The Employee Retirement Income Security Act of 1974 (ERISA) governs most retirement and health and welfare plans sponsored by private sector employers for their employees. ERISA’s so-called “church plan exemption,” however, excludes plans sponsored by churches from ERISA coverage, unless such plans affirmatively elect to be subject to ERISA. For decades, the federal courts and agencies charged with interpreting ERISA agreed that ERISA’s church plan exemption extends not only to plans sponsored by churches, but also to plans sponsored by organizations that are affiliated with churches, such as church-affiliated schools and hospitals.
In recent years, however, a series of putative class-action lawsuits has been filed across the country challenging application of the church plan exemption to plans sponsored by church-affiliated organizations.1 Those suits allege that ERISA permits only churches to establish church plans, and so plans established by church affiliates that purport to be exempt from ERISA are in fact subject to—and in violation of—the statute, including its reporting, accrual, vesting, and funding requirements, as well as the requirement to pay pension insurance premiums to the Pension Benefit Guaranty Corporation. This recent wave of church plan litigation has led at least three federal district courts to break from the long-settled interpretation that church-affiliated organizations may take advantage of the church plan exemption and hold that the exemption covers only plans established by churches themselves.2 These three cases are currently before courts of appeal on interlocutory appeals.3
In this article, we analyze the current state of the law on the ERISA church plan exemption and offer advice for church-affiliated employers in light of the fluctuating state of the law.
From the time of its enactment in 1974, ERISA has exempted “church plans”—defined as plans “established and maintained” by a church for its employees—unless such plans elect to be governed by ERISA. ERISA § 3(33)(A). In 1980, however, Congress amended the statute to expand the church plan exemption in two ways.
First, Congress provided that church plans include plans “maintained” by a church controlled or associated organization whose “principal purpose or function” is administering or funding the plan for church employees. ERISA § 3(33)(C)(i). Second, Congress provided that church plans may cover the employees of churchaffiliated entities. ERISA § 3(33)(C)(ii)(II).
For more than thirty years, federal courts—including the only two appellate courts to consider the issue— interpreted the church plan exemption to encompass not just plans established by churches, but also plans established by non-church entities that are affiliated with churches.4 Based on the 1980 amendment extending the exemption to plans maintained by tax-exempt organizations “controlled by or associated with a church,” many courts concluded that the relevant inquiry for determining whether a plan qualifies as a church plan is not whether the plan was established by a church, but whether the plan was established by an organization that is “controlled by or associated with” a church. See, e.g., Thorkelson, 764 F. Supp. 2d at 1127. The Department of Labor5 and the Internal Revenue Service6 concurred with this interpretation. As a result, plans established by an array of entities affiliated with churches—including hospitals, healthcare corporations, and even book publishers—were held to be church plans exempt from ERISA, so long as they established that they were controlled by or affiliated with a church.7
Courts Break with Three Decades of Precedent on the Church Plan Exemption
In the last few years, however, a wave of putative class action lawsuits has been filed against various non-profit hospitals affiliated with churches challenging this settled
interpretation of ERISA’s church plan exemption. See supra at n.1. Notwithstanding more than three decades of precedent to the contrary, the plaintiffs in these actions argue that plans established by church affiliates do not qualify as church plans because they are not “established and maintained” directly by a church.
On December 12, 2013, the United States District Court for the Northern District of California issued its opinion in Rollins v. Dignity Health, 19 F. Supp. 3d 909 (N.D. Cal. 2013), becoming the first court, in the recent wave of church plan litigation, to hold that only churches may establish church plans. Rollins concerned pension plans sponsored by Dignity Health, which operates a health care conglomerate and ancillary care facilities and is associated with the Roman Catholic Church. Dignity operated its pension plans as exempt from ERISA, in reliance on ERISA’s church plan exemption. The plaintiffs, however, argued that Dignity’s plans did not qualify as church plans because Dignity was not itself a church, and the plans were thus subject to and in violation of ERISA, including its minimum funding obligations. In particular, the plaintiffs alleged that Dignity’s plan was underfunded by $1.2 billion.8 Dignity moved to dismiss the complaint, arguing that although it was not a church, its plans were entitled to church plan status because of Dignity’s church affiliation.
The court denied Dignity’s motion to dismiss, holding that only a church can establish an ERISA-exempt church plan. The court rejected Dignity’s argument that the 1980 amendment expanding the definition of a church plan to include plans “maintained by a [church-associated] organization” (ERISA § 3(33)(C)(i)) meant that churchaffiliated organizations may “establish” church plans. The court held that ERISA § 3(33)(A) limits the entities that can “establish” church plans to churches, and section (C) (i) merely expands the entities that can “maintain” church plans, permitting a plan established by a church to retain its church plan status even though a church-affiliated organization, rather than the church itself, maintains the plan. Id. The court reached this conclusion based on a “plain meaning” interpretation of the statute, supported by the legislative history, which the court said suggested that the purpose of the 1980 amendment was “to permit churches to delegate the administration of their benefits plans to specialized church pension boards without losing their church plan status,” not “to broaden the scope of organizations who could start a church plan.” Id. at 915-16. Moreover, even putting aside the establishment issue, section (C)(i) limits the church-affiliated organizations that may “maintain” church plans to organizations whose “principal purpose or function” is “the administration of a plan or program” for church employees. Id. at 915. Dignity—“a healthcare organization,” whose “mission is the provision of healthcare”—failed to meet that requirement. Id.
The court acknowledged that its holding contradicted decades of precedent. The court, however, “decline[d] to defer” to the IRS’s statutory interpretation, reflected in more than three decades of private letter rulings, finding the statute clear and the IRS’s reasoning “conclusory.” Id. at 913 & n.3. The court was similarly unpersuaded by the extensive case law from other jurisdictions interpreting the church plan exemption as extending to plans maintained by church affiliates, describing that precedent as “flawed.”9
After Rollins, two other federal district courts followed suit, also holding that only churches may establish ERISAexempt church plans. See Kaplan v. Saint Peter’s Healthcare System, 2014 WL 1284854 (D.N.J. Mar. 31, 2014); Stapleton v. Advocate Health Care Network, 76 F. Supp. 3d 796 (N.D. Ill. 2014). All three such cases have been certified for interlocutory appeal and are currently pending before the Third, Seventh and Ninth Circuit Courts of Appeals. See supra at n.3.
Advice for Employers
Church-affiliated employers that sponsor employee benefit plans should be aware that with the current trend of the plaintiffs’ bar targeting the ERISA exempt status of plans sponsored by church affiliates, their plans could be at risk for potential litigation. With the law on the church plan exemption in a state of flux, church-affiliated employers that sponsor employee benefit plans should monitor the developments in this area, and, in particular, keep a close watch on the three church plan cases pending before the courts of appeals. The outcome of those cases could have far-reaching implications for church-affiliated organizations that operate their plans as exempt from ERISA based on their affiliation with a church. If the plaintiffs’ view prevails and such plans do not, in fact, qualify as church plans, the financial impact on church-affiliated organizations for bringing their plans into compliance with ERISA’s funding and other requirements could be enormous. In the meantime, as the law on the scope of the church plan exemption continues to develop, church-affiliated employers that sponsor employee benefit plans may wish to review the structure, operation, and funding levels of their plans to better evaluate the issues that could arise if their plans were subject to a similar challenge.