- U.S. Supreme Court Resolves ERISA Church Plan Dispute in Favor of Religiously Affiliated Hospitals
- August 15, 2017 | Author: Chase A. Tweel
- Law Firm: Gordon Feinblatt LLC - Baltimore Office
ERISA protects participants in pension plans through a number of safeguards including minimum funding and vesting requirements, insuring of plan benefits through the PBGC, reporting and disclosure, and fiduciary responsibilities. Although ERISA broadly protects plan participants, Congress exempted certain types of plans from ERISA’s requirements, such as plans set up by federal, state, local or tribal governments and “church plans.”
At issue in Stapleton v. Advocate Health Care Network was whether a plan established by a church-affiliated hospital (not by a church itself) qualifies as a “church plan” exempt from ERISA.
Advocate Health Care Network (“AHCN”) is a health system operating 12 hospitals and more than 250 other inpatient and outpatient facilities in Illinois. AHCN employs approximately 33,000 individuals and has generated annual revenue of $4.6 billion.
Former and current employees of AHCN alleged that AHCN’s pension plan did not fall within ERISA’s church plan exemption and thus was subject to the law’s numerous requirements. Of particular importance, they alleged that AHCN breached its fiduciary duty and harmed participants by failing to fund the plan at levels required by ERISA. AHCN did not fund, insure, or administer the plan in compliance with the requirements of ERISA because it had relied on the church plan exemption.
The controversy was part of a four-year old wave of litigation involving more than two dozen religiously affiliated hospitals, which together comprise a pension funding shortfall of approximately $4 billion. Several district courts handling these cases, including the U.S. District Court for Maryland, have ruled that plans established by church-affiliated agencies may qualify for the ERISA church plan exemption. Other district courts have sided with employees, deciding that, although religiously affiliated organizations could maintain an exempt church plan, an exempt church plan must have been established by a church. The Courts of Appeals for the Seventh, Third, and Ninth Circuits have affirmed decisions favoring employees.
ERISA’s “Church Plan” Definition
ERISA originally defined a “church plan” as a “plan established and maintained . . . for its employees . . . by a church.” The Multiemployer Pension Plan Amendments Act of 1980 (“MPPA”) expanded the meaning of “a plan established and maintained . . . by a church” to “include[ ] a plan maintained by an organization . . . 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 . . . if such organization is controlled by or associated with a [church].” MPPA’s expansion of the definition also made clear that “employees of a church” includes employees of tax-exempt entities controlled by or associated with a church.
Prior to the recent surge of litigation centered on the definition of “church plan,” courts had mostly focused on factual disputes related to whether an institution was sufficiently affiliated with a church.
The Seventh Circuit’s Ruling
AHCN argued that the statute means, by its plain text, “a plan established and maintained by a church includes a plan established by a church-affiliated organization (and maintained by either a church or a church-affiliated organization).”
The employees argued that the statute means, by its plain text, “a plan established and maintained by a church also includes a plan established by a church but maintained by a church-affiliated organization.”
The court relied on a thought-provoking analogy and legislative history to favor the employees’ interpretation.
AHCN argued that the court should give deference to the Internal Revenue Service’s (“IRS”) interpretation of “church plan,” as set out in numerous private letter rulings (“PLRs”) and a general counsel memorandum (“GCM”). The court declined to defer to the IRS, finding that the IRS’s interpretation was stated only in sub-regulatory guidance for which there was no formal adjudication or notice and comment rulemaking.
The Supreme Court’s Unanimous Decision
In a unanimous decision, the Supreme Court held that a plan maintained by a religiously affiliated organization qualifies as a church plan, regardless of who established it.
In a concurring opinion, Justice Sonia Sotomayor expressed concern about the majority opinion’s implications, stating that the Court may be denying ERISA protections to “scores of employees” who work for employers that “look and operate much like secular businesses.”
The Court’s decision means that religiously affiliated hospitals like AHCN may be able to avoid funding their plans in accordance with ERISA’s minimum standards. If the Court had ruled in favor of the employees, then such hospitals and other religiously affiliated entities would have faced a $4 billion shortfall in funding for pension plans covering 300,000 individuals.
Prior to the Supreme Court’s decision, several hospitals had agreed to multimillion-dollar settlements, ranging from $11 million to $352 million. Now, in light of the Court’s decision, hospitals and other religiously affiliated entities are on stronger footing in church plan disputes.
Future litigation will likely focus on whether, factually, such institutions are sufficiently controlled by or affiliated with a church as well as the meaning of terms like “organization,” “administration or funding,” and “principal purpose or function.” It is expected that these inquiries will center intently on hospitals’ governance structures and plans’ internal benefit committees.
The Court’s decision could also have important ramifications under ERISA preemption rules. ERISA preemption is not available for plans exempt from ERISA, so states could respond to the Court’s decision by passing legislation allowing participants in church plans to bring suits based on underfunding or fiduciary breach.The preemption fallout could extend beyond the pension plan context. For example, if group health plans established by religiously affiliated entities are found to be church plans in light of the Court’s decision, then such plans would be unable to invoke ERISA preemption to shield them from state insurance laws.