The Supreme Court of the United States has ruled that employee benefit plans sponsored by certain church-affiliated organizations do not have to be established by a church to be considered a “church plan,” which is exempt from the requirements of the Employee Retirement Income Security Act (ERISA). The Court’s ruling in Advocate Health Care Network v. Stapleton, 581 U.S ___, No. 16-17 (June 5, 2017) (Advocate) reverses contrary opinions of three federal circuit courts and brings an end to years of uncertainty on the issue.
As a result, church-affiliated organizations maintaining church plans can now breathe a momentary sigh of relief that ERISA and, in particular, the minimum funding requirements otherwise applicable to defined benefit pension plans remain inapplicable to their plans. Although such organizations may take comfort in the Supreme Court’s conclusion that they may establish church plans, they should beware that later litigation may still challenge the characteristics of the organization that maintains such plans on their behalf.
ERISA Section 3(33) defines the term “church plan” for all purposes under ERISA. Section 3(33)(A) first defines “church plans” to mean plans “established and maintained …by a church or by a convention or association of churches which is exempt from tax ….” (Emphasis added.) No Section 3(33)(A) church plans were involved in any of the cases resolved in Advocate, and we are not aware of any challenges to the church plan status of any such plans.
Several years after the original enactment of ERISA, Section 3(33)(C) was added. Section 3(33)(C)(i) provides that “[a] plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, 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.” (Emphasis added.)
The crux of the argument by the plaintiffs in the cases resolved in Advocate was that, since the words “established and” were not included at the beginning of the underlined clause in ERISA Section 3(33)(C)(i), that provision describes a subset of Section 3(33)(A) plans. Stated differently, all church plans have to be “established” by a church or by a convention or association of churches, even those the administration of which is transferred to a “principal purpose” organization described in the underlined language in Section 3(33)(C)(i) above.
The Supreme Court clearly rejected such argument but assumed that the entities that administer each of the plans involved satisfied the “principal purpose” requirement in ERISA Section 3(33)(C)(i) in reaching its decision. As described below, we believe that there may yet be more litigation (in addition to the cases involved in Advocate) in this area in which the plaintiffs assert that plans are not church plans because the entities that administer them do not satisfy such “principal purpose” requirements.
The Immediate Impact on Church Plan Sponsors
Many sponsors of church plans not established by churches might not be profoundly affected by the sudden loss of the church plan exemption had the Supreme Court upheld the three circuit court opinions it had before it in Advocate. Such sponsors would likely have experienced increased compliance costs and administrative burdens, including more frequent required amendments, the need to conduct discrimination testing, provide distribution notices, and make annual government filings such as IRS Form 5500 (Annual Return/Report of Employee Benefit Plan). Meeting these requirements would have been costly and burdensome but would have been feasible for many church-related organizations.
On the other hand, the sponsors of many underfunded defined benefit pension plans would be devastated by the application of ERISA’s minimum funding standards to such plans as a result of the loss of the church plan exemption for such plans. As illustrated in some of the lower court filings in the cases decided in Advocate, many defined benefit church plans are significantly underfunded (i.e., by up to $200 million or more).
The sponsors of those plans would experience tremendous financial hardships in raising the funding of such plans to the levels required under ERISA and in satisfying any resulting obligations, inter alia, to:
- The Pension Benefit Guaranty Corporation (“PBGC”) for past due PBGC premiums, failure to file penalties and interest on such amounts; and
- The Internal Revenue Service for excise taxes applicable to failing to make minimum contributions in past years, failure to file penalties applicable to failure to file Forms 5500, and interest on such amounts.
For now at least, such administrative and financial impacts have been avoided.
What Should Church-Affiliated Sponsors of Church Plans Do Now?
