BREAKING NEWS REGARDING THE PARTICIPATION OF CHARTER SCHOOLS IN GOVERNMENTAL PLANS BREAKING NEWS REGARDING THE PARTICIPATION OF CHARTER SCHOOLS IN GOVERNMENTAL PLANS

BREAKING NEWS REGARDING THE PARTICIPATION OF CHARTER SCHOOLS IN GOVERNMENTAL PLANS

This afternoon, the IRS and Treasury Department announced that they are considering issuing proposed regulations under § 414(d) of the Internal Revenue Code ("Code") regarding whether a state or a local retirement system which covers employees of a public charter school is a governmental plan within the meaning of Code § 414(d). 

With Notice 2015-07, the IRS acknowledged that there currently are no regulations which interpret Code § 414(d).  On November 8, 2011, the IRS and Treasury Department published an Advanced Notice of Proposed Rulemaking ("ANPRM") relating to the definition of a governmental plan under Code § 414(d).Since the issuance of the ANPRM, the IRS and Treasury Department have received numerous comments, including over 2,000 comments specific to whether a public charter school is a governmental entity or whether employees of charter schools are permitted to participate in a governmental plan.  The IRS and Treasury Department recognized that forty-two (42) states and the District of Columbia currently have laws which authorize the chartering of independent public schools of choice (i.e. charter schools). 

Accordingly, with Notice 2015-07, the IRS and Treasury Department announced that they are considering the issuance of guidance which "would take into account the special and unique nature of public charter schools, the governance structure associated with these schools, the structure of many public school systems that permit or encourage public school teachers to move between public charter and traditional public schools, and the relationship between public charter schools and the agencies authorized by the state or political subdivision of the state that hold these schools accountable for academic reasons." 


Specifically, the guidance under consideration would specify that a state or a local retirement system will not fail to be a governmental plan within the meaning of Code § 414(d) merely because the system permits employees of an entity that satisfies the following requirements to participate in the system:

A. The entity is a nonsectarian independent public school that serves a governmental purpose by providing tuition-free elementary or secondary education, or both. 

B. 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.

C. Participation in the state or local retirement system by the entity's employees is expressly required or permitted under applicable law.

D. The entity satisfies either of the following:  

  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.  For this purpose, either (i) a state, political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state must have the power to nominate, appoint, remove, and replace a majority of the members of the entity's governing board or body, or (ii) a majority of the members of the entity's governing board or body must be publically nominated and elected.
  2. In lieu of satisfying the requirements in paragraph D.1, the entity satisfies the requirements in paragraphs D.2.(i) through D.2.(iii) below.  

(i) 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.

(ii) The rights of the entity's employees to their accrued benefits under the state or local retirement system are not dependent upon 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, to no lesser extent than a governmental entity has responsibility for the continued funding of the accrued benefits of the employees of any other participating employer in the system in the event that other employer were to cease to be a participating employer. 

(iii) The entity is part of a local educational agency as defined in 20 U.S.C. 7801(26) and is 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 where, (1) the entity is held accountable by an authorized public chartering agency as defined in 20 U.S.C. § 7221i(4), which has the power to approve, renew, and revoke the charter of the entity (the authorized public chartering agency must be authorized under state law to approve charters for the creation of independent public schools and to hold the entity accountable for results) and (2) the entity is required to comply with health and safety standards, as well as academic and financial accountability standards, that are similarly to those that are generally applicable to other public schools in the state.

E. 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.  This requires that, upon dissolution or final liquidation of the entity, the entity's governing documents require the entity's net assets to be distributed to another public school that meets the requirements in (A) through (E) or to a state, political subdivision of a state, or agency or instrumentality thereof.The guidance under consideration would first be issued as part of proposed regulations under Code § 414(d) and the IRS and Treasury Department anticipate that the proposed regulations will reflect consideration of comments received in response to the ANPRM.  Notice 2015-07 specifically states that any regulations under Code § 414(d) are anticipated to apply prospectively and will include a delayed effective date.  However, the guidance in Notice 2015-07 should not be construed to create any inference regarding the proper interpretation of Code § 414(d).


The IRS and Treasury Department are requesting written comments to Notice 2015-07 by May 11, 2015.  Written comments should be directed to the following addresses: 

By Mail:
CC:PA:LPD:PR (Notice 2015-07)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington D.C.  20044
 
By Hand Delivery:
Between the hours of 8:00 a.m. and 4:00 p.m.  (Monday through Friday)
Internal Revenue Service
CC:PA:LPD:PR (Notice 2015-07)
Courier's Desk
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington D.C. 
 
Via the Internet:
notice.comments@irscounsel.treas.gov  (Reference Notice 2015-07)

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances. 
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