Does a benefit plan, to fall within the so-called “church plan exemption,” have to be directly established by a religious entity? Or is it enough for the benefit plan to be established by an organization, such as a medical institution, that is itself established by a religious entity? That is the question that a number of courts are attempting to answer through their holdings in recent cases.
A church plan is defined in the Internal Revenue Code (Code) 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 Code §501. Generally, a church plan is not subject to various requirements that apply to tax-qualified plans under the Code and Employee Retirement Income Security Act of 1974 (ERISA), such as ERISA’s rules governing reporting, disclosure, and fiduciary conduct.
For many years, it was the broad interpretation that seemed to rule due in part to IRS private letter rulings, which included in the church plan exemption plans sponsored by non-profit organizations that were controlled by or associated with a church (and not just plans directly established by a church). Consequently, the IRS and DOL have issued hundreds of rulings to church-affiliated organizations exempting their plans from ERISA. Recently, however, class actions have been filed across the country against religiously-affiliated healthcare institutions, challenging whether their benefit plans fall under the church plan exemption.
Specifically, on December 8, 2015, the U.S. District Court for the District of Colorado held in Medina v. Catholic Health Initiatives that the defined benefit pension plan sponsored by Catholic Health Initiatives, a Catholic non-profit health care system, qualified as a church plan under ERISA and was, therefore, exempt from ERISA. The court found that a plan does not need to be established by a church to qualify as a church plan; rather, such plans can also qualify as church plans if they are maintained by a tax-exempt organization controlled by or associated with a church whose principal purpose or function is the administration or funding of the benefits plan. The court then interpreted the church plan exemption under ERISA to apply to plans sponsored by church-affiliated non-profit organizations and administered by the organization’s plan committee if the principal purpose or function of the committee is administering the plan and the committee is controlled by or associated with a church.
In contrast, on December 29, 2015, the U.S. Court of Appeals for the Third Circuit upheld a decision of the U.S. District Court for the District of New Jersey in Kaplan v. Saint Peter’s Healthcare System, which held that a retirement plan sponsored by St. Peter’s Healthcare System was ineligible for the church plan exemption and must, therefore, comply with ERISA. In August 2013, the U.S. District Court for the District of New Jersey concluded that St. Peter’s Healthcare System could not establish an exempt church plan because it was not a church. St. Peter’s Healthcare System then appealed that decision to the Third Circuit. The Third Circuit stated that, as of 2012, religiously affiliated hospitals accounted for seven of the nation’s ten largest nonprofit healthcare systems and that applying the church plan exemption to these hospitals would defeat the purpose of ERISA.
Other district courts have sided with the narrow interpretation used in Kaplan:
In Stapleton v. Advocate Health Care Network and Subsidiaries, the U.S. District Court for the Northern District of Illinois held that the defined benefit retirement plan of Advocate Health Care Network is not a church plan under ERISA, and is instead fully subject to ERISA’s requirements. The court stated that although affiliated with the United Church of Christ and the Evangelical Lutheran Church in America, Advocate Health Care Network was not owned or financially supported by either church. Advocate Health Care Network has appealed that decision to the Seventh Circuit.
In Rollins v. Dignity Health, the U.S. District Court for the Northern District of California ruled that a pension plan sponsored by Dignity Health was not a church plan exempt from the ERISA because it was not directly established by a church or convention of churches. The court rejected the IRS’s broad interpretation of the church plan exemption described above. Dignity Health has appealed that decision to the Ninth Circuit.
It is unclear how the circuit courts will rule in these cases. What is clear, however, is that there is disagreement between the government agencies and certain courts as to how to apply the church plan exemption — the effects of which could have hefty consequences for religiously-affiliated healthcare institutions and/or the participants in their benefit plans.