Over 30 lawsuits have been filed over the past several years alleging that defined benefit plans maintained by religiously-affiliated hospital systems are not entitled to church plan status under the Employee Retirement Income Security Act of 1976, as amended (“ERISA”). On June 5, 2017, after hearing oral arguments on March 27, 2017, the United States Supreme Court issued a unanimous decision (Justice Neil Gorsuch did not participate) reversing the Courts of Appeals’ decisions in the three consolidated cases referred to as Advocate Health Care Network et. al. v. Stapleton et. al. (“Advocate”). Relying on the “natural reading” of ERISA’s text and a “simple logic problem,” the Court held that employee benefit plans maintained by religiously-affiliated hospital systems are exempt from ERISA as “church plans” regardless of whether a church established the plan.
A “church plan” is defined under ERISA Section (3)33 as:
“(A) …[A] plan established and maintained (to the extent required in clause (ii) of subparagraph (B)) for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under section 501 of the Internal Revenue Code of 1986 [Code Sec 501]. …
(C)(i) A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.”
In the Advocate opinion, the Court referred to entities under Subsection (C)(i) above as “principal-purpose organizations”.
The Advocate cases hinged on the interpretation of the language in Subsection (C)(i). The current and former employees of the hospitals alleged that the “includes” language was only meant to modify which entities could “maintain” a church plan, but that only churches could establish the plans. Since the hospitals both established and maintained their pension plans, the respondents argued that such plans are not church plans and ERISA should apply. If ERISA applied, the hospitals’ defined benefit pension plans would have been out of compliance with, among other provisions, the minimum funding rules that require an employer to fund to a trust a certain amount of assets per year to ensure that there are sufficient funds available at the time of an employee’s retirement. The hospitals and the three government agencies in charge of enforcing ERISA (the Internal Revenue Service, the Department of Labor, and the Pension Benefit Guaranty Corporation) disagreed – arguing that Congress intended to remove the establishment requirement with regard to principal-purpose organizations as of the date of the amendment to ERISA in 1980 (which added Subsection (C)(i)).
The Court agreed with the hospitals, holding that a plan maintained by a principal-purpose organization qualifies as a church plan under ERISA, regardless of whether a church established it.
Justice Sotomayor concurred in the opinion; however she expressed concern that Congress may not have contemplated that multi-billion dollar non-profit entities affiliated with a church would be relying on the exemption they created and this decision might prompt Congress into action.
While this decision is a significant victory for religiously-affiliated pension plans, the Court’s opinion leaves several unresolved issues. The Court did not express a view on whether the hospitals or their benefits committees qualified as “principal-purpose organizations” that would be eligible for the exemption. The Court also did not rule on what is meant to be “controlled by or associated with” a church or a convention or association of churches, leaving open the possibility for future litigation on these issues.