In a decision that may have profound consequences for the funding and continued operation of defined benefit retirement plans covering employees at religiously affiliated organizations, the U.S. Supreme Court has decided to hear consolidated appeals from the Third, Seventh and Ninth Circuits to determine the scope of the “church plan” exemption under the Employee Retirement Income Security Act (ERISA). The Supreme Court’s decision will mainly affect pension plans sponsored by religiously affiliated hospital systems, but other church-associated social service organizations and educational institutions that rely on the church plan exemption may also be impacted.

The church plan exemption allows pension plans sponsored by church affiliated organizations to avoid complying with ERISA’s minimum funding, vesting, insurance and other requirements that protect plan participants. The exemption clearly applies to pension plans established and maintained by actual churches, but many religiously affiliated entities also rely on the exemption.

Over the past three years, participants in numerous religiously affiliated hospital systems have challenged their employers’ reliance on the church plan exemption on the basis that ERISA’s statutory language does not extend to pension plans maintained by entities that are affiliated with a church. In many of these cases, federal courts have given little deference to IRS opinion letters stating that certain of these religiously affiliated institutions qualified for the church plan exemption. In each of the three appeals that were consolidated for the Supreme Court’s review, the appellate courts ruled against the hospital systems.

If the Supreme Court’s decision extends ERISA coverage to religiously affiliated employer pension plans, participants in these plans will stand to benefit from the many protections that ERISA provides. But depending on the scope of the ruling, the financial pressures of meeting ERISA’s minimum funding requirements could force affected employers to freeze or terminate their pension plans. If your organization sponsors a pension plan and relies on the church plan exemption, you should pay careful attention to the Court’s decision in these cases.