narrow achievement gaps and are showing that success is possible in neighborhoods where traditional schools have been failing for decades. In less than 20 years, charter schools have rebuilt trust in the public education system by providing options for all kids.

Charter Schools Background

The California Charter School Act of 1992 is the legislation that gave origin to charter schools. The subsequent AB 544 legislation established further guidelines and requirements for charter schools. This legislation is also intended to shift toward a performance-based system and provide competition within the public school system. Similar legislation was enacted in other states at different times.

The intent of such legislation was to:

• improve pupil learning;

• increase learning opportunities for all students, with special emphasis on academically lower achieving students;

• encourage the use of different and innovative teaching methods;

• create new professional opportunities for teachers;

• provide parents and students with expanded choices in the types of educational opportunities that are available within the public school system;

• hold the schools accountable for meeting measurable pupil outcomes;

• provide the schools with a method for a performance based accountability system; and

• provide vigorous competition within a public school system to stimulate continual improvements in all public schools.

Los Angeles Unified Case Study: Types of Charter Schools

The Los Angeles Unified School District (LAUSD), the nation’s second-largest U.S. school district, views charter schools as integral to the district’s offerings and an opportunity to teach both students and educators.

Currently, there are 274 charter schools (53 Affiliated, 221 Independent) under the jurisdiction of the LAUSD, serving more than 139,000 students in kindergarten through 12th grade. If approved, a charter is granted by the LAUSD Board of Education for a period of up to five years. Charter schools are open to any child residing in the State of California who wishes to attend. If the number of students who wish to attend a charter school exceeds the school's capacity, the school determines admission based on a public random drawing (lottery).

Charter schools may not be a conversion of a private school, must be non-sectarian, may not discriminate, may not charge tuition, must achieve a racial and ethnic balance reflective of the district population, and may not compel students to attend or teachers to be employed at the charter.

There are two types of charter schools in the LAUSD: Conversion and Start-up. A conversion charter is an existing district school that later becomes a charter. A start-up is a charter school that is created "from scratch" by educators, parents, foundations and any member of the public. These charters can be fully independent or district-affiliated, which have closer ties to the district. Both must have their board-approved charter proposal, and both are held to a high level of accountability.

Organization, Structure and Retirement Plans

As the number of charter schools increases across the county, a question is often posed about whether charter schools are eligible for 403(b) plans as part of the public education system or as 501(c) (3) organizations.

The answer this question depends on how a charter school is structured. If a charter school is a part of the state public education system, under current law the 403(b) plan is not subject to Title 1 of ERISA, nor is it subject to non-discrimination rules for employer contributions. And, if the charter school is a public charter school, it would not be eligible to sponsor a 401(k) plan UNLESS the state or a state agency set up the 401(k) plan before May 1986 (in which case the charter could offer a grandfathered plan).

However, if a charter school is organized only as a 501(c) (3) nonprofit organization, is not a governmental organization and makes employer contributions to its 403(b) plan, then ERISA will apply. If your 403(b) plan consists only of voluntary employee salary reductions, there is a safe harbor regulation (DOL Reg 2510.3-2(f)) the Department of Labor (DOL) issued, expanded in two field assistance bulletins (FAB 2007-2 and the more recent FAB 2010-01), which outline the requirements to maintain an ERISA exemption.

The requirements include the need to keep a very limited involvement in “discretionary” decisions, such as directly approving transactions like loans and hardship withdrawals. In addition, ERISA will apply if a charter school is organized only as a 501(c) (3) nonprofit organization and is not a governmental organization, and is making employer contributions to the 403(b) plan.

It is also important to note that some charter schools may be organized as “for–profit” schools, in which case they would not be eligible for a 403(b) plan at all, but would be eligible to sponsor a 401(k) plan or a SIMPLE IRA.

*Source: A Growing Movement: America’s Largest Charter School Communities, National Alliance for Public Charter Schools, December 2014

Richard H. Ford is the Senior Vice President and Chief Marketing Officer of PlanMember Services.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.