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July 13 — A recent flurry of litigation aimed at religiously affiliated hospitals running their pension plans as “church plans” has raised questions about the role the IRS played in the problems these plans are facing.
Since March, nearly two dozen lawsuits have targeted major hospital systems taking this approach. The lawsuits charge that the hospitals falsely treated their plans as “church plans,” jeopardizing workers' pensions in the process. If the plans are terminated, the workers could be left with next to nothing.
In all, these lawsuits allege that 247,000-plus hospital employees are facing a $3.5 billion shortfall in their pensions because the hospitals haven't adequately funded the plans. The hospitals sued include Mercy Health, SSM Health Care Corp., Bon Secours Health System, Wheaton Franciscan Services Inc. and Holy Cross.
So what's the Internal Revenue Service's role in all of this? Many of the hospitals got the greenlight from the IRS in private letter rulings to treat their plans as “church plans.” In some cases, the PLRs date back at least 30 years—meaning that for decades, the plans had no obligation under federal law to fund and protect workers' pensions. Approximately 300 religiously affiliated hospitals have received these PLRs.
As the litigation has escalated, the IRS has been silent. Bloomberg BNA asked the IRS several times for an interview or a comment on its policy on hospital church pension plans, but the agency declined, ultimately directing Bloomberg BNA to general guidance on church plans and publicly available documents.
For plan sponsors, there are advantages to claiming church plan status. If a retirement plan is deemed to be a church plan, it doesn’t have to comply with the funding, disclosure or fiduciary conduct rules of the Employee Retirement Income Security Act. Not having to comply with ERISA can lead to gross underfunding of pension plans for one reason or another.
The sponsor of a church plan “gets to make their promises to the participant that they’re going to provide this great retirement benefit,” Theresa S. Gee, a member with Miller & Chevalier Chartered in Washington, told Bloomberg BNA. The sponsor also gets the tax benefits of providing a retirement plan, but if it's unable to deliver on its promises, faces few consequences, she said.
There's another catch. Church plans aren’t insured by the Pension Benefit Guaranty Corporation, which means that if the plans are terminated or are underfunded, there are no government-insured benefits for participants. If a plan is terminated, workers who have counted on a pension their entire careers can be left out in the cold, with little recourse.
While many of these hospitals have gone to court armed with the PLRs as proof that they're exempt from ERISA, there's actually no requirement that a plan get a PLR before it can declare itself a “church plan.”
To date, the PLRs have held no weight in court: two federal appeals courts have ruled against plan sponsors that point to the PLRs as proof that they're church plans. In reality, all these letters do is give comfort to the plans that they are operating under a correct assumption. There are no guarantees.
And during all this litigation, the IRS has remained silent and has given no indication as to whether it will revoke the PLRs if a court rules against the plan sponsor.
Michael T. Graham, a partner with McDermott Will & Emery LLP in Chicago, told Bloomberg BNA that these PLRs don’t have “precedential effect in litigation.”
Instead, the letters serve as a testament to the IRS’s position on certain ERISA provisions, but they aren't binding in any way when it comes to a court decision, he said.
While the agency has been quiet during the recent spate of litigation, it has seemed to recognize that issuing the PLRs to religiously affiliated hospitals was causing some problems. The agency issued a moratorium on further church plan rulings in 2007, but then lifted the ban in 2011.
The IRS then placed a condition on sponsors that wanted church plan status: they had to tell workers that they were seeking a PLR, and they needed to explain what happens when participants lose the protections provided by ERISA.
Many if not all of the hospitals targeted in the lawsuits were originally ERISA-covered plans, but at some point they pulled themselves out from under the federal law by obtaining a PLR from the IRS.
The Pension Rights Center has been very vocal about its disapproval of the IRS rulings over the years, filing several amicus briefs on behalf of the participants in these cases.
Karen Ferguson, director of the center, told Bloomberg BNA that it is her understanding that almost all of the hospital church plans were ERISA plans at some point. “It was only years later when consultants advised them that they could save a lot of money by seeking a church plan ruling” that the hospitals went to the IRS and got their PLRs, she said.
Converting from an ERISA plan can be “truly devastating” to both employees and retirees who received many documents showing they were covered by ERISA, only to lose this protection and have "their promise of secure retirement" be shattered, she said.
All of these plans went to the trouble of asking the IRS to rule on the status of their plans, but does that make a difference in litigation? Yes and no.
If one of the cases goes to the U.S. Supreme Court and the court rules that it isn’t a church plan, “that PLR will have to go away,” said Mary K. Samsa, also a partner with McDermott in Chicago.
The IRS can essentially stay quiet on this issue until it's told that a specific letter ruling issued for a specific entity is wrong, or until there is a change in the law indicating that all of the PLRs the IRS has issued are wrong, Samsa told Bloomberg BNA.
The IRS also is facing the problem of having to make cutbacks in many areas, which adds to the likelihood that it would be reluctant to spend resources to address the church plan status of religiously affiliated hospitals unless pushed.
“Apparently the IRS and Treasury have taken the position that they can’t change their position. Agencies often find it difficult to reverse themselves, but we think they should. The reality is that they appear to be awaiting for final decisions by the courts,” Ferguson said.
If the issue boils over before a case gets to the Supreme Court, the IRS could take some sort of action, but that isn't the usual way it's done, Graham said.
The IRS has for many years made its position known through its rulings, Graham said. “There’s no need for them to make a move from that statement at this point and they will follow with what the majority of the courts ultimately hold,” he said.
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