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Federal Court Issues Unfavorable Ruling for Church Pension Plan Sponsors




by:
Theodore M. Becker
Drinker Biddle & Reath LLP - Chicago Office

Joseph C. Faucher
Drinker Biddle & Reath LLP - Los Angeles Office

Mark E. Furlane
Joshua J. Waldbeser
David L. Wolfe
Drinker Biddle & Reath LLP - Chicago Office

 
December 19, 2013

Previously published on December 17, 2013

On December 12, 2013, the U.S. District Court for the Northern District of California ruled in Rollins v. Dignity Health that a pension plan sponsored by a large tax-exempt health care system does not satisfy ERISA’s exemption for “church plans.” This case is one of the five lawsuits described in our April 2013 Client Alert.

In denying Dignity Health’s motion to dismiss, the court rejected the “committee” model for church plan sponsorship, which is relied upon by a number of tax-exempt organizations such as hospitals and universities that are affiliated with churches. The court agreed with the plaintiff’s contention that while a church-affiliated entity may “maintain” an ERISA-exempt church plan, only plans established directly by a church or convention of churches qualify as church plans. This case has important implications for sponsors of church pension plans that are not churches and rely instead on the committee model.

Background

As set forth in our April 2013 Client Alert, five substantially identical lawsuits have been filed against large health care systems, challenging their pension plans’ status as church plans. These cases attack the committee model, raise constitutional arguments, and allege that the defendants do not satisfy the exemption’s requirement of church association because, due to certain aspects of their operations, they do not share “common religious bonds and convictions” with a church. In Dignity Health, the court held that the committee model is not supported by the language of ERISA and therefore did not address either of the plaintiff’s other two arguments.

The Court’s Ruling

The committee model for church plan sponsorship which the court struck down is widely relied upon, and has been upheld by decades of IRS and DOL rulings (as well as previous court holdings). The committee model is based on ERISA §3(33)(C)(i), which provides in relevant part 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...the principal purpose or function of which is the administration or funding of a plan...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 Dignity Health court held that although an organization whose principal purpose is the administration or funding of the plan (i.e., the committee) may “maintain” a church plan, the plan must still be established by a church or convention of churches. To rule otherwise, the court opined, would violate principles of statutory construction and render meaningless §3(33)(A) of ERISA, which contemplates church establishment. The ruling indicates that since the “principal purpose or function” of Dignity Health is not “the administration or funding of a plan” (but rather, its principal purpose is to provide health care services), it would not qualify as the type of organization that §3(33)(C)(i) would allow to “maintain” a church plan. The court rejected the notion that a committee or subcommittee of Dignity Health could be relied upon as the organization contemplated by the statute.

The court’s holding conflicts with the regulatory guidance noted above and the holdings of other courts which permit the establishment and maintenance of a church plan by a tax-exempt entity controlled by or associated with a church, so long as a church plan committee that satisfies the “organization” requirement is in place (note that the ERISA provision set forth above begins with the language “(a) plan established and maintained for its employees...by a church or by a convention or association of churches includes...) The court was not persuaded by these contrary authorities. It held that IRS letter rulings are not entitled to judicial deference and that conflicting court rulings utilized “flawed approaches.”

What’s Next

The practical effect of the ruling on church plan sponsorship will depend on whether the court’s reasoning is applied in other jurisdictions and if the 9th Circuit Court of Appeals affirms the holding. In the meantime, the decision is likely to embolden plaintiffs’ attorneys to file similar cases against sponsors of other plans that have, until now, been treated as ERISA-exempt church plans.

Dignity Health and the other four lawsuits seek as relief that the pension plans be “brought into compliance” with ERISA and that the plans make whole any losses to participants, as well as the payment of civil penalties and attorneys’ fees for the plaintiffs. To the extent the Dignity Health ruling is upheld and/or its approach is followed by other courts, the financial implications for sponsoring employers may include funding the plans to meet IRS-mandated levels, payment of PBGC premiums, and paying losses to participants allegedly harmed by plan terms and operations less favorable than those required by ERISA. Employers who may be affected by this issue should continue to monitor these developments closely with the assistance of legal counsel.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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