Are Religiously Affiliated Hospitals’ Pension Plans Exempt from ERISA?

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The U.S. Supreme Court justices are grappling with the question of whether pension plans maintained by religiously affiliated organizations—such as plans offered by some hospitals and schools—are exempt from the Employee Retirement Income Security Act (ERISA).

The act provides certain safeguards to protect employee retirement plans. For example, many private-employer plans must provide notices and disclosures to participants, meet minimum-funding obligations and be insured through the Pension Benefit Guaranty Corp. (PBGC). 

"Church plans" are exempt from ERISA—meaning the plans are not protected by the law—but it isn't clear if that exemption applies to church-affiliated organizations.

[SHRM members-only toolkit: Designing and Administering Defined Benefit Retirement Plans]

"The stakes are enormous," noted Howard Shapiro, an attorney with Proskauer in New Orleans. "There have been over 30 church-plan class actions filed since 2013. For the plans challenged in these cases, plan assets exceed $10 billion. The number of employees covered by these church plans exceeds 200,000," he said. "What the Supreme Court rules has future, important ramifications."

Statute Isn't Clear

During oral argument on March 27, the justices focused heavily on questions about statutory interpretation, said Tess Gee, an attorney with Miller & Chevalier in Washington, D.C.

The church-plan exemption applies to plans that are "established and maintained" by a church, but a 1980 amendment added that exempt plans may be "maintained" by organizations that are controlled by a church.

The amendment allowed churches to establish a plan and rely on church pension boards to maintain it. It also allowed churches to continue covering church-affiliated employees after a sunset provision took effect in 1982.

However, the amendment doesn't say whether church plans can be "established" by affiliated organizations, such as the hospitals' plans in the three consolidated cases currently before the high court.

Participants in Advocate Health Care Network, St. Peter's Healthcare System and Dignity Health pension plans argue that the hospitals have been improperly claiming the exemption because they were not first established by a church. Rather, the plans were both established and are maintained by church-affiliated organizations.

"I think everyone would agree that the 1980 amendment was not the model of statutory drafting," Gee told SHRM Online.

Justice Ruth Bader Ginsburg asked during the oral arguments what it means to establish a plan. "I didn't see any statutory definition of what it takes to establish a plan," she said.

"It's very odd language," Justice Elena Kagan added.

High Stakes

The question in this case might seem pretty technical, but the decision could affect thousands of plan participants and could cost nonprofit hospitals and schools a significant amount of money.

The participants argued that their pension plans are extremely underfunded and should fall under ERISA's purview. The hospitals, however, reasoned that the IRS and the Department of Labor (DOL) have all supported their position that many religiously affiliated organizations have exempt church plans.

For example, the IRS has issued private letter rulings to the hospitals, finding that they qualify for the exemption.

The plaintiffs claimed that the IRS and the DOL got it wrong and that only churches—meaning places where religious worship occurs—may establish and maintain church plans, Shapiro said.

"This would mean that a hospital or a school that is controlled by and/or affiliated with the Roman Catholic Church, as an example, would no longer qualify for church-plan status and would be covered by ERISA, retroactively," he said.

What Does It Mean?

During oral arguments, Kagan seemed pretty sympathetic to the employees, while Justice Samuel Alito Jr. did not, Gee said. The other justices were all over the board with their questioning as they tried to understand the statutory construction, she noted.

Justice Sonia Sotomayor said during the arguments that she was torn. "This could be read either way in my mind," she said.

Arguing for the plan participants, James Feldman, an attorney in Washington, D.C., said that Congress didn't intend for the hospitals to be exempt from ERISA.

"ERISA covers every private employer, every nonprofit, every hospital in the country," he said, adding that the only category excluded (other than public employers) is church plans. "And Congress actually defined church plans carefully."

The lawmakers wanted a close tie between the church and the plan because they didn't want to get involved in church affairs, he argued.

Lisa Blatt, an attorney with Arnold & Porter in Washington, D.C., argued on behalf of the hospitals. "Pension plans for religious nonprofits have been exempt from ERISA for over 30 years, whether or not a church established the plan," she said. Blatt added that "the government's consistent view, over three decades, has generated enormous reliance interest and warrants deference."

The justices were mainly trying to determine what the statute means and how narrowly the exemption should be read, Gee said. She noted that the subsection of ERISA in question will likely have to be read in context with other subsections.

She added that some justices also expressed concerns about the impact on the hospitals if the exemption doesn't apply. The defendants before the court are all large and well-funded organizations, but the justices focused on how the decisions would affect smaller hospitals and schools, she said.

In the three consolidated cases currently before the court, the appeals courts each ruled in favor of the plan participants.

A Supreme Court ruling is expected by June.

The cases are Advocate Health Care Network v. Stapleton, No. 16-74; St. Peter's Healthcare System v. Kaplan, No. 16-86; and Dignity Health v. Rollins, No. 16-258.

 

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