Public Charter School Teacher Retirement Funds at Risk

IRS Proposed Change: A proposed change in Internal Revenue Service regulations could have devastating effects for public charter school teachers by making them ineligible for state retirement plans – and they could stand to lose much of the money that they already have accrued.

The proposed rule, released near the end of last year, would make major changes to the definition of “governmental plans,” the federal standard defining who can be considered a government employee for the purposes of participating in state pension systems.

Under the proposed regulations, it appears public charter schools would not be agencies or instrumentalities of the state. The proposed regulations provide five criteria for determining whether an entity is an agency or instrumentality of the state. The major factors are whether:

(1.) the entity’s governing board or body is controlled by the state;

(2.) the members of the governing board or body are publicly elected;

(3.) a state has the fiscal responsibility for the general debt and liabilities of the entity;

(4.) the entity’s employees are considered employees of the state for purposes other than providing employee benefits;

(5.) the entity is delegated the authority to exercise sovereign powers.

Of the five criteria, some charter schools may satisfy the first factor. However, public charter schools are unlikely to satisfy the remaining four factors. Therefore, based on the proposed regulations, public charter school teachers’ continued participation in the state retirement system would cause such plans to no longer be governmental plans.


Impact: In North Carolina, legislation permits, but does not require, participation in the state-sponsored retirement system. Even though participation in the North Carolina retirement system is voluntary, the proposed rule would directly impact 900 public charter school teachers in North Carolina.

The National Alliance for Public Charter Schools (NAPCS) estimates that if the rule is enacted, over 95,000 charter school teachers nationwide – more than 93 percent of the charter workforce – would be forced to either leave their schools or risk losing their pensions.


Recent Developments: On February 3, 2012, the National Alliance for Public Charter Schools submitted their public comments to the IRS. The NAPCS public comment can be found here.

On that same day, the IRS extended the deadline for public comment until June 18, 2012.

This extension was a result of significant grassroots advocacy from the charter school community. The IRS also issued a public statement that there “is nothing in our [proposed regulations] that excludes public charter schools being treated as a governmental entity.”

If the five-part test in the draft proposed guidelines is amended (or clarified, as the NAPCS states in their public comment) to reflect the IRS’s recently announced intent, the charter schools will be protected from harm.


For more information about the issue and action steps, please click here.

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