Earlier this week, in a unanimous decision, the U.S. Supreme Court overturned decisions by three federal Circuit Courts of Appeals and held that an employee benefit plan maintained by a church-controlled or church-affiliated organization can qualify as a “church plan” exempt from ERISA regardless of who establishes the plan. Advocate Health Care Network v. Stapleton, No. 16-74, 581 U.S. ___ (2017). In a concise and clearly written opinion, Justice Elena Kagan restored order in the church plan universe – and validated nearly 40 years of administrative decisions by the Internal Revenue Service, the Department of Labor, and the Pension Benefit Guaranty Corporation – by explicitly affirming that church-affiliated hospitals and other organizations can establish benefit plans that should be accorded the same treatment as plans actually established by a church. The Stapleton decision completely shut down the primary line of argument pursued by plaintiffs in a series of class action lawsuits. The plaintiffs challenged the status of pension plans maintained by hospitals and other church-affiliated organizations as church plans, and sought to bring those plans into the strict regulatory framework of ERISA. Nevertheless, the decision leaves open one final line of argument that could be pursued by attorneys representing aggrieved plan participants in church plan cases. So the discussion, and the litigation, may not end here.
The question presented in the Stapleton case was whether a benefit plan must have been established by an actual church in order for that plan to qualify for the “church plan” exemption under ERISA. Federal Circuit Courts for the Third, Seventh, and Ninth circuits found that the statutory provisions of ERISA indeed created such a requirement and that exemption rulings (and related guidance) issued by Internal Revenue Service, the Department of Labor, and the Pension Benefit Guaranty Corporation relied on a mistaken interpretation of ERISA. As originally enacted, ERISA defined the term “church plan” to mean “a plan established and maintained . . . for its employees . . . by a church.” (Emphasis added.) In 1980, Congress modified the definition of church plan – and arguably expanded the scope of the exemption – by adding that “a plan established and maintained . . . by a church . . . includes a plan maintained by an organization . . . the principal purpose or function of which is the administration or funding of a plan . . . .” (Emphasis added.) Justice Kagan used the term “principal-purpose organization” as a short-hand way to refer to the organization contemplated by the statute.
Attorneys representing the plaintiff classes argued that even though the modified definition would allow a church plan to be “maintained” by an organization other than a church, only a church may “establish” a church plan. Under that interpretation of the statute, a plan established by an organization other than a church (including church-affiliated hospitals and schools) could never qualify for the church plan exemption because it was not established by a church itself. The Court, applying time honored approaches to statutory interpretation, rejected that argument in its entirety. The Court found that when Congress modified the definition of church plan to “include” plans maintained by a principal-purpose organization, Congress did not inadvertently omit the word establish. Rather, Congress intended to bring within the scope of the church plan exemption a plan maintained by a principal-purpose organization regardless of whether the plan had been established by a church. Justice Kagan explained that the Court’s interpretation of the statute had a strong foundation in basic logic. Citing an early District Court opinion on the matter: “[I]f A is exempt, and A includes C, then C is exempt.”
The Supreme Court’s opinion in the Stapleton case is correctly viewed as a victory for hospitals and other church-affiliated organizations that have relied on church plan exemption rulings for years, but the decision may not put an end to church plan litigation. That is because the Court expressly did not address the question of what attributes or criteria must be met for an organization to be considered a “principal-purpose organization” that is capable of maintaining a church plan within the scope of the exemption. That matter will have to be addressed by the Circuit Courts whose decisions have been reversed, potentially District Courts to whom earlier decisions may be remanded by the Circuit Courts, and, of course, any new cases that may be brought or cases that have been suspended pending the outcome of the Stapleton case. In the meantime, while the Stapleton decision may reduce the price tag for settling cases that still are pending, church-affiliated employers are left to ponder what they can do to shore up the exemptions for their plans.
We offer the following preliminary thoughts for consideration by sponsors of church plans in light of the Stapleton decision:
- Formalize plan administration and management - Any church-affiliated organization that has not established a formal governance structure for plans that it intends to treat as church plans should do so. For example, if a plan has been administered by corporate officers or other employees without the framework of a formal committee operating under authority delegated by the governing body, the employer should formalize the governance structure in a way that would demonstrate that the plan is maintained by an organization that can be recognized as a “principal-purpose organization.”
- Refine and “rebrand” existing governance structures - A church-affiliated employer that has already established a formal governance structure for its church plans may wish to consider a “rebranding” (for lack of a better term) of its plan administrative committee in a way that would help support the current and historic status of such committee as a principal-purpose organization. For example, the committee should operate under a written charter affirming that its “principal purpose and function” is to administer and manage a church plan. In appropriate cases, it may be desirable to add to the committee one or more members who could, by their presence, support the status of the committee as an entity controlled by or associated with a church or convention or association of churches. Most church-affiliated organizations have missions that refer to religious teachings in some way, so this change should not be too difficult to make.
- Amend plan documents and disclosure materials if necessary - Finally, any plan that is intended to be maintained as a church plan should be reviewed, and amended if necessary, to assure that it does not contain terms and provisions that invoke ERISA. We are continually surprised at how frequently we see ERISA provisions in plans that are intended to be church plans. ERISA terms or provisions generally can and should be removed. (For example, even though a plan can and should contain a claims procedure it should not refer to rights participants may have under ERISA.) Provisions that explicitly state that the plan is not subject to ERISA are, of course, welcome.
We will continue to think about these issues and work with our church and church-affiliated clients to shore up the positions of their church plans as exempt from ERISA.