In a much-anticipated ruling, the U.S. Supreme Court ruled on June 5 that retirement plans maintained by church-affiliated organizations can be exempt from the Employee Retirement Income Security Act (ERISA), regardless of which organization establishing the plan. While the ruling may provide some temporary relief to church-affiliated organizations, it also reveals what is likely to be the next wave of challenges in this area of the law.

ERISA is a 1974 federal law designed to protect the pension and health plans of employees who work for private employers. As originally enacted, ERISA specifically exempted “church plans” which were defined as plans “established and maintained . . . for its employees . . . by a church.” In the early 1980s, Congress amended the definition of “church plan” to include plans “maintained” (but not established) by principal-purpose organizations which are “controlled by or associated with” a church or convention of churches. These organizations included church-associated organizations whose chief purpose or function is to fund or administer a benefit plan for the employees of a church or church affiliate.

For years, the longstanding administrative guidance of the Internal Revenue Service, Department of Labor, and Pension Benefit Guaranty Corporation all made clear that the amendment offered an alternative route to “church plan” status for plans not “established’ by a church. In both private letter rulings and advisory opinions, these agencies concluded the exemption applied even if the plans were not originally established by a church, so long as they were maintained by a principal-purpose organization that was controlled by or associated with a church. Relying on this guidance, the retirement plans maintained by many church-related organizations, including hospitals, did not comply with ERISA’s minimum funding requirements, reporting and disclosure standards, participation and vesting rules, and/or PBGC premium payments, producing significant cost savings to these church-related organizations.

In a wave of recent litigation, current and former employees of church-affiliated hospitals brought lawsuits, arguing their retirement plans were not established by a church and thus should have complied with ERISA since inception. These plaintiffs have had some notable successes. Prior to the Supreme Court’s ruling, five federal courts ruled in the employees’ favor, holding that only church plans established by a church qualified for the exemption. Meanwhile, eight federal courts had held that as long as church plans are maintained by a church-affiliated organization they qualify for the exemption, regardless of whether the plan was established by a church. During this time, many hospitals also reached multi-million dollar settlements with current and former plan participants.

In Advocate Health Care Network v. Stapleton, 581 U.S. _____ (2017), the Supreme Court consolidated three of those lower court cases. Citing both the plain language of the statute and the longstanding agency interpretation of the exemption, the Court reasoned that because the larger category of plans “established and maintained by a church” included plans “maintained by” principal-purpose organizations, the exemption applied to these organizations even if the affiliated church had not established the plan. Writing for the Court, Justice Elena Kagan also agreed with the hospitals’ characterization of the legislative history, finding that Congress intended to ensure that churches and church-affiliated organizations received comparable treatment under ERISA.

Now we know a church-affiliated hospital’s retirement plan can be exempt from ERISA even if a church does not “establish” the plan. However, the Court specifically did not address what constitutes a “principal purpose organization” or what relationship with a church is sufficient to establish its affiliation, both elements of which are required in order to meet the exemption. These other elements likely will form the basis for future litigation.

Along those lines, in her concurring opinion, Justice Sonia Sotomayor questioned whether the holding of the case is consistent with Congressional intent in light of the hospitals’ sophisticated business activities. According to her concurring opinion: “Despite their relationship to churches, [these] organizations … operate for-profit subsidiaries; employ thousands of employees; earn billions of dollars in revenue; and compete in the secular market with companies that must bear the cost of complying with ERISA” (citations omitted). She suggested that this decision may prompt Congress to take another look at the current law since thousands of employees who work for organizations that function like secular businesses now definitively do not have the protection of ERISA.

Church-affiliated employers who sponsor and maintain retirement plans should re-evaluate their plans’ “church plan” status in light of the Court’s opinion. This is not a one-size-fits-all exemption. With significant dollars at risk for a mischaracterization, this is not a determination that should be made lightly.