In a somewhat surprising decision, a unanimous Supreme Court (with new Justice Neil Gorsuch not participating) overturned the consistent views of three circuit courts, the Third, Seventh and Ninth, and sided instead with the interpretation of three federal agencies, the Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corp., to hold that pension plans established and maintained by tax-exempt hospitals affiliated with churches qualify for the “church plan” exemption from certain ERISA [Employee Retirement Income Security Act of 1974] requirements, even though those plans were not established by a church.

ERISA Language

At issue for the court was the interpretation of a 1980 amendment to ERISA. Under ERISA, “church plans” do not have to comply with the various reporting, participation, vesting and funding requirements of ERISA.

Prior to 1980, a “church plan” was defined in ERISA Section 1002(33)(A) as “a plan established and maintained … for its employees … by a church or any convention or association of churches.” In 1980 this definition was changed. The change added reference to church-affiliated organizations in ERISA Section 1002(33)(C)(i):

A plan established and maintained for its employees … 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 or program for the provision of retirement benefits or welfare benefits, or both, 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.

The IRS and other federal agencies interpreted the language to mean that the internal benefits committee of a church-affiliated nonprofit meets this definition.

Employees of church-affiliated hospitals sued, contending that the pension plans of church-affiliated hospitals were not exempt from ERISA requirements since, for the pension plan to be exempt, the plan must still be established by the church even though it is maintained by a church-affiliated organization.

The new ruling

The unanimous Supreme Court in Advocate Health Care Network v. Stapleton, SCt. 2017-1 USTC ¶50,237, ruled that the statutory language permits the exemption of a pension plan from the ERISA requirements even if it was established by the church-affiliated organization and not by the church itself.

Although this ruling was in line with the position of the federal agencies administering the statute, the Supreme Court relied on its interpretation of the statutory language and did not appear to be relying on deference to administrative interpretations.

Effect of the decision

The initial effect of the decision is to continue to expose thousands of employees of church-affiliated hospitals to possible loss of pension benefits due to those pension plans being under-funded and without any federal guaranty available from the Pension Benefit Guaranty Corp.

In a concurring opinion, Justice Sonia Sotomayor seemed to be inviting Congress to revisit the statutory language in light of this concern and the fact that many church-affiliated hospitals have become very large organizations that directly compete with non-church-affiliated hospitals, either tax-exempt or for-profit, that do still have to meet the ERISA requirements.

Justice Elena Kagan, writing for the majority, emphasized that the court was not deciding which hospitals meet the definition of a church-affiliated hospital. Footnote 2 of the opinion states:

The employees alternatively argued in the District Courts that the hospitals’ pension plans are not “church plans” because the hospitals do not have the needed association with a church and because, even if they do, their internal benefits committees do not count as principal purpose organizations…. Those issues are not before us, and nothing we say in this opinion expresses a view of how they should be resolved.

The same point is re-emphasized in Footnote 3 of the opinion.

It appears likely that attorneys for hospital employees will continue to challenge the ERISA exemption on this ground of lack of sufficient association of the organization or the hospitals’ internal benefit committee with a church to meet the definition of an affiliated organization under the 1980 ERISA amendment.

Beyond the three circuit court cases addressed in the Supreme Court ruling, many other similar cases had been working their way through the courts. Many of those cases had resulted in significant settlements by hospitals in the face of the unified decisions by the three circuit courts. Such settlements are likely to cease in continuing litigation in light of the Supreme Court’s decision. The continuing analysis of the degree of the affiliation with a church will be a very fact-based analysis of a particular situation that may or may not set major precedent for other litigants.

Still, the Supreme Court’s ruling will create a more difficult path for litigation by hospital employees seeking the protections of ERISA going forward.

It remains to be seen whether Congress will be moved to take any action in response to the Supreme Court decision.

Congress had not appeared to be moved to respond to the interpretations of the 1980 amendment to ERISA by the various federal agencies involved that have been consistent with the view now expressed in the Supreme Court decision.

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