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Putting the Steeple (Back) on the Hospital: Supreme Court Rules that Benefit Plans for Employees of Religious-Affiliated Hospitals are Exempt from ERISA

In a June 5, 2017 decision, the U.S. Supreme Court held that benefit plans covering employees of church-affiliated hospitals were “church plans,” and hence not subject to ERISA, despite not being “established” by a church.  The decision, Advocate Healthcare Network v. Stapleton, ___U.S.___, 2017 U.S. LEXIS (U.S. June 5, 2017), reverses a recent trend in the district and circuit courts that caused considerable consternation among those institutions, who always believed they were exempt from the Employee Retirement Income Security Act (ERISA), and in many cases had letters from the IRS agreeing with them.

Justice Kagan, who delivered the opinion of the Court, offered little bit of background for the non-ERISA geeks.  ERISA, the Employee Retirement Income Security Act of 1974, generally obligates private employers offering pension plans to adhere to an array of rules designed to ensure plan solvency and protect plan participants, including minimum funding standards, reporting and disclosure mandates and participation and vesting requirements.  “Church Plans,” those covering employees of churches and church-affiliated nonprofits, have always been exempt (or at least were thought to have been exempt) from these requirements.  That is, until recently.  In a series of class action lawsuits involving non-profit, religious-affiliated hospitals, current and former employees alleged that their employers’ pension plans did not fall within the church plan exemption because those plans were not “established” by a church, and, therefore, did not fit within ERISA’s “church plan” definition.

Appellate courts in the Third, Seventh and Ninth Circuits agreed.  Those courts concluded that the plain reading of the statute requires that a pension plan must be established by a church to qualify for the church plan exemption.  Those rulings came as a bit of a shock to the organizations, which had always assumed, rightly as it turned out, that they were covered by a 1980 amendment to ERISA, which expanded the definition of “church plan” to include benefit plans covering employees of church-affiliated organizations, like the hospitals involved in the case.

And the kicker was that the government previously had agreed.  Justice Kagan’s opinion noted that the three federal agencies responsible for administering ERISA, the IRS, Department of Labor and the Pension Benefit Guaranty Corporation, had historically believed that benefit plans sponsored by church-affiliated nonprofits qualified as church plans under the 1980 amendment.  That interpretation resulted in hundreds of private letter rulings and opinion letters since 1982, including several provided to the hospitals in the case.  Those hospitals included Advocate Health Care Network, which operates 12 hospitals and some 250 other healthcare facilities in Illinois, and is associated with the Evangelical Lutheran Church in America and the United Church of Christ; St. Peters’ Healthcare System, which runs a teaching hospital and other medical facilities in New Jersey; and Dignity Health, which has an extensive network of community hospitals throughout the country and has ties to the Catholic religious orders that initially sponsored some of those facilities.

So how did the Supreme Court resolve this dilemma?  The same way it was caused, by reading the statute.  The Court coined the term “principal purpose organization” to describe an entity that funds or manages a benefit plan for employees of churches or church affiliates.  Then, going back to the first clause of the definition, the Court reasoned that a plan “established” by a church, “includes” a plan “maintained” by a principal purpose organization, regardless of who “established” it.  Verbal gymnastics?  Perhaps.  But that’s the 8-0 ruling by the highest court in the land.  (Newly appointed Justice Gorsuch took no part in the case.)

So what are the implications?  Well, for starters those plans no longer have to comply with the minimum funding standards under ERISA, which was the bone of contention in the class action lawsuits.  Justice Sotomayor noted as much in her concurring opinion; that it was the failure of some unregulated church plans that spurred cases such as these.  While agreeing that the statutory text compelled the result, the Justice noted that by holding that ERISA’s exemption for church plans covers plans neither established nor maintained by a church, scores of employees who work for organizations that look and operate much like secular businesses potentially might be denied ERISA’s protections.

While the decision addressed only pension plans, it has implications for life, health and disability benefit plans as well.  To the extent that those plans are once again deemed to be church plans, ERISA’s protections, and its limitations, will not apply.  Employee rights and remedies will be governed by state, rather than federal law, which can lead to the inconsistent results ERISA was enacted, in part, to avoid.

For a confidential analysis of your employment issues, or questions about TRC’s employment/labor practice area, please contact Jerry R. Hogenmiller, Esq. at (412) 316-8689 or [email protected] or Jim Rogers, Esq. at (412) 316-8651 or [email protected]

Important NoticeThis information is intended for general guidance only, and should not be used as a substitute for specific legal advice.  For specific legal advice applicable to your situation, you should consult an attorney of your choice.  Although believed to be accurate when written, no guarantee of completeness or accuracy to your particular circumstances should be implied.  Laws, regulations, and court decisions in this area change frequently, and you should consult the attorney of your choice for up-to-date information.