Until recently, the Internal Revenue Service (IRS), the Department of Labor (DOL), and federal courts seemed to agree that a retirement plan established and maintained by a church-affiliated organization generally qualified as a “church plan” exempt from requirements under the Employee Retirement Income Security Act (ERISA). However, two federal circuit courts have now ruled that such plans do not qualify as church plans and are therefore subject to ERISA and to being sued for not complying with ERISA’s requirements. These rulings represent a growing and significant shift in how courts interpret the church plan exemption. Sponsors of these plans may need to reassess their exempt status and prepare for the possibility that the ERISA exemption could be lost.
Recent and Anticipated Federal Rulings on Church Plan Exemptions
In December 2015, the Third Circuit Court of Appeals became the first circuit court to reject a church-affiliated organization’s church plan exemption in Kaplan v. Saint Peter’s Healthcare System, 810 F.3d 175. The suit was initiated by a plan participant claiming the defined benefit plan was subject to ERISA, was underfunded by $30 million, and had failed to comply with ERISA’s disclosure, trust and fiduciary requirements. The court focused on whether a 1980 amendment to ERISA Section 3(33) changed the apparent requirement that a plan must be both established and maintained by a church in order to be a church plan. The defendant argued that, following the amendment, a plan could qualify for the exemption so long as it was maintained by a religiously affiliated organization, as described in the statute, regardless of which entity established the plan.
The appellate court rejected this argument and held that the amendment simply allowed a church-affiliated organization (such as a pension board) to maintain a plan but did not alter the requirement that a church first establish the plan. The court recognized that its opinion was at odds with longstanding informal guidance from both the IRS and the DOL, but it rejected the guidance as directly conflicting with the statute. Of equal concern, the court also expressed in a footnote its “substantial reservations” as to whether the defendant-hospital could even maintain a church plan. However, having already ruled that the plan was not a church plan, the court found that reaching this additional question was unnecessary.
Under ERISA Section 3(33)(C), a church-affiliated organization may maintain a church plan if its “principle purpose or function . . . is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or convention or association of churches” and it “is controlled by or associated with a church or convention or association of churches.” The court stated that the defendant did not appear qualified to maintain a church plan because its principal purpose was “the provision of healthcare and not the administration or funding of the retirement plan.”
In March of this year, the Seventh Circuit Court of Appeals, in Stapleton v. Advocate Health Care Network,became the second federal appellate court to reject a claim by a church-affiliated organization that its plan was exempt as a church plan under ERISA. __ F.3d __, 2016 WL 1055784, at *7 (noting that, “[o]ther than the Third Circuit, . . . no other circuit has directly addressed this question”). The plaintiff-participants alleged the defined benefit plan was subject to ERISA, was severely underfunded, and had not been otherwise maintained in accordance with ERISA’s requirements. The court’s opinion closely mirrored the Kaplan decision and likewise concluded that ERISA only permits a church-affiliated organization to maintain a church plan if it is first established by a church. The court similarly rejected informal agency guidance and prior court rulings as ignoring the plain language of the church plan definition. The court also expressed doubts as to whether the defendant’s principal purpose of providing healthcare would even allow it to maintain a church plan in the first place.
The Ninth Circuit appears poised to rule soon on a trial court’s rejection of a plan’s church plan status in Rollins v. Dignity Health, 19 F. Supp. 3d 909 (N.D. Cal. 2013) (interlocutory appeal filed Feb. 25, 2015). Oral arguments in the suit were heard on February 16 of this year, so a decision could be forthcoming in a matter of weeks. The Sixth Circuit came close to addressing a trial court’s approval of a church-affiliated organization’s church plan exemption in Overall v. Ascension Health, 23 F. Supp. 3d 816 (E.D. Mich. 2014), but the case settled before oral arguments were held. Two similar suits are pending in trial courts in the Sixth Circuit against two Cincinnati-area hospitals, Boden v. St. Elizabeth Medical Center (claiming pension plan was underfunded by $204 million) and Lupp v. Mercy Health (claiming pension plan was underfunded by $210 million), but, as they were both just filed in March of this year, sponsors will have to wait some time before hearing from the Sixth Circuit Court of Appeals.
What Should a Plan Sponsor Do in Light of These Cases?
The recent holdings by two, and perhaps soon to be three, federal circuit courts rejecting the church plan exemption for plans established and maintained by church-affiliated organizations represent an alarming trend for sponsors of such plans. These holdings not only conclude that a church-affiliated organization cannot establish a church plan but also suggest that many such organizations are not even qualified to maintain a church plan. While the loss of exemption for these plans is not yet an inevitability, plan sponsors should view the loss as a real possibility and plan accordingly. If a defined benefit plan does not meet ERISA’s strict funding requirements, or if a plan has not otherwise been designed or operated in accordance with ERISA’s trust, disclosure, non-discrimination or other requirements, the plan may be exposed to liability.