For some, church can help with a lot of things, but is it enough to get a pension plan out of ERISA’s funding requirements? This question is heating up ERISA litigation in court rooms nationwide, and a string of recent circuit court cases denying church plan exemptions to religiously-affiliated hospitals demonstrates that interpreting ERISA §3(33)(A) and §3(33)(C) holds the answer.
Here’s how it works: ERISA imposes funding rules to ensure that an employer contributes enough to its pension plan to provide the benefits promised to its employees (because there’s nothing worse than thinking you have $100,000 coming your way, and then having someone say “just kidding!”). Church plans, however, are exempt from this and other requirements imposed by ERISA, under the ERISA church plan exemption (not to be confused with “church plan status” as provided by I.R.C §414 and §501(c)). So when religiously-affiliated hospitals claim that their plans fall under the church plan exemption, they are able to underfund them by, say, a few billion dollars. If ERISA applied, however, those same plans would have to face the music. Which brings church to litigation. Participants are suing hospitals alleging that they cannot claim church plan status and ignore ERISA requirements.
The issue comes down to who must establish the plan and whether ERISA authorizes that ability to a nonprofit that is not a church. ERISA §3(33)(A) provides the following: “The term ‘church plan’ means a plan established and maintained…for its employees (or their beneficiaries) by a church or by a convention or association of churches….” Does this mean the plan must be established by a church to be eligible for the church plan exemption, or does this mean the plan qualifies for the church plan exemption even if it is established by an organization other than a church whose principal purpose is religiously-affiliated and who maintains the plan?
Until December of 2015, the district courts had been left to answer that question alone with varying results. Several district court cases have ruled in favor of the health-care companies, allowing them to treat their pension plans as ERISA-exempt church plans, even though the plans were not established by churches, on the basis that the organizations were administering the plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches. (See Medina v. Catholic Health Initiatives, 147 F. Supp. 3d 1190 (D. Colo. 2015); Lann v. Trinity Health Corp., 2015 BL 357838 (D. Md. Feb. 24, 2015); Overall v. Ascension, 23 F. Supp. 3d 816 (E.D. Mich. 2014); Thorkelson v. Publishing House of Evangelical Lutheran Church in America, 764 F. Supp. 2d 1119 (D. Minn. 2011)).
Conversely, at least three district courts ruled in favor of participants finding that the plans at issue were not covered under the ERISA church plan exemption because they were established by the hospitals and not by a church, as required by the statute. (See Stapleton v. Advocate Health Care Network & Subsidiaries, 76 F. Supp. 3d 796 (N.D. Ill. 2014); Rollins v. Dignity Health, 19 F. Supp. 3d 909 (N.D. Cal. 2013); Kaplan v. Saint Peter's Healthcare Sys., 2014 BL 88288 (D.N.J. Mar. 31, 2014)). On appeal, these district courts were affirmed by their respective circuit courts, which elevates the potential impact these cases may have going forward.
The Ninth Circuit’s recent ruling denying the use of the church plan exemption in Rollins v. Dignity Health, No. 15-15351, 2016 BL 239357 (9th Cir. July 26, 2016), echoes the sentiments of the Third and Seventh circuits on this issue. In Rollins, two Sisters of Mercy Congregations established nonprofit hospital systems in California in the early 1980’s. Through a series of mergers and corporate restructuring, these hospitals became Dignity Health (Dignity), which came to sponsor a single pension plan (Plan) beginning in January 1989. Approximately three years later, Dignity’s board of directors arranged to treat the Plan as a church plan (read: no funding rules apply).
Having worked for an affiliate hospital of Dignity for years, one participant filed suit against Dignity alleging violations of ERISA requirements and that the church plan exemption should not apply to Dignity. Dignity agreed that it did not satisfy ERISA requirements, but argued it was not required to do so as an exempt church plan under ERISA §3(33)(C)(i) – ERISA §3(33)(C)(iii), as amended by the Multiemployer Pension Plan Amendment Act of 1980 (MEPPA).
The district court determined that a “church plan” must be established by a church to claim the church plan exemption under ERISA, and then sought interlocutory appeal from the Ninth Circuit on the issue. The Ninth Circuit affirmed the district court. Reviewing the legislative history of the modifications MEPPA made to ERISA §3(33)(C), the Ninth Circuit explained that modifications made to ERISA §3(33)(C)(i) were only intended to relax the requirement that a church plan be maintained by a church, which previously prohibited church plans from being maintained by principal purpose organizations like religiously-affiliated hospitals. Further, the modifications MEPPA made to ERISA §3(33)(C)(ii) were only intended to expand the definition of employees who were eligible to participant in church plans. The Ninth Circuit held that neither the addition of organizations that may maintain a church plan, nor the expansion in the definition of employees eligible to participate in a church plan, eliminated the requirement that the Plan be established by a church in the first place. Because Dignity’s plans were not established by a church, the Ninth Circuit affirmed the district court’s partial summary judgment for plaintiff and remanded for further proceedings.
What complicates the issue is that the IRS has provided guidance in contravention to the court rulings. Under I.R.C. §414(e)(3), an organization that is controlled by a church, or whose principal purpose is to fund or administer the plan or program for the employees of a church or of a convention or association of churches, may still be treated as a church plan. The IRS has published several private letter rulings treating the plans of health-care related companies as church plans. (See PLR 200023057, PLR 9717039, PLR 9525061, PLR 9409042). Similarly, in GCM 39007 (Nov. 2, 1982), the IRS stated that “[a] retirement plan covering the lay employees of a religious order whose main activity is the operation of nursing homes or hospitals exempt from tax under [I.R.C. §501] may be a church plan if the requirements of [I.R.C. §414(e)] are met.” Defendants in these cases have used the IRS guidance to support their position that, as religiously-affiliated hospitals maintaining the plans, they are eligible for church plan status. The Ninth Circuit, concurring with the Third and Seventh Circuits, ruled that the IRS documents were a misread of the statutory text and not entitled to deference.
The question of whether ERISA §3(33)(A) requires a plan to be established by a church in order to receive the church plan exemption continues to be litigated, but these circuit court decisions carry several implications. These rulings will require the plans to satisfy the various I.R.C. requirements from which they were previously treating themselves as exempt. Similarly, ERISA funding standards will require shoring up the underfunded pension plans. In addition, these decisions raise the question of whether denials like those in Rollins, Stapleton and Kaplan, will be imposed on nonprofit organizations’ other benefit plans, and whether they will lead the IRS to change its position. Stayed tuned, because the next episode of General Hospital could get really interesting.
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