However, not all homeschool organizations are run as cooperatives, some may be charitable organizations. And, just like private schools, they may be eligible to participate in 403(b) plans. The growth of homeschool organizations may mean a growth in homeschool teachers and educators, and a corresponding growth in educators who may be eligible for 403(b) plan participation.
As long as there have been parents, there have been complaints about schools, and innovations in the educational model. Most recently, when schools grappled with when to bring children back to in-person education, as waves of the COVID-19 virus waxed and waned, some parents opted to try different educational models. Many parents transferred their public-school attending kids to private schools, which had smaller class sizes and therefore more flexibility in meeting pandemic guidelines. Others opted for a hybridized homeschooling approach. All of these changes in education may mean changes to those who can participate in 403(b) retirement plans. In fact, it’s possible that some of the new educators don’t realize they can participate in these plans. This may mean those new to sponsoring benefit plans, like health care and employee savings plans may not know a 403(b) plan is an option. Whether you’re new to benefit sponsoring, or newly in a position with an educator group, we thought a review of the qualifications for 403(b) plans might be of use. And for those experienced folks fielding questions from the new educators, this article may help in your mentorship.
Growing Up Quick! A report in Parents Magazine in 2020 noted that “approximately 2.5 million children in the United States in grades K-12 are homeschooled, which equates to 3 to 4 percent of school-aged children.”[1] By 2022, that number had grown. Some groups now say there were more homeschool students than Catholic school students and slightly fewer homeschool than public charter school students during 2021-2022.[2] Estimates have been as high as 5.56% of all school-age children in the United States were homeschooled during the 2021-2022 academic year.
The ABCs of 403(b)s: The IRS has been clear that 403(b) plans are not available to every employee. Instead, as they say “Only certain tax-exempt employers are eligible to maintain a 403(b) plan for eligible employees.”[3] Those eligible employees include “[e]mployees of tax-exempt organizations established under IRC Section 501(c)(3); Employees of public school systems involved in the daily operations of a school; Employees of a cooperative hospital service organization; They make clear that public schools have a certain definition: “IRC Section 170(b)(1)(A)(ii) defines a public school system as an educational organization that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. Included in this category are employees of: Public schools; State colleges; Universities.” So, homeschool organizations would not meet the definition of a public school, nor would a private school. But those organizations might fall into other categories eligible to participate in 403(b) plans.
501 Say What? A private school that is operated as a charitable organization, who has been granted tax exempt status under section 501(c)(3) of the IRS Code (IRC), would be eligible, if they were an employee. So too would a homeschool educator, if their homeschool was organized in the same way. However, many homeschool organizations are run as cooperatives. Texas Homeschool Coalition is an example of a cooperative.[4] That is, participants pay a member fee, which goes to creating programs that they use and participate in. Cooperatives are organized under a different section of the (IRC), 501(c)(12) and have to meet certain requirements to have their income be tax exempt.[5]The most commonly identifiable thing about a cooperative is the dividend payment. Anyone who is a member of the outdoor retailer REI knows they receive a dividend for the purchases they make. REI was founded as a cooperative, so members could pool funds to purchase equipment. Homeschoolers have the same idea: they create members to pool resources (usually a fee) to purchase teacher services and educational materials. Because they are cooperatives, they are not eligible to participate in a 403(b) plan.
However, not all homeschool organizations are run as cooperatives, some may be charitable organizations. And, just like private schools, they may be eligible to participate in 403(b) plans. The growth of homeschool organizations may mean a growth in homeschool teachers and educators, and a corresponding growth in educators who may be eligible for 403(b) plan participation.
[1] https://www.parents.com/kids/education/what-is-a-homeschool-co-op
[4] https://thsc.org/homeschool-co-op
[5] https://www.irs.gov/pub/irs-tege/eotopice02.pdf
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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