Executive Summary: The U.S. Supreme Court’s decision in Advocate Health Care Network v. Stapleton serves as a reminder to church-affiliated hospitals and other organizations using the ERISA church plan exemption to review the basis for their plans’ exemptions and their plan governance structures.
On June 5, 2017, the U.S. Supreme Court overturned three appellate court decisions to restore a long-established understanding of the definition of a “church plan” exempt from the comprehensive federal law governing employee benefit plans, the Employee Retirement Income Security Act of 1974 (ERISA). The immediate impact of the decision, Advocate Health Care Network v. Stapleton, is some relief for church-affiliated nonprofit hospitals facing a nationwide wave of lawsuits alleging that they had improperly treated their benefit plans as church plans exempt from the requirements of ERISA. With the decision restoring some clarity to the church plan definition, church-affiliated organizations using the church plan exemption should review the grounds on which their plans qualify as church plans and take the opportunity to review their plan governance structure to ensure that it supports a finding of church plan status.
Church Plans Are Exempt from ERISA and Certain Tax Code Requirements
Most nongovernmental employee benefit plans—such as defined benefit pension plans, 401(k) plans, 403(b) plans, and health and welfare plans—are subject to ERISA, which imposes extensive reporting, disclosure, and fiduciary requirements on the administrators of the plans. For defined benefit pension plan sponsors, ERISA requires the payment of premiums to the Pension Benefit Guaranty Corporation (PBGC) to insure plan participants’ benefits in the event of the plan’s failure. ERISA also subjects group health plans to COBRA continuation coverage requirements. Church plans are exempt from these ERISA requirements. Separate from the exemption from ERISA, church retirement plans also are exempt from certain minimum coverage, vesting, and minimum funding requirements imposed by the Internal Revenue Code.
The Supreme Court Concludes Not All Church Plans Need Be Established by Churches
ERISA and the Internal Revenue Code define church plans to include plans established and maintained by a church (a “church” for the purpose of the definition includes a convention or association of churches), or a plan maintained by an organization controlled by or associated with a church that has the principal purpose or function of administering or funding employee benefit plans for employees of churches or of tax-exempt organizations controlled by or associated by a church. The Supreme Court decision turned on the technical interpretation of the statutory definition of church plan to determine whether plans maintained by organizations that have a principal purpose or function of administering church-associated plans (“principal-purpose organizations”) also had to have been independently established by a church to qualify as church plans. The Supreme Court concluded that there was no requirement that a plan maintained by one of these principal-purpose organizations had to have been established by a church to qualify as a church plan.
The Supreme Court’s Decision Offers Some Relief to Church-Affiliated Organizations Using the Church Plan Exemption, but Other Avenues to Challenge Church Plan Status Remain
Some church-affiliated nonprofit organizations, like hospitals, sponsor plans that were established by the organization itself (rather than by the church with which the organization is affiliated) but are maintained by benefits committees or other unincorporated organizations that have the principal purpose of administering the plans. The sponsoring organizations and the IRS, Department of Labor, and PBGC had long taken the position that these plans were church plans exempt from ERISA and certain Internal Revenue Code provisions. Some high-profile failures of defined benefit pension plans sponsored by church-affiliated organizations—which threatened the retirement benefits of participants because the plans had been exempt from insuring benefits with the PBGC as church plans—brought scrutiny to the application of the church plan definition.
A series of lawsuits by plaintiff class action firms challenged the use of the church plan exemption by church-affiliated hospitals and health systems. A successful argument in lower courts has been that the plans could not be church plans because they were not actually established by churches but only by the church-affiliated organizations. The Supreme Court’s decision forecloses the use of this argument, but challenges to church plan status can continue on other grounds. For example, the decision expressly avoided addressing the use of internal benefits committees as principal-purpose organizations, but only decided the more general question of whether a plan can be a church plan by virtue of being maintained by a principal-purpose organization even if the plan was not established by a church. The plaintiff class action firms can still pursue the issue of what is a valid principal-purpose organization for the purpose of the exemption.
Notably, although this decision was decided unanimously by eight justices (Justice Gorsuch did not participate), Justice Sotomayor wrote a concurring opinion indicating that she was “troubled” by employees of large, sophisticated health systems being excluded from the protections of ERISA. The concern reflected in the concurrence may signal that future challenges to church plan status on other grounds may be more likely to survive.
Church-Affiliated Organizations Using the Church Plan Exemption Should Review the Basis for the Exemption
Church-affiliated organizations with plans exempt from ERISA as church plans should review the basis for their plans’ status in light of the decision. In general, a plan may be a church plan if:
- The plan was established and maintained by a church or a convention or association of churches; or
- The plan is maintained by a principal-purpose organization, an organization (not necessarily a formal corporation) that:
- Is controlled by or associated with a church, and
- Has a principal purpose or function of administering or funding a plan or program of employee benefits for employees of a church or a convention or association of churches (employees of churches or conventions or association of churches include employees of tax-exempt organizations controlled by or associated with a church or a convention or association of churches).
Accordingly, church affiliates relying on the principal-purpose organization basis to classify their plans as church plans should review their plan governance structure to ensure that they can show that their plans are maintained by an organization that is controlled by or associated with a church and that has the principal purpose of overseeing employee benefit plans of churches or church affiliates. Control of a principal-purpose organization by a church can be shown by a church’s control over the appointment of the organization’s manager or majority of board members. Association with a church is a subjective analysis that considers whether the organization shares common religious bonds and conventions with that church.
Even for organizations that sponsor plans subject to ERISA, periodic review of plan governance structure is an effective method of ensuring that plan fiduciaries are well-position to meet their obligations under the law. For both ERISA plans and non-ERISA church plans, plan governance and other compliance issues can be addressed in a comprehensive audit by counsel.