Supreme Court rules hospitals' 'church plans' can qualify for ERISA exemption

July 1, 2017


The U.S. Supreme Court ruled June 5 that pension plans covering employees of faith-based hospitals and other religious organizations can qualify for "church plan" exemption from federal pension regulations including for plan funding, disclosures and reporting.


The unanimous decision is consistent with 30-plus years of determinations by the Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation with respect to "church plan" language set out in the U.S. Employee Retirement Income Security Act of 1974 and expanded in a 1980 amendment.

The Supreme Court case, Advocate Health Care Network et al. v. Stapleton et al. was decided together with cases involving ministry members Saint Peter's Healthcare System and Dignity Health.

Plan stewardship
Leslie Hirsch is interim chief executive and president of New Brunswick, N.J.-based Saint Peter's. Hirsch said of the decision, "This is not a matter of 'we won and the employees lost.' Our concern and focus is on the retirement security of our employees and others involved in the plan. We're funding the plans appropriately and being a good fiduciary. We're fulfilling our responsibility (to be strong stewards of the plans) and will continue to do so."

In its statement following the ruling, San Francisco-based Dignity Health, too, affirmed the solidity of its plan: "We remain committed to ensuring our pension plan is adequately funded and properly managed."


Lisa Gilden, CHA vice president and general counsel, said that CHA is very pleased that the Supreme Court confirmed the long-held position of the relevant government agencies that CHA members are eligible for the church plan exemption. Although the court indicated that there may be other issues to be resolved by the lower courts — such as the association of a specific Catholic hospital with the church — given the centrality of the statute to these disputes, "we expect the decision will go a long way to entirely resolve all of the pending church plan cases," she said.

ERISA intent
The Supreme Court case centered on language contained in ERISA and the 1980 amendment Congress added to broaden the types of organizations eligible for exemption from ERISA regulations. The 1974 language says in part that to be exempt, plans must be "established and maintained … by a church."

Language added by Congress six years later said that pension plans maintained by a church-affiliated or church-controlled organization can qualify as church plans. That expanded definition included plans maintained by an organization whose "principal purpose" is the administration or funding of such a plan. The 1980 amendment also says organizations that maintain the plans must be "controlled by or associated with a church."

All three class action cases involved plans established by faith-based hospitals and managed by internal employee benefits committees. The pensioners' attorneys argued that under the statute's language, pension plans had to be originally established by a church to qualify for the church plan exemptions to ERISA rules. In a unanimous decision, eight justices said ERISA does not impose that requirement.

The Supreme Court said in its decision that the issue of what it means to be "controlled by or associated with a church" and the issue of what organizations count as "principal-purpose organizations" were not up for deliberation in this case.

Justice Sonia Sotomayor, in a concurring ruling, wrote that while she joined in the court's opinion, she is "nonetheless troubled by the outcome of these cases." She wrote that the organizations offering today's church plans "bear little resemblance to those Congress considered when enacting the 1980 amendment" — in part because they are very large, and in many cases financially healthy systems. She wrote the "current reality might prompt Congress to take a different path."

Fitting the definition
Class action law firms and other legal representatives have initiated more than 30 lawsuits in the last three years-plus against church plans on behalf of pensioners.

Some systems — including St. Louis-based Ascension and Livonia, Mich.-based Trinity Health — had settled prior to Supreme Court involvement in the issue, to avoid further litigation. Other lawsuits had advanced to various levels of the court system. Englewood, Colo.-based Catholic Health Initiatives prevailed at the district court level. Its case is now before the 10th Circuit Court of Appeals.

The three defendant systems that lost at the federal appellate court level were the plaintiffs in the Supreme Court case.

Gilden said that the lower court cases that have been on hold during the Supreme Court deliberations will now come back to life. Since the threshold question of eligibility for the exemption has now been decided, the focus will be on whether the plans meet the other parts of the "church plan" definition — namely, the "association with a church" and the "principal purpose" requirements.

Gilden cautioned that the courts will need to tread carefully when examining an organization's "association with a church" as this "raises significant church/state issues," she said. CHA has consistently argued throughout the litigation that under constitutional principles, only a church, and not the government, can determine what organizations are part of the church's ministerial work.


Ongoing challenge
Jeffrey Greenbaum is chair of the class action practice group of Sills Cummis & Gross P.C., the defense firm that was lead counsel for Saint Peter's. Greenbaum and Saint Peters' Hirsch said that had the Supreme Court ruled in the pensioners' favor, it could have been "ruinous" for many church plans. Hirsch said the "look-back" potential for punitive fees and penalties associated with noncompliance with ERISA going back 30-plus years could have been a "significant issue" for Saint Peter's.

And, said Greenbaum, such a ruling could have had implications for church-related hospitals, schools, day care centers, nursing homes and other ministries that the IRS and other governmental agencies already had said were exempt from the ERISA regulations. Greenbaum said that many church plans would "not survive" if they were subject to ERISA compliance, because they would be unable to cover expenses and strict funding formulas.

Greenbaum and Hirsch said Saint Peter's pension plan is fiscally sound and plan contributions are held in an irrevocable trust that must be solely used for pension funding. The plan is not insured by the Pension Benefit Guarantee Fund, Greenbaum said. "The plan is currently being funded on a weekly basis with the advice of actuaries in accordance with church plan guidelines. It is very well funded as a church plan," he said. "No beneficiary has ever missed a payment under the pension plan and benefits have not in any way been reduced as a result of the litigation."

Greenbaum expects Saint Peter's opposing counsel to challenge whether Saint Peter's meets the definition of an organization that qualifies for the exemption. But, Greenbaum said, Saint Peter's position is that the main issue in its case already has been decided in its favor by the Supreme Court. Saint Peter's is sponsored directly by a diocese, and the bishop of that diocese retains significant control of the hospital's governance, and so Greenbaum believes that association with a church is well established for the hospital. (A small minority of Catholic hospitals are sponsored directly by a diocese.)


Copyright © 2017 by the Catholic Health Association of the United States
For reprint permission, contact Betty Crosby or call (314) 253-3490.

Copyright © 2017 by the Catholic Health Association of the United States

For reprint permission, contact Betty Crosby or call (314) 253-3490.