IRS anticipates issuing proposed regs that would allow state or local retirement systems to cover public charter schools employees

 

The IRS has announced that it anticipates issuing proposed regulations under Code Sec. 414(d), which defines the term “governmental plan,” that would include provisions allowing a state or local retirement system that is a governmental plan to cover employees of a public charter school, if certain conditions are satisfied. The IRS also discusses transition relief and seeks comments on the guidance under consideration.

Background

In November 2011, the IRS published an advanced notice of proposed rulemaking on the definition of “governmental plan” under Code Sec. 414(d). In response to a request for comments, members of the public charter school community submitted over 2,000 comments, which, together with all of the other comment letters received, the IRS and Treasury Department continue to review. Although the advanced notice of proposed rulemaking did not change the law regarding, or directly address, whether a charter school is a governmental entity or whether employees of charter schools are permitted to participate in a governmental plan, these commenters expressed concern that if the guidance described in the advanced notice of proposed rulemaking was published in its current form as a final regulation, it would deter state or local retirement systems from permitting charter school employees to participate in their retirement systems in order to retain their governmental plan status.

The IRS notes that 42 states and the District of Columbia have laws authorizing the chartering of independent public schools of choice. The IRS explains that these schools, often referred to as public charter schools, are generally funded with public revenue on a per-pupil basis, do not charge tuition, are open to all students within a specified geographic boundary, and are viewed by states as part of the public school system. In addition, states that authorize public charter schools generally either require or permit public charter school employees to participate in their state retirement systems.

Proposed regs

After review and consideration of the comments made, the IRS is considering proposing regulations under Code Sec. 414(d), which specify that a state or local retirement system that covers employees of a public charter school will not fail to be a governmental plan within the meaning of Code Sec. 414(d), if certain conditions are satisfied. The IRS expects that the proposed guidance, including the specified conditions provided by the IRS, would apply regardless of whether the retirement plan is a defined benefit, defined contribution, Code Sec. 403(b) plan, or Code Sec. 457(b) governmental plan. The IRS intends that the guidance will cover only employees of public charter schools and anticipates that the effect of participation of employees of entities other than public charter schools in a state or local retirement system on the system’s status as a governmental plan under Code Sec. 414(d) would be determined in accordance with the general rules provided in the regulations after final regulations under Code Sec. 414(d) are issued. The IRS has provided an example that illustrates the proposed guidance.

Transition relief

The IRS anticipates that proposed regulations would include the guidance concerning public charter school employees’ participation in a state or local retirement system and the subject matter under consideration in the November 2011 advanced notice of proposed rulemaking. In addition, the IRS expects final regulations under Code Sec. 414(d) will apply prospectively and will include a delayed effective date. The IRS further anticipates that the final regulations under Code Sec. 414(d) will provide that a state or local retirement system that covers employees of a public charter school and that meets the required conditions under consideration for periods starting on and after the effective date of the final regulations will not fail to be a governmental plan within the meaning of Code Sec. 414(d), even if the plan covered those employees for periods before the effective date of the final regulations when the public charter school did not meet the required conditions under consideration. However, the IRS cautions that these conditions under consideration should not be construed to create any inference concerning the proper interpretation of Code Sec. 414(d) prior to the effective date of final regulations.

The IRS explains that comments from the November 2011 advanced notice of proposed rulemaking relating to broader transition relief, such as safe harbors or grandfathering, are being reviewed and are expected to be addressed when Code Sec. 414(d) proposed regulations are issued.

Comments requested

Comments are requested regarding the public charter school proposed guidance, including whether the requirements of the proposed guidance are sufficient to limit the guidance to participation of employees of public charter schools in a state or local retirement system. Written comments should be submitted by May 11, 2015.

Source: IRS Notice 2015-07, February 9, 2015.

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