Since 2014, large church-controlled health systems that offer defined benefit pension plans have seen lawsuits filed as to whether such plans are eligible to qualify for the ERISA church-plan exemption, which governs those arrangements. When a retirement plan meets the ERISA church-plan exemption, it is exempt from the typical funding and vesting requirements of ERISA and the Internal Revenue Code as well as from the ERISA reporting and disclosure requirements. As the church-plan litigation moves to the appellate level, two adverse decisions are reached denying ERISA church-plan exemption to two health systems.
Since 2013, there have been more than 10 lawsuits filed against various health care systems across the country that maintain and operate defined benefit pension church plans. These suits allege that the retirement plans are not eligible for church-plan status and, therefore, cannot be exempt from the funding and disclosure requirements of the Employee Retirement Income Security Act of 1974 (ERISA). As the litigation has progressed over the past two years, the district courts have been divided on the issue, with district courts in Colorado, Maryland and Michigan affirming church-plan status for certain health care system and district courts in California, Illinois and New Jersey denying church-plan status for other health care systems. The remaining district courts where complaints have been filed have either not yet reached a decision or have put their decisions on hold pending decisions in other cases.
In the past four months, two federal appellate courts have decided appeals on the church-plan argument. On December 29, 2015, the US Court of Appeals for the Third Circuit issued its opinion in Kaplan v. Saint Peter’s Healthcare System, concluding that although a church agency can “maintain” an exempt church plan, it cannot “establish” such a plan. The Third Circuit concluded that under ERISA’s plain text, only a church can establish a plan that qualifies for the ERISA church-plan exemption. The Third Circuit determined that because the St. Peter’s Healthcare System retirement plan was not established by a church (it was instead established by the health care system), it was ineligible for the ERISA church-plan exemption. Similarly, on March 17, 2016, the US Court of Appeals for the Seventh Circuit reached its decision in Stapleton v. Advocate Healthcare Network, concluding that a retirement plan established by a church-affiliated organization, such as a hospital, was not exempt from ERISA.
Dissecting the “Plain Meaning” of the Church-Plan Exemption
The key turning point issue in each of these two appellate cases is the precise language used in the originally enacted ERISA provision in 1974 and then the extension of that church-plan provision in 1982 under the Multiemployer Pension Plan Amendments Act of 1980. The original church-plan exemption language enacted in 1974 read as follows:
ERISA Section 3(33)
(A) The term “church plan” means 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 title 26.
(B) The term “church plan” does not include a plan—
(i) which is established and maintained primarily for the benefit of employees (or their beneficiaries) of such church or convention or association of churches who are employed in connection with one or more unrelated trades or businesses (within the meaning of section 513 of title 26), or
(ii) if less than substantially all of the individuals included in the plan are individuals described in subparagraph (A) or in clause (ii) of subparagraph (C) (or their beneficiaries).
In 1980, subparagraph (C) was added to ERISA Section 3(33), which relevant portions for the litigation read as follows:
(C) For purposes of this paragraph—
(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.
Both the Third and Seventh Circuits focused on the fact that the precursory language of new ERISA Section 3(33)(C)(i) iterated the language “a plan established and maintained for its employees…by a church…” before further stating which types of plans would be “included” within that definition. Both courts found it significant from a plain-meaning interpretation that the phrase “includes a plan maintained by an organization…for the employees of a church or a convention…” did not articulate that the “inclusion” also captured a plan “established” by such organization for the employees of the church. In other words, both courts held that the precursory language always requires that the plan be established by a church, but the inclusion merely clarified that if such a church-established plan was then later maintained by another organization for the church, it would equally meet the church-plan exception. Both courts determined that although the underlying health care system was affiliated with a church, the health care system itself had “established” the retirement plan, not the underlying church. Therefore, the retirement plans failed to meet the requisite church-plan definition.
Both the Third and Seventh Circuits noted that if Congress chose to include particular language in one section of ERISA but omitted it in another section of the same statue, it should generally be presumed that such decision was intentional and purposeful. Further, the Third Circuit in Kaplan stated that because ERISA is a “remedial” statute, it should be liberally construed in favor of protecting the participants in employee benefit plans. As such, excluding plans established by church agencies could take a large number of employees outside the scope of the ERISA protections.
These adverse decisions for church-plan status have caused several health care systems in pending cases to consider resolving their cases before further appellate decisions are issued. For example, in Overall v. Ascension Health, a case in which the Eastern District of Michigan previously ruled that Ascension Health’s retirement plan did in fact qualify as a church plan, the parties ultimately decided in May 2015 to settle the issues while the case was on appeal. After fully briefing an appeal pending in the US Court of Appeals for the Sixth Circuit, Ascension agreed to provide for certain retirement plan provisions that would enhance the retirement security of the members in the settlement class. Specifically, barring a significant change in the law surrounding church plans, the Ascension pension plan would remain a non-ERISA church plan. However, because church plans are generally financially responsible only for pension obligations to the extent those plans are funded, Ascension agreed to guarantee participants would receive the level of benefits stated in the retirement plan through June 30, 2022. Notwithstanding this agreement, Ascension was only required to make an $8 million contribution to the retirement plan and pay the plaintiff’s attorneys’ fees and expenses of roughly $2 million. Further, Ascension agreed to provide certain “ERISA-type” protections for employees, including production of summary plan descriptions, issuance of pension benefit statements and adherence to claims review procedures similar to those under ERISA.
Equally, in December 2015, two additional health care systems decided to settle their church-plan disputes rather than wait for an appellate court decision on the plan’s status. Specifically, Trinity Health, which was successful in defending its church-plan status in in Lann v. Trinity Health Corp. (pending in the District of Maryland), entered into an undisclosed joint settlement with participants; while Catholic Health East, which was unsuccessful in defending its church plan status in Chavies v. Catholic Health East (pending in the Eastern District of Pennsylvania), entered into an undisclosed joint settlement with participants.
Because the settlement terms in cases like these are typically kept confidential, it is difficult to draw any conclusions as to the impetus for the settlements or if there will be longer-term impacts on church-plan litigation generally. However, plan sponsor decisions to settle litigation in lieu of long and protracted litigation does appear to provide plan sponsors some breathing room to increase their funding status and comply with some of the more innocuous ERISA disclosure requirements without having to manage the litigation process at the same time.
Next Foreseeable Wrinkle in the Church-Plan Argument
In Kaplan v. Saint Peter’s Healthcare System, the Third Circuit opined on an issue that was not directly before the court. Specifically, the Third Circuit stated that ERISA Section 3(33)(C)(i) expressly states that if a plan is to be maintained by an organization that is not a church, it must be an organization “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…” The court noted that Saint Peter’s itself did not meet the “principal purpose or function” test because it primarily provided health care, not administration or funding of the retirement plan. Consequently, the court stated that it had “substantial reservations over whether St. Peter’s can even maintain an exempt plan.” Although St. Peter’s argued that it had a retirement plan committee and that committee’s principal purpose was to maintain and administer the retirement plan, the court noted that ERISA does not provide that the organization may have a committee who administers the plan; instead, ERISA requires that the organization itself act as the administrator of the plan and act in that capacity as its principal purpose.
While this issue has not received considerable attention or vetting by the courts up to this point, it may become a significant issue applying the Third and Seventh Circuits’ “plain meaning” test to church-plan status. The question that may arise is: If a health care system can in fact meet the ERISA church-plan exemption, will it be best to have a separate nonprofit entity within the system, whose sole role is to maintain and administer the respective church plans? That question may well impact the final determinations as to church-plan status for retirement plans of health care systems.