Last Thursday, Judge Thelton Henderson of the United States District Court for the Northern District of California denied Dignity Health’s motion to dismiss in a case challenging the application of ERISA’s church plan exemption. In doing so, Judge Henderson determined Dignity Health’s plan is not a church plan exempt from ERISA. Thus, the plaintiff will be permitted to proceed with a putative class action alleging various violations of ERISA, including $1.2 billion in underfunding. This is the first order considering a motion to dismiss from a flurry of five similar lawsuits filed in recent months.

A flurry of five similar lawsuits filed in the last year challenge the application of ERISA’s church plan exemption to pension plans sponsored by non-profit hospital systems that are affiliated with the Roman Catholic Church. In a nutshell, a “church plan” is a plan that is established and maintained “by a church or by a convention or association of churches which is exempt from tax under section 501 of title 26.” 29 U.S.C. § 1002(33)(A). Church plans are not subject to the reporting, disclosure, participation, vesting and funding requirements that are imposed on most retirement plans (as well as health and welfare plans) under ERISA. For example, a church plan is not required to file a Form 5500 or to provide summary plan descriptions or summaries of material modifications to participants. The church plan exemption is applicable to church health plans and to most church welfare plans, as well as retirement plans.

The plaintiffs in the five similar lawsuits contend that the pension plans sponsored by the non-profit hospital systems are not subject to the church plan exemption under ERISA. The arguments regarding why the plans are not subject to the exemption are relatively similar across the complaints filed. Essentially, the plaintiffs argue that the plans in question are not plans that are “established and maintained” directly by churches as defined by 29 U.S.C. §1002(33)(A) or by “pension boards” as defined by 29 U.S.C. §1002(33)(C)(i). As such, the plaintiffs assert that the defendants violated, inter alia, the minimum funding, notice, plan document, and fiduciary rules of ERISA in their sponsorship and maintenance of defined benefit pension plans.

Last Thursday, the first order was issued considering a motion to dismiss in one of these cases. In Starla Rollins v. Dignity Health, et al., No. 3:13-cv-01450-THE, Judge Thelton Henderson of the United States District Court for the Northern District of California denied Dignity Health’s motion to dismiss, finding that Dignity Health’s plan is not a church plan exempt from ERISA. In reaching this conclusion, Judge Henderson acknowledged the series of Internal Revenue Service private letter rulings supporting the applicability of the church plan exemption to Dignity Health’s plan. However, Judge Henderson found such letters to be conclusory and not entitled to deference. Judge Henderson was also not persuaded by contrary case law from other jurisdictions.

Instead, Judge Henderson held the text of the statute is conclusive and requires that a church plan be established by a church or convention or association of churches. Dignity Health did not argue that it was a church or convention or association of churches. However, it sought church plan status by arguing that the statute also extends to plans maintained by church-associated organizations. Judge Henderson rejected this argument, finding that the statute simply allows churches to delegate the administration of their benefit plans to specialized church pension boards without losing their church plan status; it does not broaden the scope of organizations “who” can start a church plan. Judge Henderson noted that this interpretation of the statute is supported by the legislative history, which reflects concerns by church leaders that plans managed by pension boards maintain their status.

This decision has broad implications for employers such as Dignity Health who currently rely on the church plan exemption based on the entity’s “association” with a church. If these plans are not church plans, they will be subject to ERISA and face allegations of ERISA violations. For example, the plaintiff in the above case alleges that the Dignity Health plan is underfunded by $1.2 billion.

Due to the significance of this issue, we expect that Dignity Health will seek permission to file an interlocutory appeal of the order denying its motion to dismiss. Thus, the Ninth Circuit may have its chance to rule on this issue. We also await decisions on the pending motions to dismiss in the other church plan cases. See Marilyn Overall v. Ascension Health et al., No. 2:13-cv-11396-AC-LJM (E.D. Mich.); Albert R. Chavies et al. v. Catholic Health East et al., No. 2:13-cv-01645-CDJ (E.D. Pa.); Janeen Medina v. Catholic Health Initiatives et al., No. 1:13-cv-01249-REB-KLM (D. Colo.); Laurence Kaplan v. St. Peter’s Health Care Sys. et al., No. 3:13-cv-02941-MAS-TJB (D.N.J.).

We note that Judge Henderson’s order is against the weight of authority, including the guidance offered by the Internal Revenue Service and other courts that permits church plan sponsorship by church-affiliated organizations such as the hospitals affiliated with the Roman Catholic Church. Thus, we anticipate that this is not the last word on the scope of ERISA’s church plan exemption.