Only a church—and not a religious hospital—can establish a church plan that is exempt from the notice and funding requirements of the Employee Retirement Income Security Act, the U.S. Court of Appeals for the Third Circuit has ruled.

The Dec. 29 ruling is the first by a federal appeals court to consider the scope of ERISA’s church plan exemption, which is the subject of about a dozen similar lawsuits pending in federal district courts (Kaplan v. Saint Peter’s Healthcare Sys., 3d Cir., No. 15-01172, 2015 BL 428951, 12/29/2015).

The ruling is a blow to Saint Peter’s Healthcare System, a nonprofit health care company with ties to the Roman Catholic Diocese of Metuchen, N.J.

For plan participants, the ruling means that employers not eligible for the church plan exemption will have to put more money into the plan, provide more notice on the plan benefits, and comply with ERISA’s minimum participation, coverage and vesting requirements.

The defined benefit plan at the center of the dispute was established by Saint Peter’s in 1974 and covers substantially all employees of Saint Peter’s hired before July 1, 2010.

In an ERISA lawsuit filed against Saint Peter’s in federal district court in New Jersey, plan participants alleged, among other ERISA violations, that the plan was underfunded by more than $70 million at the end of 2011.

While that lawsuit was pending, the IRS on Aug. 14, 2013, issued a private letter ruling affirming the plan’s status as an exempt church plan for tax purposes (PLR 201345042).

In March 2014, the federal district court declined to dismiss the lawsuit, ruling that the plan didn’t meet the requirement under Section 3(33)(A) of ERISA that the plan be established by a church or association of churches in order to qualify as a church plan.

The court also said it wouldn’t defer to the PLR, saying that it “conflicts with the plain text of the statute and is therefore unreasonable.”

Affirming the lower court ruling, the Third Circuit rejected virtually every argument presented by Saint Peter’s that the plan was a church plan.

First, the “plain meaning” of ERISA’s church plan exemption, found at Section 3(33)(A), provides that only a church may establish a church plan, the court said.

Second, the court said it had “substantial reservations” about the strength of the company’s argument that Section 3(33)(C) of ERISA allows entities other than churches to maintain a church plan.

Third, the legislative history of the church plan exemption “overwhelmingly supports the conclusion that Congress did not intend to open up the exemption that broadly,” the court said.

The IRS position that companies such as Saint Peter’s could operate an ERISA-exempt church plan wasn’t the result of “formal adjudication or notice-and-comment rulemaking,” and it “lacks the power to persuade” because it’s at odds with the statutory text, the appeals court said.

The case can now proceed toward a trial or settlement negotiations.

Two other circuit courts—the Seventh and the Ninth--are currently considering similar lawsuits against Advocate Health Care Network and Dignity Health. The complaint against Dignity Health alleges that the company’s pension plans were underfunded by $1.2 billion as of 2012.

See related article, Church Plan Challengers Win First Appellate Decision.

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