In a victory for religiously affiliated hospitals sponsoring defined benefit (DB) plans, the U.S. Supreme Court ruled on June 5 that such plans need not have been originally established by churches to be exempt from ERISA. The Court’s decision in Advocate Health Care Network v. Stapleton, Nos. 16-74, 16-86 and 16-258, 581 U.S. ____ (2017), settles a contentious and longstanding battle over the proper statutory interpretation of ERISA’s “church plan” exemption, but several important aspects of the exemption remain unresolved.

ERISA Exemption for Church Plans

ERISA was designed to protect the benefits of participants and beneficiaries under pension and welfare benefit plans established by employers in private industry. When enacting ERISA, Congress provided an exemption for “church plans,” i.e., plans for the employees of churches. Under this exemption, a church plan that is a DB plan is exempt entirely from ERISA’s minimum standards for reporting and disclosure, participation, vesting, funding and fiduciary responsibility, and from insurance through the Pension Benefit Guaranty Corporation (PBGC).

As initially enacted, ERISA defined “church plan” in Section 3(33)(A) as “a plan established and maintained . . . for its employees . . . by a church . . . .” In 1980, this definition was expanded to include certain additional plans to fall within it. Specifically, the original definitional phrase was amended:

  • to provide in Section 3(33)(C)(ii)(II) that an “employee of a church” would include an employee of a church-affiliated organization (such as a hospital, school or charity); and
  • to include, pursuant to Section 3(33)(C)(i), plans maintained by certain church-associated entities whose main function is to fund or manage a benefit plan for the employees of churches or (under the amendment noted above) church affiliates, i.e., a “principal-purpose organization.”

Comparable provisions are found in Section 414(e) of the Internal Revenue Code (Code).

In hundreds of private letter rulings and opinion letters issued since 1982, the Internal Revenue Service, the Department of Labor and the PBGC have all read the ERISA and Code provisions, taken together, as exempting plans maintained by church-affiliated organizations, even if such plans were not originally established by a church. Until recently, no court had questioned the three agencies’ longstanding interpretation of the church plan exemption. Since 2013, however, dozens of class-action lawsuits have challenged the church-plan status of various church-related nonprofit organizations that operate healthcare facilities.

Supreme Court Decision in Advocate Health Care Network

Advocate Health Care Network involved three church-affiliated hospitals that maintain DB pension plans for their employees. The plans were established by the hospitals themselves and not by churches.

Current and former employees of these hospitals filed class actions alleging that their employers’ plans failed to satisfy ERISA’s church-plan exemption and were subject to ERISA requirements. The courts of appeals for the Third, Seventh and Ninth circuits all ruled that the hospitals’ DB plans were not exempt from ERISA because the plans had not been established by a church. It has been reported that, if the appellate court rulings against the hospitals had been upheld by the Supreme Court, the hospitals would have faced a funding shortfall as to their DB plans of some $4 billion, representing the amount they would have had to contribute to those plans, to satisfy minimum-funding requirements, absent the church plan exemption.

The Supreme Court, however, reversed the courts of appeals, holding that ERISA does not require an exempt “church plan” to have been originally established by a church. Justice Kagan, writing for a unanimous Court (Justice Gorsuch did not participate), concluded that the language of the 1980 amendment “brought within the church-plan definition all pension plans maintained by a principal-purpose organization, regardless of who first established them.”

The Court reasoned that because Congress deemed the category of plans “established and maintained by a church” to “include” plans “maintained by” principal-purpose organizations, such plans are “church plans” exempt from ERISA’s requirements, whether or not established by a church. The Court largely adopted the argument of the amicus brief filed by the three agencies referred to above.

The Supreme Court assumed for purposes of the case that the three hospital systems all had the needed association with a church and that all of their internal benefits committees were principal-purpose organizations, but this is disputed by the plaintiffs and remains to be litigated in these cases. Plaintiffs have alleged that the hospital plans are not church plans because (i) they are not “maintained” by a principal-purpose organization; (ii) the hospital systems are not “controlled by or associated with a church,” as required by Section 3(33)(C)(ii)(II); and (iii) exempting the plans from ERISA is an unconstitutional religious preference.

Justice Kagan’s opinion specifically states that the Court was not ruling on whether the hospitals’ internal benefits committees qualify as “principal-purpose organizations.”

In a concurring opinion, Justice Sotomayor expressed her view that the church plan exemption, including which organizations qualify as “principal-purpose organizations,” should be construed “with a view toward effecting ERISA’s broad remedial purposes,” noting that:

Despite their relationship to churches, organizations such as [the hospitals] operate for-profit subsidiaries . . ., employ thousands of employees . . ., earn billions of dollars in revenues . . ., and compete in the secular market with companies that must bear the cost of complying with ERISA.

Implications of Advocate Health Care Network for Nonprofit Religious Organizations

Nonprofit religious organizations who have relied upon the church plan exemption can take some comfort from the Advocate Health Care Network decision, but they still must assess:

  • whether they can establish “principal-purpose organization” status;
  • whether maintaining a church-plan exemption is worth the litigation risk and;
  • whether complying with ERISA requirements is an acceptable alternative.

Several hospital systems have already agreed to multi-million dollar settlements, and other religious organizations will watch future developments in this area.

If a nonprofit religious organization’s benefit plans qualify for the church-plan exemption, Section 514(a) of ERISA, which preempts state laws that “relate” to a benefit plan, will not apply. In the absence of preemption, states could conceivably enact their own funding and other requirements as to these plans.