Devil in the Details as Justices Mull Church Pension Cases

Pension & Benefits Daily™ covers all major legislative, regulatory, legal, and industry developments in the area of employee benefits every business day, focusing on actions by Congress,...

By Jacklyn Wille

The pension benefits of more than 300,000 hospital workers will be at stake when the U.S. Supreme Court convenes on March 27, and it’s anybody’s guess what the justices will want to discuss.

The court will hear arguments in three cases by hospital workers who claim their pension plans are severely underfunded because the hospitals have wrongly claimed a religious exemption from federal pension law. More than three dozen class actions against hospitals with “church plans” have been filed in the past four years, with the workers scoring big appellate victories in cases against Advocate Health Care Network, Saint Peter’s Healthcare System and Dignity Health.

In all, the lawsuits allege that more than 300,000 employees at religiously affiliated hospitals are facing a pension funding shortfall of about $4 billion because their plans are being run as church plans, which are exempt from the Employee Retirement Income Security Act.

Court watchers may be able to predict how the justices will rule based on which legal issues they target with their questions. Three distinct issues are percolating in these cases: the proper interpretation of the ERISA statute, how much deference is owed to government agencies and whether the First Amendment’s religion clauses play any role in the dispute.

Statutory Interpretation

Although the cases involve eye-catching sums of money and the retirement security of hundreds of thousands of workers, they’ve so far turned on a seemingly banal question of statutory interpretation: Must a pension plan be both “established and maintained” by a qualifying church-connected entity to claim the legal exemption, or is the exemption available to plans merely “maintained” by a qualifying entity?

“I really think the statutory interpretation argument is going to dominate the issues before the justices,” Edna S. Kersting, an employee benefits attorney and partner in Wilson Elser’s Chicago office, told Bloomberg BNA.

Kersting said the hospital employees likely have the better reading of the statute, but the practical effect of a ruling in their favor could be financially ruinous for the hospitals.

All three appellate courts that have considered these cases devoted significant attention to statutory interpretation. Finding the statute unambiguous, they ruled that church plans must be established by churches—and the hospital defendants don’t qualify.

Mark Chopko, a partner with Stradley Ronon in Washington and chair of the firm’s nonprofit and religious organizations group, said that statutory construction is likely to be the “first stop” in the court’s arguments.

“The statute isn’t exactly a model of clarity,” Chopko told Bloomberg BNA. “What I expect is that both sides will say, ‘It’s clear and it’s read my way,’ and the questions from the bench will be, ‘Well if that’s true, then wouldn’t Congress have said it the way you just said it?’”

Agency Deference

Another looming issue is how much deference should be paid to the federal agencies in charge of pension oversight—particularly the Internal Revenue Service.

For more than 30 years, the IRS issued determination letters giving hospitals permission to treat their pension plans as ERISA-exempt church plans. After three federal appeals courts directly rejected this position, the IRS and other agencies filed an amicus brief urging the Supreme Court to defer to the long-standing position expressed in these letters.

With “more than three decades of reliance on administrative rulings on the line,” the Supreme Court will have to address the deference question “head-on,” Joanne C. Youn, an ERISA attorney and member of Caplin & Drysdale in Washington, told Bloomberg BNA in an email.

“Given the stakes, the Court will presumably want to provide very clear guidance to employers who have relied on IRS private letter rulings to bless their church plan status and to the lower courts,” Youn said. This makes a 4-4 split ruling “unlikely,” she said.

None of the appellate courts involved in this litigation afforded any deference to the IRS. Each court reasoned that because the IRS letters weren’t formal rulemakings, the letters were owed deference only to the extent they were persuasive. And in the words of one appellate court, the letters weren’t persuasive because they were based on “an obvious misreading of the statutory text.”

Echoing that ruling, law professor Norman P. Stein called the IRS position a “colossal blunder” that the agency is now loath to admit.

“The IRS, without much thought or research or care, leaped into a colossal blunder when it first came up with this position, but, unfortunately, agencies don’t relish admitting colossal blunders,” Stein, who teaches at Drexel University’s Thomas R. Kline School of Law in Philadelphia, told Bloomberg BNA.

Stradley Ronon’s Chopko said the agency deference issue would be better framed as a question of whether the hospitals relied, to their detriment, on assurances by the IRS that their plans are ERISA-exempt.

“Hundreds and hundreds of people have relied on this interpretation of the church plan exemption for decades,” Chopko said. “If you can’t rely on that, then we need another way forward.”

Constitutional Issues?

The cases also present the justices with an opportunity to consider constitutional questions: namely, whether forcing the hospital pension plans to comply with ERISA would discriminate against particular religions or force an excessive government entanglement in religion. All three appellate courts appeared to have little difficulty answering these questions in the negative.

Stein said the justices are unlikely to spend much time on constitutional issues. He pointed out that the question certified to the court focused on statutory interpretation and didn’t touch on the First Amendment.

“If they were interested in it, the question that they certified would have been somewhat different and broader,” Stein said.

Wilson Elser’s Kersting agreed.

“There might be some First Amendment talk, but I can’t see it being the chief issue,” she said.

What’s at Stake

The court’s ultimate ruling will likely affect workers at dozens of hospitals that have been ensnared in pension litigation. Workers at other religiously affiliated hospitals, schools, nursing homes and day care centers are likely to be affected, too.

If the court rules for the workers, they may win additional assurances that pension benefits they’ve counted on will be there when they retire. Those assurances could come in the form of increased pension contributions and coverage by the Pension Benefit Guaranty Corporation, the federal agency that insures private pensions.

But those assurances could come at a cost, Kersting said.

That’s because the amount of money that would be needed to bring these plans into compliance with ERISA is “potentially enough to put the hospitals out of business,” she said. Short of that, hospitals forced to make significant pension contributions might respond by increasing the cost of the medical care they provide, Kersting said.

Stein, the law professor at Drexel, sees things differently. He predicted that if the plans are found to be ERISA-covered, the agencies in charge of pension oversight would work hard to give the hospitals a “soft landing,” adding that the agencies have a robust tool kit to facilitate such a landing.

“I think it’s appropriate and fully expect that the government agencies will do everything in their power to let these entities ease into compliance over a period of time, particularly with respect to the funding rules,” Stein said. “And the idea that agencies are going to pursue, or courts are going to award, staggering fines is absolute nonsense.”

The cases are Advocate Health Care Network v. Stapleton, U.S., No. 16-74, arguments scheduled 3/27/17 ; Saint Peter’s Healthcare Sys. v. Kaplan, U.S., No. 16-86, arguments scheduled 3/27/17 ; and Dignity Health v. Rollins, U.S., No. 16-258, arguments scheduled 3/27/17 .

The court will hear oral arguments on March 27.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.