Hospital Industry Viewpoint

Religiously affiliated hospitals and health systems have recently come under attack by private litigants for exercising the right to remain exempt from ERISA requirements. Such hospitals and health systems should assess their potential exposure now and develop an action plan to minimize the fallout from any litigation that they may become subject to.

Many religiously affiliated hospitals have a pension plan that is operated as a “church plan” exempt from the federal pension law known as the Employee Retirement Income Security Act of 1974 (ERISA). These plans are not required to comply with ERISA’s funding, disclosure, and other provisions.

A recent wave of class action lawsuits, however, is challenging those church plan designations, even for plans that have received specific approval from the Internal Revenue Service (IRS) or the US Department of Labor (DOL). In the lawsuits, the plaintiffs are trying to make hospitals contribute hundreds of millions of dollars into their pension plans and to pay premiums to the Pension Benefit Guaranty Corporation (PBGC), as well as trying to seek other monetary and nonmonetary relief.

Two recent appellate court decisions have endorsed these lawsuits and substantially narrowed the applicability of the church plan exception such that many Catholic or other religiously affiliated hospitals may no longer qualify for the church plan exemption.[1]

WHAT IS THE CHURCH PLAN EXEMPTION?

The church plan exemption, enacted by Congress to prevent government entanglement with religious institutions, excuses pension plans that meet particular criteria from ERISA’s requirements. Importantly, church plans are not subject to ERISA’s minimum funding standards; are not required to provide ERISA-required notices, including about benefit freezes and reductions, plan funding, and Summary Plan Descriptions; and do not have to pay PBGC premiums.

WHAT CRITERIA MUST A PENSION PLAN MEET TO BE A CHURCH PLAN?

Until recently, most courts, the IRS, and the DOL expressed the view that an organization “controlled by or associated with a church or convention of churches” may have a church plan. This, in turn, was interpreted to apply to not-for-profit hospitals that shared “common religious bonds and convictions” with a church. As a result, many religiously affiliated hospitals—particularly Catholic hospitals—considered their pension plans to be church plans exempt from ERISA.

In the two recent decisions mentioned above, however, courts of appeals rejected these interpretations of the church plan exemption and held that only a “church” may establish a church plan. Since those decisions have issued, more than 10 new class action lawsuits have been filed against other religiously affiliated hospitals, and many more are expected.

The US Supreme Court will likely take up this issue in the coming years.

WHAT IF A PLAN IS DETERMINED TO BE A CHURCH PLAN BY THE IRS OR DOL?

In the past, many religiously affiliated hospitals submitted requests to the IRS or the DOL for approval of pension plans as church plans. Over the course of more than 30 years, government agencies have issued more than 500 Private Letter Rulings and Advisory Opinions approving particular pension plans as church plans exempt from ERISA’s requirements. However, those opinions and rulings are not binding on the courts and have not been afforded any deference in the decisions mentioned above.

In other words, religiously affiliated hospitals cannot rely on the IRS or DOL opinions to protect them from these lawsuits or to help defend against them.

WHAT SHOULD RELIGIOUSLY AFFILIATED HOSPITALS CONSIDER IN LIGHT OF THESE CASES? 

Because of the uncertainty of which plans will ultimately qualify as church plans exempt from ERISA, church plan sponsors should consider

  • examining the funded status of their plan to identify the effect that ERISA compliance would have on hospital finances and cash flows,
  • examining the cost and burdens of complying with ERISA’s disclosure and other requirements,
  • reviewing insurance policies—including fiduciary liability insurance—to determine whether there is coverage applicable if litigation were filed,
  • determining if there are unique facts that pertain pertaining to their particular health system that may increase the system’s chances of success in litigation, and
  • creating a communication plan to address potential external inquiries and inquiries from employees or former employees about the current lawsuits or about the church plan status of a sponsor’s pension plan.

CONCLUSION

The church plan cases have brought to light that many religiously affiliated hospital pension plans are underfunded when viewed according to ERISA’s funding requirements. Recent plaintiff victories in the courts of appeals have only encouraged more lawsuits to be filed. Because of the risks and the uncertainties in the law, plan sponsors should evaluate their plans now to assess potential vulnerabilities.