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Court will decide if church-affiliated hospitals’ retirement plans must comply with ERISA
The U.S. Supreme Court announced on Dec. 2 that it will hear three consolidated cases asking whether pension plans maintained by church-affiliated organizations, such as hospitals, are exempt from the Employee Retirement Income Security Act (ERISA).
The closely watched class actions were brought by hospital employees who claimed their employers failed to comply with various ERISA provisions. The hospitals, however, argued that their pension plans do not fall under ERISA's purview because of their religious affiliation.
David M. Kaufman, an attorney with Freeborn & Peters in Chicago, noted that the IRS, the Pension Benefit Guaranty Corp. (PBGC) and the Department of Labor have all taken the position that many church-affiliated organizations, such as the hospitals, fall under the church-plan exemption.
However, the employees claimed that regardless of the agencies' position, the statutory language in ERISA's church-plan exemption doesn't actually include the hospitals. Therefore, they argued, their employers impermissibly avoided their obligations under the act.
"If the health plans lose at the high court, it would bring a whole new class of organizations within the pension requirements of ERISA, exposing them to extensive liability—in the billions of dollars—and imposing fiduciary obligations and minimum-funding rules," said M.C. Sungaila, an attorney with Haynes and Boone in Orange County, Calif., and the chair of the Amicus Curiae Committee of the International Association of Defense Counsel.
Enacted in 1974, ERISA created certain safeguards to protect employee retirement plans. Among other things, ERISA requires many private-employer plans to meet minimum-funding obligations and to be insured through the PBGC. Although these requirements provide safeguards for employees, they are costly for employers.
Church plans, however, are exempt from ERISA's coverage.
[SHRM members-only toolkit: Designing and Administering Defined Benefit Retirement Plans]
"The main idea is that plans established by churches are exempt from ERISA because of the separation of church and state," explained Tiffany Downs, an attorney with Ford Harrison in Atlanta.
"Over time, the exemption has been expanded by the IRS to include hospitals and other entities that are affiliated with religious organizations," she added.
The IRS has issued private letter rulings to the hospitals, finding that they qualify for the exemption as church-affiliated organizations.
The hospitals argued that they've been allowed to use the exemption for years, but the plaintiff-employees said that regardless of what the IRS said, their plans don't actually fall under the exemption, Kaufman explained.
'Established and Maintained'
"The primary question is one of statutory construction and what Congress meant when it created the exemption for church plans," Kaufman said.
The church-plan exemption applies to plans that are "established and maintained" by a church.
An amendment to ERISA added that exempt plans may be "maintained" by organizations that are controlled by a church, but the amendment doesn't say that church plans can be "established" by an affiliated organization.
The amendment allowed churches to establish a plan and rely on church pension boards to maintain the plan. It also allowed churches to continue covering church-affiliated employees after a sunset provision took effect in 1982.
The crux of the dispute before the Supreme Court is whether the exemption applies to plans like the hospitals' that were not "established" by a church, but rather were both "established" and are "maintained" by a church-affiliated organization.
That might sound complicated, but it goes to the heart of what Congress meant to make exempt, Kaufman said. There were certain concerns about government entanglement with religion if the federal government regulated church pension plans.
Illinois-based Advocate Health Care Network, New Jersey's Saint Peter's Healthcare System and Dignity Health in California are challenging rulings by the 7th, 3rd and 9th U.S. circuit courts of appeals, respectively, which held that their retirement plans can't be excluded from ERISA as church plans, Sungaila explained.
The federal appeals courts reasoned that "the health care networks are not themselves 'churches' and no 'church' per se initially established the plans," she added.
"The cases also raise important First Amendment questions," she said, "including whether it is proper for the courts to engage in an analysis which tests whether these church-affiliated organizations are 'religious' enough to be excluded from the ERISA statute and asks the courts to draw lines between direct church activity and ministry activities."
"This is a narrow issue that will only affect those entities affiliated with churches," Downs said. "But if the Supreme Court upholds the circuit court decisions, HR professionals working for those organizations may have a relatively short period of time to get their pension plan funding up to where it needs to be."
A broader implication of a ruling in favor of the employees is not to necessarily rely on IRS letter rulings or past practices, Kaufman said. "Don't be too comfortable with past assumptions."
A ruling in favor of the hospitals would mean that they can continue to use the exemption.
Kaufman said this case has a lot to do with the relationship between the federal government and religious organizations, so the high court's position in this case may be an indicator as to how it will view other issues related to religious organizations.
A ruling in the case is expected in the spring of 2017, but absent a ninth justice on the Supreme Court, a 4-4 ruling would be possible.
If that happens, the appellate court rulings would still apply, but only in their circuits. The question would remain unresolved in other jurisdictions, and other appellate courts could take different positions.
Therefore, it's possible that the dispute could continue after this term.
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