Again, we believe there may be additional litigation testing the “principal purpose” requirements that must be satisfied by the organization maintaining a church plan. To prepare for the next wave of such church plan exemption challenges, non-church organizations that sponsor church plans should thoroughly review the legal structure and operation of the entity that maintains the plan to ensure it is a “principal-purpose organization” (in the words of the Supreme Court), as described in ERISA Section 3(33)(C)(i), and be prepared to make any changes as necessary to more closely comply with such requirements.
To this point, because the lower courts in Advocate struck down the church plan exemption on the basis of what entities may establish a church plan, those courts have had no need to reach the second question of what entities may maintain a church plan, even though the plaintiffs challenged the plans in question on this basis as well. Nevertheless, throughout the relevant opinions, the lower courts subtly and repeatedly questioned whether the organizations at issue met the two statutory requirements of a principal-purpose organization under Section 3(33)(C):
The “principal purpose or function” of the organization maintaining the plan “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” (the “principal purpose test”); and
The organization maintaining the plan “is controlled by or associated with a church or convention or association of churches” (the “control or association test”).
Importantly, in regards to the principal purpose test, Section 3(33)(C)(ii)(II) further provides that “an employee of a church or convention or association of churches” includes the employee of an organization “which is exempt from tax under Section 501 of the Internal Revenue Code of 1986 and which is controlled by or associated with a church or convention or association of churches.” Furthermore, for purposes of the control or association test, Section 3(33)(C)(iv) provides that an organization “is associated with a church or a convention or association of churches if it shares common religious bonds and convictions with that church or convention or association of churches.”
For instance, the Third and Seventh Circuit Courts of Appeals expressed serious doubt as to whether the defendant hospitals’ principal purpose of providing healthcare satisfied the principal purpose test. See Kaplan v. Saint Peter’s Healthcare System, 810 F.3d 175 (3d Cir. 2015); Stapleton v. Advocate Health Care Network, 817 F.3d 517 (7th Cir. 2016).
Similarly, the Supreme Court in Advocate also recognized the plaintiffs’ original claims that the hospitals did not have the requisite associations with a church under the control or association test and that their benefits committees did not count as organizations for purposes of the principal purpose test, but the Court stated that “[t]hose issues are not before us, and nothing we say in this opinion expresses a view of how they should be resolved.” See 581 U.S. at ____,No. 16-17, slip op. at 5 n.2.
Further, in her concurring opinion, Justice Sotomayor overtly proclaimed that the requirements for a principal-purpose organization under ERISA Section 3(33)(C) “need also be construed in line with their text and with a view toward effecting ERISA’s broad remedial purposes.” Id., concurring slip op. at 3. Whether other courts adopt what at least suggests a narrow reading of the principal purpose requirements in Justice Sotomayor’s opinion will be decided in future litigation.
Questions to Be Answered in Light of These Developments
As a result of these recent developments, the threshold question to the maintenance inquiry for many church-affiliated plan sponsors will now focus on identifying the entity that “maintains” their plan and, specifically, whether such entity is a principal-purpose organization described in ERISA Section 3(33)(C)(i). Is it the employer/sponsor of the plan, whose principal purpose is likely something other than maintaining an employee benefit plan? Or is it the benefits committee (or similar institution) that administers the plan?
In addition to this question, any ostensible principal-purpose organization should be prepared to answer the following:
Is the organization’s principal purpose the administration or funding of a plan that benefits (i) employees of a church or convention or association of churches or (ii) employees of an organization that is controlled by or associated with a church or convention or association of churches?
Is the organization maintaining the plan controlled by or associated with a church or convention or association of churches, or does it at least share a common religious bond with a church or convention or association of churches?
If the answer to either of these questions is arguably “no,” the ability of the organization to maintain the plan as a church plan could still be called into question despite the Supreme Court’s opinion in Advocate. Therefore, if possible, sponsors should proactively seek to strengthen the factual underpinnings of the administration of their plans to better support the “yes” position on both of these questions so they can help avoid continued uncertainty of their plan’s exempt status under ERISA.