ERISA Church Plan Exception Applies to Pension Plans of Hospitals with Church Association

A new Supreme Court decision has answered the prayers of church-associated entities seeking relief from the regulatory requirements of the Employee Retirement Income Security Act of 1974 (ERISA).

Employee benefit plans, including defined benefit pension plans, are generally regulated by ERISA, which requires pension plans to disclose information about the plan and its investments, to adequately fund the plan and to participate in the federal pension insurance program.

However, “church plans” are excepted from ERISA’s requirements (as well as its protections).  Numerous church-associated entities, including hospitals, schools and social service agencies, maintain church plans.  One main difference is that participants in church pension plans have no federal insurance protection and may find themselves in underfunded pension plans.

When is a Plan a “Church Plan”?

Employees in three different hospital systems brought three different class actions challenging the “church plan” status of their defined benefit pension plans, and sought relief related to non-compliance with ERISA. The employees argued that in order for a pension plan to be a “church plan,” it must first have been originally established by a church, not merely maintained by a church-related organization. Because none of the hospital plans were established by a church, but were instead established by their non-profit entities, the employees argued that the plans did not qualify as “church plans” and were subject to ERISA. The federal Third, Seventh and Ninth Circuit Courts of Appeal agreed with the employee-classes in each of the three cases.

In Advocate Health Care Network v. Stapleton, the U.S. Supreme Court examined all three cases and reversed each of the lower courts’ holdings. By an 8-0 vote, the court ruled that pension plans maintained by a principal-purpose organization qualify as a “church plan” that is excepted from ERISA, regardless of who established the plan.

This decision aligns with hundreds of private letter rulings and opinion letters issued by the Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Board which have all exempted plans maintained by church-affiliated organizations, even if such plans were not originally established by a church.

What is a “Principal-Purpose Organization”?

In making this ruling, the Supreme Court assumed for purposes of the case that the three hospital systems were in fact “principal-purpose organizations,” meaning organizations the principal purpose of which is the administration or funding of a plan for employees of a church or entity associated with a church.

As these cases go forward under this new interpretation, the employees bringing the lawsuits intend to contest the Supreme Court’s characterization of the hospitals as principal-purpose organizations so that they can continue to challenge the conclusion that the pension plans are actually “church plans.”

Church Plans Are Subject to State Law

Notwithstanding the Advocate Health Care decision, church plans exempt from ERISA are still subject to state common law and statutory law governing fiduciary duty and trusts.

Bottom Line

Litigation over benefits plans of church-associated organizations will continue, but will focus on the status of the entity as a “principal-purpose organization” and on state law.  While the Advocate Health Care Network decision is a blessing for church-affiliated organizations and their benefits plans, it is not full dispensation from all of the “church plan” exception’s requirements.