The Supreme Court issued a stunning ERISA decision on Monday, overturning the law in the three federal circuits as to what constitutes a “church plan” that is exempt from ERISA’s requirements. In Advocate Health Care Network v. Stapleton, 581 U. S. ____ (2017), issued June 5, 2017, the Court held that ERISA’s “church plan” exemption applies to plans sponsored by hospitals that are affiliated with churches, regardless of whether or not those plans were actually established by a church. This decision reverses contrary rulings by the Third, Seventh, and Ninth Circuits.   

Petitioners in the case were three church-affiliated nonprofits that ran hospitals and offered defined-benefit pension plans to their employees. The plans were established by the hospitals rather than by a church and were managed by internal employee-benefits committees. Respondents, current and former employees of the hospitals, had filed class actions alleging that their employers’ pension plans did not fall within ERISA’s “church plan” exemption because the plans had not been established by churches. The District Courts had agreed with the employees’ position, and the Third, Seventh, and Ninth Circuits affirmed those decisions.   

The Supreme Court unanimously rejected Respondents’ argument. The Court, led by Justice Kagan, held that while Congress had initially only included plans “established and maintained” by a church in its definition of “church plan,” Congress’s 1980 amendments to the statute had included all plans “maintained by” principal-purpose organizations in that definition. The Court concluded that “a plan maintained by a principal-purpose organization therefore qualifies as a ‘church plan,’ regardless of who established it.” In so holding, the Court also noted that the three federal agencies responsible for administering ERISA (the Internal Revenue Service, Department of Labor, and Pension Benefit Guaranty Corporation) had long read the 1980 provisions as exempting plans like the hospitals’ from ERISA’s mandates.   

Justice Sotomayor wrote a separate concurrence. While she was “persuaded that [the Court’s Opinion] correctly interpret[ed] the relevant statutory text,” she was “troubled by the outcome of these cases.” She observed that “the available legislative history [did] not clearly endorse this result” and said “this silence gives me pause.” “The decision to exempt plans neither established nor maintained by a church could have the kind of broad effect that is usually thoroughly debated during the legislative process and thus recorded in the legislative record.”   

Justice Sotomayor also noted that organizations such as those of petitioners bore “little resemblance to those Congress considered when enacting the 1980 amendment to the church plan definition.” They “earn billions of dollars in revenue, and compete in the secular market with companies that must bear the cost of complying with ERISA.” Given this reality, Sotomayor suggested that Congress might be prompted “to take a different path.”  

And it certainly draws into question the wisdom of hundreds of millions of dollars that have been paid in settlements of earlier church plan litigation, when the legal landscape looked much different—for example, in October 2016, Providence Health & Services agreed to pay nearly $352 million to settle class action claims that it had underfunded its pension plan by wrongly treating its plan as a “church plan” exempt from ERISA’s funding and vesting requirements.   

The downside of this ruling, of course, is the potential impact on the millions of participants and beneficiaries of plans across the country maintained by church-affiliated organizations, such as schools and hospitals. Pursuant to the Court’s decision, they are not protected by ERISA. ERISA provides federal consistent standards under which benefit plans must be operated – all designed to protect participants and beneficiaries. If ERISA does not apply to these plans, protections relating to fiduciary duties, vesting of benefits, funding, insurance, termination procedures, and claims and appeal rights may not exist. As a result of this ruling, therefore, church-affiliated organizations will have more leeway in the structure, design, and operation of their plans. On the other hand, it should not be forgotten that without ERISA preemption, state laws will govern these plans. ERISA’s remedies are limited, whereas conceivably there may be more (or at least different) avenues for relief available to participants and beneficiaries who are harmed by their benefit plans under state law. With ERISA out of the way, claimants are free to pursue state law claims, such as breach of contract, negligence, and statutory claims, against these plans. In addition, plans may also be liable for extra-contractual damages, such as punitive damages, under state law.