Charter schools were introduced as a concept in the 1970s. They expanded with the success of a charter school program in Philadelphia in the 1980s, and now are in nearly 90% of the states. And they affect more than students and teachers — they also have implications for the retirement savings of the teachers who staff them.
In an April 24 NTSA webcast that was complimentary for members, Susan Diehl, President of PenServ Plan Services, Inc., provided a look at where charter schools are today and their relation to educators’ retirement saving.
The State of Things
The original concept of charter schools was introduced in the ’70s by a New England educator, Diehl said; the idea was that they would provide groups of teachers an opportunity to set up contracts, or “charters,” with their local school board to discover new approaches in the education field. She said that they were “relatively small” until the ’80s, when Philadelphia tested the concept; it worked, and then charter schools expanded. In the ’90s, Diehl said, charter schools became the fastest-growing education reform in the country. They were so successful that by 2006 that the Bush administration initiated federal funding proposals to support them, and the Obama administration continued to support them. Today, Diehl noted:
- 43 states have charter schools;
- there are 7,000 charter schools nationwide;
- 3.2 million students attend them;
- their funding amounts to $440 million; and
- there are 219,000 charter school teachers.
Ninety percent of charter schools are public schools, Diehl said, although some states allow for-profit organizations to run them as well. “Cyber charter schools” exist as well. Whether a charter school is a public school depends on the laws in the state where it is located.
Charter Schools and Retirement Plans
Diehl presented Pennsylvania’s treatment of charter schools as an example of how a charter school program makes retirement plan coverage available to the teachers who work in them.
Charter schools are treated as a governmental employer (public schools). Employers are required to either cover teachers under the state retirement system or cover them with a “comparable” plan that is approved at the state level, typically this a 403(b). In this case, the 403(b) plan will receive mandatory employee contributions and employer matching or nonelective contributions
When the plan is adopted (with a future effective date), the plan along with other information must be submitted to the Pennsylvania Public School Employees’ Retirement System (PSERS). Some employers will permit a choice between PSERs and the 403(b); others will mandate that new hires participate in the 403(b). Employee and employer contributions can be structured any way but typical approval is for a 5% mandatory employee contribution and a 5% employer nonelective contribution. The plan also can permit elective deferrals for all employees.
Almost all PSERS-approved plans are non-ERISA public school 403(b) plans. Organizations in Pennsylvania that assist in the management of charter schools do not establish the plan. It is critical, Diehl said that the school keep track of who is eligible for the state plan and the 403(b), and the default is the state plan.
In Michigan, Diehl said, charter schools are public schools. Charter management companies (CMOs) — which are non-profit — and Education Management Organizations (EMOs) — which are for profit — work with charter schools and there is a grandfathered 401(k) plan that is set up as a multiple employer plan (MEP). The plans are established as non-ERISA 401(k) plans.
Arizona is quite different, Diehl noted. There are approximately six types of charter schools, and one is not a public school. The law there is “extremely strict” about qualification as a public charter school, and those must be governed by a local school board.
Are charter school plans governmental plans? Diehl noted the following factors in addressing that question.
The IRS and Department of Labor say that a state plan that accepts contributions from charter schools will not change the status of the state plan as a governmental plan. Before 2015 there was a six-part test which no longer applies. Some privately run charter schools will be subject to ERISA.
IRS Notice 2015-07 addresses the anticipation of proposed regs that will define the term “governmental plan.” These regulations also will address any possible transitional relief should a charter school not satisfy the final regs. when issued. Verbally the IRS has indicated that there is no definition of a governmental plan today, Diehl said, adding, “But we will get one.” She added that if a charter school does not meet the definition there will be a transition period to restate to an ERISA plan.
Diehl also noted that the current preamble to the 403(b) regulations mentions that they do not deal with charter schools.
Until the proposed regulations are issued by IRS, Diehl suggests waiting and looking at individual states’ charter school laws. “When the proposed regs are issued, more comment letters will be drafted,” she said. She added. “If the final regs do not follow the state charter school laws — which we do not anticipate — there will a correction period prospectively and grandfathering for the past.”
More information about upcoming NTSA webcasts is available here.