Supreme Court Heals Hospital Issue: ERISA-Exempt Church Plans Don’t Need to be Set Up By a Church

Healthcare

Supreme Court Heals Hospital Issue: ERISA-Exempt Church Plans Don’t Need to be Set Up By a Church

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In a unanimous decision, the Supreme Court reasoned based on statutory interpretation that religiously-affiliated hospitals can run ERISA-exempt church plans.  The decision could affect retirement and pension benefits to more than 300,000 workers.

The Employee Retirement Security Act (“ERISA”) definition of a “church plan,”[1] and whether a religiously-affiliated hospital that has a retirement plan can meet this definition despite not being established by a church, has been a hotly debated issue.  The distinction is that a qualifying “church plan” is exempt from certain Internal Revenue Code (“IRC” or the “Code”) legal and reporting requirements.

The U.S. Supreme Court recently held in Advocate Health Care Network v. Stapleton [2] that the ERISA exemption for church plans does not require the plan to be originally established by a churchThus, a plan maintained by an entity described in ERISA §3(33)(C)(i), which the Court called a “principal-purpose organization,” qualifies as a church plan, regardless of who established it.  Although, the decision does not address which entities fall within the scope of a “principal-purpose organization.”

In Advocate Health Care v. Stapleton, employees (the “Employees”) of the hospital (“H” or the “Hospital”) had vested claims to benefits under H’s retirement plan (the “Plan”).  The Employees alleged that H had not maintained its pension plan according to the standards set forth by ERISA.

More specifically, it was alleged that H breached its fiduciary duty and harmed the Plan’s participants by: (i) requiring an improperly long period of five years of service to become fully vested in accrued benefits; (ii) failing to file reports and notices related to benefits and funding; (iii) funding the Plan at insufficient levels; (iv) neglecting to provide written procedures in connection with the Plan; (v) placing the Plan’s assets in a trust that did not meet statutory requirements; and (vi) failing to clarify participants’ rights to future benefits.  The Hospital argued that because the Plan was a “church plan,” it was exempt from the ERISA requirements.

Internal Revenue Code §414(e) and ERISA §3(33) define a “church plan” as a plan established and maintained for its employees (or their beneficiaries), by a church, or by a convention or association of churches, which is exempt from tax under Internal Revenue Code §501.  Additionally, a plan not meeting the above requirements may nevertheless be a “church plan” if the plan covers persons who may be deemed employees of a church, or a convention or association of churches, and the plan is maintained by an organization that is controlled by or associated with a church or convention or association of churches, and that has as its principal function the administration of retirement or welfare benefits to church employees.

The Supreme Court unanimously ruled that a plan maintained by a church-associated organization, whose principal purpose or function is to fund or administer a benefits plan for the employees of a church or a church-affiliated nonprofit, may qualify as a church plan regardless of whether a church established the plan (backing the longstanding IRS position on the matter).

[1] As per Internal Revenue Code Section 414(e) and ERISA Section 3(33).

[2] Advocate Health Care Network v. Stapleton, No. 16-74, No. 16-86, No. 16-258, U.S. (June 5, 2017).

The court relied on strict interpretation of the statutory language, which reads a plan “established and maintained by a church” includes a plan “maintained by” a qualifying church-affiliated entity.

This victory for the hospitals is also a victory for the IRS, which has for decades given its blessing to hospitals treating their pension plans as ERISA-exempt church plans.

As mentioned earlier, the decision does not address which entities fall within the scope of a “principal-purpose organization.” In the months leading up to the Supreme Court decision, a number of hospitals have agreed to multimillion dollar settlements, such as Providence Health and Services ($352M), Saint Francis Hospital ($107M), Trinity Health Corp. ($75M), among others. As such, employees challenging a church plan’s ERISA exemption may still be able to formulate an argument based on the entity’s ties to the church; specifically that they are insufficient in terms of rising to the level of “principal-purpose organization.”

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