Justices Side with Church-Affiliated Hospitals in ERISA Exemption Case

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The U.S. Supreme Court has ruled that pension plans established and maintained by religiously affiliated nonprofit organizations—like those offered by certain hospitals and schools—can qualify as church plans that are exempt from the Employee Retirement Income Security Act (ERISA).

ERISA requires private employers to follow certain minimum standards when they offer employees voluntary benefits like pension plans. Among other things, employers must provide notices and disclosures to participants and meet minimum-funding requirements.

So-called church plans, however, are exempt from ERISA—meaning that the plans don't have to comply with the act. In three consolidated cases involving hospitals that are associated with churches, the Supreme Court justices had to decide whether pension plans that are both established and maintained by religiously affiliated organizations (like the plans in these cases) fall under the church-plan exemption—or if the exemption is reserved for plans that were first established by places where religious worship happens.

On June 5, the Supreme Court justices reversed the decisions of three federal appeals courts and unanimously sided with the hospitals (Justice Sonia Sotomayor wrote a concurring opinion, and Justice Neil Gorsuch didn't participate).

The high court handed down an opinion "that is a major win for religiously affiliated health care systems—and nonprofits generally—that sponsor retirement plans that are maintained as exempt under ERISA," said Michael Graham, an attorney with Michael Best in Chicago.

There have been more than 30 church-plan class actions filed in the last few years, covering several hundred thousand plan participants.

Howard Shapiro, an attorney with Proskauer in New Orleans, said the decision will allow these church-affiliated entities to continue their mission of dedicating health and hospital resources to serving uninsured, impoverished and underinsured patients who are not served by other hospital systems.

"Instead of spending money on ERISA compliance, these religiously based hospitals may spend money on patient care," he added.

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

Statutory Interpretation

Since ERISA was enacted in 1974, the church-plan exemption has applied to plans that are "established and maintained" by a church. A 1980 amendment added that exempt plans may be "maintained" by organizations that are controlled by a church. This allowed churches to establish a plan and rely on church pension boards to maintain it.

However, the amendment isn't clear about whether church plans can be "established" by church-affiliated organizations like the hospitals' plans in these three class actions.

The plan participants argued 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 the church-affiliated hospitals.

The participants said that their pension plans are critically underfunded and should have to meet the minimum-funding obligations under ERISA.

On the other side, the hospitals argued (among other things) that the three agencies responsible for administering ERISA—the IRS, the Pension Benefit Guaranty Corp. and the Department of Labor—have all supported their position that many plans established and maintained by religiously affiliated organizations are exempt church plans.

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

"The question presented here is whether a church must have originally established such a plan for it to so qualify," Justice Elena Kagan wrote for the court. "ERISA, we hold, does not impose that requirement."

The decision confirms more than 30 years of uninterrupted judicial precedent and regulatory pronouncement from the three agencies concerned with pension regulation, Shapiro noted.

The justices turned to the statutory language. "The Supreme Court utilized a very textualist approach to finding that Congress intended to include within the exemption for church plans those plans established and maintained by principal-purpose organizations," Graham explained. 

A principal-purpose organization is one whose primary function is to administer or fund a benefits plan for the employees of a church "if such organization is controlled by or associated with a church or a convention or association of churches." The term "church employees" includes employees of an organization that is tax exempt under section 501 of the Internal Revenue Code and is controlled by or associated with a church. 

Kagan used sound analogies to support the court's holding that Congress in 1980 intended to extend the exemption to those church plans established by principal-purpose organizations as well as those plans originally established by a church, Graham added.

Next Steps

"This is a significant and hard-fought victory for the hospitals, but the dispute is far from over," said Tess Gee, an attorney with Miller & Chevalier in Washington, D.C. She said the high court's decision marks what is probably just the first battle in determining what the statutory language means, but the remaining issues entail individualized questions with respect to the specific hospitals and their plans' internal employee-benefit committees. 

The hospitals maintain that their internal employee-benefits committees count as principal-purpose organizations—though the court did not address that issue.

"While the Supreme Court's decision does provide finality on whether a church plan must be established by a church or just by a principal-purpose organization, the next wave of litigation in this area may shift to the question of whether an entity qualifies as a principal-purpose organization," Graham said. "That question may breed a new wave of litigation to further complicate this already complicated area of ERISA."

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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