Recently, two federal appeals courts ruled that pension plans sponsored by Catholic hospitals did not qualify as exempt “church plans,” and were therefore subject to minimum funding requirements, fiduciary duty, and other mandates under Federal pension law. More than 20 other similar lawsuits against church-affiliated health care organizations are pending, in what one court labeled a “new wave of litigation.” These two decisions will have far-reaching impacts on retirement plans sponsored by church-affiliated entities, including the many such organizations in the health care industry.
Since its enactment in 1974, the Employee Retirement Income Security Act (“ERISA”) has exempted “church plans” from most of its myriad substantive requirements, including minimum participation, vesting, reporting, and funding standards. In particular, church pension plans are exempt from the strict minimum funding requirements under ERISA and the Internal Revenue Code (Code), and are not covered by the Pension Benefit Guaranty Corporation (PBGC) pension insurance program.
The church plan exemption is particularly important in the health care industry, since many hospitals and health care years of service are associated with churches, especially the Catholic Church. The website of the Catholic Health Association, which represents the church’s health ministry in the United States, claims there are 639 Catholic hospitals in the U.S. and that 1 in 6 U.S. patients are cared for in a Catholic hospital. Although there are no publicly available data on the number of exempt church plans – since they are not subject to ERISA, they do file Form 5500s – it is safe to assume that there are hundreds of U.S. pension plans that currently take advantage of ERISA’s church plan exemption.
Initially, the church plan exemption was strictly limited to plans established and maintained by churches or religious orders for the benefit of their employees only. However, the “church plan” definition was amended in 1980, ostensibly to permit plans that covered employees of church affiliates (like schools and hospitals), or that were administered by certain church-affiliated boards or organizations, to also qualify for exemption. As will be seen, the amended definition created an ambiguity as to whether an exempt plan still had to be established by a church, or whether being maintained by a qualifying church affiliate was enough. This ambiguity is at the center of most of the current lawsuits challenging church plan status.
Despite the apparent ambiguity, however, following the 1980 amendments and until recently, the church plan definition was consistently interpreted so as to permit pension plans sponsored and administered by church affiliated organizations – including nonprofit hospitals and long-term care facilities – to qualify as exempt “church plans”, as long as the sponsoring organization was deemed to be sufficiently “associated” with a church or religious order. For example, in 1986 the IRS ruled that a retirement plan sponsored by a nonprofit hospital was an exempt church plan because the hospital entity was closely associated with a religious order. It was sponsored and controlled by the order, and was listed in the order’s official directory. In fact, the IRS and the Department of Labor have issued dozens of advisory opinions and letter rulings that approved of church plan exemptions for plans sponsored by health care (and other) organizations that clearly were not churches, provided that the sponsor was sufficiently associated with a church or religious order.
However, since 2013, more than 20 federal court lawsuits have been initiated that challenge the exempt status of pension plans sponsored by church-affiliated health care organizations. A listing of these lawsuits can be found on the website of the Pension Rights Center, a nonprofit organization devoted to protecting retirement benefits of American workers and retirees. The principal allegation in these lawsuits is that the church plan exemption should not apply to pension plans that were not established by a church, and that sponsorship or administration of the plan by a church affiliate is insufficient.
The primary issue in these lawsuits is the portion of the 1980 amendment that is sometimes called the “pension board” clause, because it was intended to permit plans administered by pension boards, or other church-affiliated committees or organizations, to qualify for exemption. As noted earlier, the original ERISA definition stated that an exempt plan had to be established and maintained by a church. The 1980 amendment added the following:
A plan established and maintained … by a church … includes a plan maintained by an organization … the principal purpose or function of which is the administration or funding of a plan … if such organization is controlled by or associated with a church or a convention or association of churches.
Again, for 30 years the IRS and the Labor Department consistently interpreted this language so as to exempt plans established and sponsored by non-church organizations, as long as they were administered by a pension board or other entity controlled by or sufficiently associated with a church. Some of the lower courts that have issued rulings in the recent cases have agreed with this long-standing agency position.
However two federal appeals courts recently held that the federal agencies had been misinterpreting the church plan definition, holding that an exempt church plan must be established by a church, and that plans established by church affiliates do not meet this requirement. In Kaplan v. Saint Peter’s Healthcare System, 810 F.3d 175 (3d Cir., Dec. 29, 2015), the Third Circuit Court of Appeals held that a pension plan sponsored by the St. Peter’s Healthcare System (headquartered in New Jersey) was not an exempt church plan because it was established by a nonprofit health care entity, not by a church. The fact that the Roman Catholic Diocese of Metuchen, New Jersey, controlled the nonprofit entity was, in the court’s view, insufficient, since the “plain meaning” of the statutory definition was that a church plan must be established by a church, even if it is administered or funded by a church affiliate.
More recently, the Seventh Circuit Court of Appeals reached the same conclusion. In Stapleton v. Advocate Health Care Network, 817 F.3d 517 (7th Cir, Mar. 17, 2016), the Court held that a pension plan sponsored by the Advocate health care system and established by its nonprofit predecessor, was subject to ERISA for the same reason cited by the Saint Peter’s court: It was not established by a church.
So far during this “new wave of litigation” (as the Kaplan court termed it), no federal appeals court has held that a plan established by a non-church entity qualified for ERISA exemption, though several lower (district) courts have done so. In addition, several cases have been settled, with the challenged hospital or health system agreeing to make substantial contributions to the plan and to take other actions consistent with coverage by ERISA.
The implications of the two appeals court decisions (and the reported settlements) are enormous. Pension plans that have been wrongly utilizing the church plan exemption (including those in the health care sector) may find themselves subject, for the first time, to many onerous ERISA requirements, including:
- the minimum funding rules
- the fiduciary-duty provisions
- the reporting and disclosure rules (including the Form 5500 filing requirement)
- the PBGC plan termination insurance program, including the provisions of ERISA, which make controlled group members jointly and severally liable for pension plan underfunding.
Sponsors of pension plans (and other ERISA plans) that have been using the church plan exemption would be wise to reexamine whether the plans are rightly using the exemption in light of these new cases.
 See https://www.chausa.org/about/about/facts-statistics.
 PLR 8625073 (Mar. 26, 1986).
 29 U.S.C. section 1002(33)(C)(i); Internal Revenue Code section 414(e)(3)(A).
 E.g., Medina v. Catholic Health Initiatives, 2015 U.S. Dist. LEXIS 164343 (D. Colo. 2015); Lann v. Trinity Health Corp., 2015 U.S. Dist. LEXIS 147205 (D. Md. Feb. 24, 2015).
 See, for example, “Trinity Health hospital to pay $107 million to settle pension lawsuit”, Modern Healthcare (May 25, 2016), http://www.modernhealthcare.com/article/20160525/NEWS/160529946.