JOURNAL OF DEFERRED COMPENSATION

Transcription

1 JOURNAL OF DEFERRED COMPENSATION VOLUME 20, NUMBER 4 SUMMER 2015 Nonqualified Plans and Executive Compensation Editor-in-Chief: Bruce J. McNeil, Esq. JDC

2 Update on Charter School Benefits Conundrum DANIEL SCHWALLIE Daniel Schwallie, JD, PhD is an attorney with Aon Hewitt s Retirement-Legal Consulting & Compliance practice. His areas of consulting include the design and administration of qualified pension and profit-sharing plans, 403(b) and 401(k) plans, and 457(b) nonqualified deferred compensation plans. He has published articles on plan design and compliance and is the primary author of the Cash Balance Plan Answer Book, 2nd ed. (New York: Wolters Kluwer, 2012). In Notice , the Internal Revenue Service (IRS) and the U.S. Department of the Treasury (Treasury) describe rules under consideration regarding whether a state or local retirement system plan covering employees of a charter school is a governmental plan for purposes of Internal Revenue Code (Code) Section 414(d). INTRODUCTION In the Winter 2015 issue of this journal, the author considered charter schools as an example of entities whose benefit plans, or benefit plans in which their employees participate, might be affected by possible regulations described in a 2011 advance notice of proposed rulemaking (ANPRM) from Treasury and the IRS to define the term governmental plan within the meaning of Code Section 414(d). 1 There are currently no regulations interpreting Code Section 414(d). 2 The guidance under consideration in Notice , released January 23, 2015, would provide that employees of a public charter school may participate in a state or local retirement system, if certain conditions are satisfied. The Notice does not address plans that might be maintained by the public charter school itself. The Notice raises the potential for transition relief in addition to prospective application of any final regulations under Code Section 414(d) and requests comments on the specific rules being considered regarding whether a state or local retirement plan covering employees of a charter school is a governmental plan. This article reviews the possible guidance considered in the Notice. 1

3 2 / JOURNAL OF DEFERRED COMPENSATION NOTICE According to Notice , more than 2,000 comments were received from members of the public charter school community in response to the ANPRM, which continue to be reviewed. A principal concern of the comments was that, if the guidance suggested by the ANPRM were to become a final regulation, in order to maintain governmental plan status, state and local retirement systems might not permit charter school employee participation, which could jeopardize the retirement security of charter school employees and adversely affect the schools ability to attract and retain teachers. Public Charter Schools Notice describes public charter schools as generally funded with public revenue on a per-pupil basis, not charging tuition, open to all students within a specified geographic boundary, and viewed by the state as part of the public school system, but as typically operated independently of the governance structures generally in place for other public schools, such as a district board of education. The Notice further indicates that 42 states and the District of Columbia have laws authorizing public charter schools and, generally, states that authorize public charter schools either require or permit the charter school employees to participate in their state retirement systems. Rules under Consideration According to the Notice, the rules under consideration would take into account the special and unique nature of public charter schools, the governance structure associated with them, the ability of public school teachers to move between public charter and traditional public schools, and the relationship between public charter schools and the authorized agencies that hold these schools accountable for academic results. The IRS and Treasury expect that the same principles would apply regardless of whether the retirement plan is a defined benefit or defined contribution plan, a 403(b) plan, or a governmental 457(b) plan. The guidance described in the Notice is intended to cover only employees of public charter schools. The effect of participation by employees of entities other than public charter schools in a state or local retirement system on the status as a governmental plan would be determined in accordance with general rules set forth when final regulations under Code Section 414(d) are issued. 3 The guidance under consideration would specify that a state or local retirement system does not fail to be a Code Section 414(d) governmental plan merely because the system permits employees of an entity satisfying the requirements listed below to participate in the system 4 :

4 UPDATE ON CHARTER SCHOOL BENEFITS CONUNDRUM / 3 The entity is a nonsectarian independent public school that serves a governmental purpose by providing tuition-free elementary or secondary education, or both. 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. Participation in the state or local retirement system by the entity s employees is expressly required or permitted under applicable law. The entity satisfies either paragraph (1) or (2) below: 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, where either: (i) the state, political subdivision of the state, or an agency or instrumentality of the state or political subdivision of the state has 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 are publicly nominated and elected. 2. The entity satisfies the following three requirements: (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 on 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, and, to no lesser extent than a governmental entity has responsibility for the continued funding of the accrued benefits of

5 4 / JOURNAL OF DEFERRED COMPENSATION the employees of any other participating employer in the system in the event such other employer were to cease to be a participating employer. (iii) The entity is part of a local educational agency 5 (or is its own local educational agency) 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, as described in (a) and (b) below: (a) The entity is held accountable by an authorized public chartering agency, 6 which has the power to approve, renew, and revoke the charter of the entity, and which for this purpose must be authorized under state law to approve charters for the creation of independent public schools and to hold the entity accountable for results. (b) The entity is required to comply with health and safety standards, as well as academic and financial accountability standards, that are similar to those that are generally applicable to other public schools in the state. 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. A state, political subdivision of a state, or agency or instrumentality of a state or political subdivision of a state is not treated as holding all financial ownership interests in an entity unless, 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 described in this and the other four bulleted items of this paragraph or to a state, political subdivision of a state, or agency or instrumentality thereof. The Notice requests comments on the guidance under consideration by May 11, 2015, including whether the requirements under consideration are sufficient to limit the guidance to participation of employees of public charter schools in a state or local retirement system and, for example, not to cover participation of employees of entities that provide management or other services to public charter schools. 7

6 UPDATE ON CHARTER SCHOOL BENEFITS CONUNDRUM / 5 Transition Relief The IRS and Treasury anticipate first issuing proposed regulations under Code Section 414(d), including guidance under consideration in Notice and the 2011 ANPRM, that consider comments received in response to the Notice and ANPRM. Proposed regulations will request comments on all aspects of the proposed regulations. The IRS and Treasury anticipate that final regulations under Code Section 414(d) will apply prospectively and will include a delayed effective date. They also anticipate final regulations will provide that a state or local retirement system, which covers employees of a public charter school and meets the requirements of the guidance under consideration described in the Notice for periods starting on and after the effective date of final regulations, will not fail to be a governmental plan within the meaning of Code Section 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 requirements of the guidance under consideration in the Notice. However, the guidance under consideration described in the Notice should not be construed to create any inference concerning the proper interpretation of Code Section 414(d) prior to the effective date of final regulations. Questions regarding broader transition relief are expected to be addressed when proposed regulations are issued. 8 CONCLUSION Notice appears to move toward resolving the charter school benefits conundrum with respect to state and local government retirement systems. However, it remains to be seen what the reaction from the charter school community is and how the final rules develop. As noted in the Introduction, the Notice does not address how a retirement plan maintained by the charter school itself, such as a 403(b) plan, is to be treated. NOTES 1. D. Schwallie, Charter School Benefits Conundrum: Governmental Plans or Not?, 20 Journal of Deferred Compensation 31 (Winter 2015). 2. Announcement , Internal Revenue Bulletin , and Notice , section II. 3. Notice , section III. 4. Notice , section III.A. 5. As defined in 20 U.S.C. 7801(26). 6. As defined in 20 U.S.C. 7221i(4). 7. Notice , section V. 8. Notice , section IV.

7 2015 CCH Incorporated. All Rights Reserved. Reprinted from Journal of Deferred Compensation, Volume 20, Number 4, Summer 2015, pages 1 5, with permission from Wolters Kluwer, New York, NY ,