On June 5, 2017, the United States Supreme Court rendered an important decision that will impact restructurings — particularly health care provider restructurings — going forward. The Supreme Court reversed the Third, Seventh and Ninth Circuits, holding that pension plans maintained by church-affiliated organizations qualify as “church plans” and therefore are exempt from compliance with the Employee Retirement Income Security Act of 1974 (ERISA). In Advocate Health Care Network, et al. v. Stapleton et al.,1 the Supreme Court parsed the language of the definition of a church plan and employed canons of statutory construction to reach its determination. As a result of this decision, many plans of organizations affiliated with churches will continue to be exempt from burdensome funding, fiduciary and other obligations under ERISA that could have a negative effect on their balance sheets as well as an impact on potential restructurings. As noted in the concurring decision, it also provides an advantage to certain profitable church-affiliated businesses that compete directly with other businesses whose compliance with ERISA may affect liquidity. In assessing the competitive advantages of businesses within an industry — especially health care businesses — investors will want to consider the impact of this decision.
Three not-for-profit hospitals located in different parts of the country, all of which are associated with churches, faced class action lawsuits from current and former employees arguing that their respective defined benefit pension plans were not church plans and therefore needed to comply with ERISA. The basis for the plaintiffs’ argument was that these plans were established by the hospitals themselves and were managed by internal employee-benefits committees.
A church plan is generally defined under ERISA as a plan “established and maintained” by a church (including other places of worship) or by a convention or association of churches for its employees. See 29 U.S.C. § 1002(33)(A). “Employee of a church” for this purpose includes employees of church-affiliated organizations. See 29 U.S.C. § 1002(33)(C)(ii)(II). ERISA also provides that “church plan” includes what is referred to in the decision as a “principal-purpose organization.”
[A] plan maintained by an organization … the principal purpose or function of which 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 a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.
29 U.S.C. § 1002(33)(C)(i).
The District Courts hearing those cases agreed with the employees, holding that a plan had to be established by a church to qualify as a church plan. Other District Courts reached the opposite conclusion.
Circuit Courts’ Analysis
The Third, Seventh and Ninth Circuits affirmed the District Courts’ reading of the statute. All three relied on similar rationales for the inclusion of Section 1002(33)(C)(i), finding that the language of the statute was unambiguous and legislative history need not be analyzed. Each of the three circuit courts also provided certain insights that are worth noting. First, the Third Circuit in Saint Peter’s focused on ERISA being a “remedial” statute requiring liberal construction to protect the interests of employees. The Third Circuit also found that Congress intended two requirements — established and maintained — since it did not use the word “either.” Next, the Seventh Circuit in Advocate Health determined that “establish” had to have meaning, since Congress included it and the District Courts that have ruled the other way fail to reconcile subsections 33(A) and 33(C)(i). Thereafter, the Ninth Circuit in Dignity Health pointed out that when Congress wanted to use an “or” construction, it did so, such as with the definition of a governmental plan under 29 U.S.C. § 1002(32). In addition, the Ninth Circuit (agreeing with the Third and Seventh Circuits) does not accord deference to the Internal Revenue Service’s memorandum defining church plans as those established or maintained by church-affiliated organizations.
Supreme Court Ruling — Majority
Upon granting certiorari, the Supreme Court conducted a thorough statutory construction exercise focused on the phrase “established and maintained.” The respondent employees argued that plans maintained by a hospital must also have been established by a church even if the principal-purpose organization maintains the pension plan. The petitioner hospitals contend the opposite: The purpose of subsection (C)(i) is to include all plans maintained by a principal-purpose organization, regardless of whether a church established the plan. “If A is exempt and A includes C, then C is exempt” provided the Supreme Court with logical guidance. The Supreme Court reasoned that had Congress intended alternative readings of the language, then the words would clearly evidence that intention. Using the principle that “each word Congress uses is there for a reason,” the Supreme Court determined that the respondent employees’ position would eliminate the words “established and,” which were clearly used for a purpose — an outcome that is implausible. The Supreme Court notes, “Establishment of a plan, after all, is a one-time historical event: it is the entity maintaining the plan that has the primary ongoing responsibility (and potential liability) to plan participants.” According to the majority, when Congress amended the church plan definition under the Multi-Employer Pension Protection Act of 1980 (MPPA) to include the “principal-purpose organization” language, it intended to expand the definition of church plans to include church-affiliated organizations that maintain plans. Therefore, the Supreme Court reversed the lower courts and determined that church-affiliated hospital-maintained pension plans fall within the church plan definition and thus are exempt from compliance with ERISA.
Supreme Court Ruling — Concurrence
Justice Sonia Sotomayor penned a concurrence agreeing that the statutory interpretation of the majority was correct in this instance. However, Justice Sotomayor expressed concern that the exemption denies ERISA protections to employees of for-profit or not-for-profit organizations that operate like secular businesses but have an affiliation with a religious organization. Justice Sotomayor focused on the fact that these organizations generate billions in revenue but are not required to comply with ERISA as their competitors are. The concurrence seems to suggest that Congress may want to revisit the language of this exemption because the principal-purpose organizations operating as church affiliates in 1980 when MPPA included the term, were significantly different from those taking advantage of the exemption today.
The purpose of ERISA is to provide protections to employees to ensure that they receive the pension plan benefits promised by their employers. These provisions include minimum funding requirements, coverage under the Title IV insurance provisions, reporting and disclosure requirements, and protection from sponsor misbehavior under strict fiduciary standards. Congress allowed church plans to be exempt from such requirements to avoid entanglement between the government and a religious organization due to ERISA’s requirement for oversight of books and records. The Supreme Court’s ruling that plans of church-affiliated organizations, such as hospitals and schools, are exempt from ERISA means employees of such organizations are not subject to the same requirements that ERISA imposes on other businesses. In some cases, certain of these church-affiliated organizations may generate significant revenue, although they do not have to comply with minimum funding and other costly requirements associated with maintaining an ERISA pension plan. A decision in favor of the employee plaintiffs would have required additional funding and other design and operational changes that would have substantially increased the costs of maintaining those plans. This decision clearly addressed whether organizations maintained by a church affiliate fall within the church plan exemption. However, the Supreme Court did not address other potential ambiguities in the statutory language, such as what organizations actually constitute church-affiliated organizations and whether internal benefits committees satisfy the requirements to be a principal-purpose organization. Further litigation may ensue to clarify the intent of those statutory phrases.
It is also important to note that this decision does not affect the minority of church plans that have irrevocably elected to be subject to ERISA.
The decision comes at an interesting time, when the nation is facing an increase in financial restructurings of hospitals and health care institutions. (The decision also applies to educational institutions, which have not been immune to restructurings.) In any large business restructuring (whether in or out of bankruptcy), one critical cost component is pension and retiree costs. These costs may be reduced or avoided by religiously affiliated institutions. For example, avoiding the necessity of paying minimum funding requirements alleviates certain liquidity stresses on the balance sheet that other businesses (subject to ERISA) cannot avoid. However, the Supreme Court decision highlights the fact that employees of such organizations are potentially more exposed to loss of their pension plan benefits if the church-affiliated organization fails to maintain adequate funding and such employees may not be receiving the necessary information to understand the financial health of their pension plan. The concurring opinion highlights these concerns and may prompt remedial action by Congress to narrow the breadth of the church plan exemption. Broader labor-related dynamics, such as maintaining a supportive workforce, especially when those employees work directly in providing care to patients, in the case of hospitals, will factor into how the distressed employer balances its liquidity needs with preserving employee morale. For the time being, however, religiously affiliated institutions have more flexibility when it comes to their pension plans and addressing financial restructurings.