Supreme Court rules church plans exempt from ERISA

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The Supreme Court’s unanimous decision on June 5, 2017 in Advocate Health Care Network v. Stapleton is a significant victory for church-affiliated hospitals and similar institutions. The opinion reverses three appellate decisions on the matter.

The Court ruled that an employee benefit plan maintained by an organization controlled by or associated with a church with the principal purpose of administering or funding an employee retirement or welfare plan for the employees of a church — such organization being a “principal-purpose organization” — is a “church plan” exempt from the requirements of the Employment Retirement Income Security Act of 1974. This ruling applies to plans that were established by the principal-purpose organization and not directly established by a church.

An employee benefit plan that qualifies as a “church plan” under Section 3(33) of ERISA is exempt from the extensive compliance, reporting and disclosure requirements imposed by ERISA, such as the minimum funding requirements.

For many financial services institutions, knowing when a given client or counterparty is subject to ERISA can be critical, given ERISA’s unforgiving penalties associated with fiduciary breaches and prohibited transactions.

By resolving the potential ambiguities associated with the recent split among circuits, the Supreme Court’s decision in Advocate promises to provide greater clarity to many financial institutions struggling with the broader policies underlying these arrangements.

ERISA originally defined a “church plan” as a “plan established and maintained . . . for its employees — or their beneficiaries — by a church or a convention or association of churches.” This definition was later expanded to provide that:

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 of churches, if such organization is controlled by or associated with a church or a convention of churches.

Many church-affiliated hospitals and similar institutions have established and maintained retirement plans they considered to be “church” plans, relying both on the language of ERISA as well as guidance from the Internal Revenue Service, Department of Labor and others.

Also see: “There is no monopoly on benefits advice

The petitioners in Advocate were three church-affiliated non-profits that ran hospitals and other healthcare facilities, collectively “hospitals.” The hospitals offered their employees defined-benefit pension plans that were established by the hospitals themselves and managed by internal employee-benefits committees.

The cases were brought by employees and former employees of the hospitals, the “Respondents,” alleging that the employers’ pension plans did not qualify as “church plans” and were therefore subject to all of the requirements of ERISA.

The cases were part of a recent wave of litigation challenging the position that a plan maintained by a principal-purpose organization does not need to be established by a church to be considered a “church plan.”

Although the respondents conceded that the definition of “church plan” allowed for principal-purpose organizations to maintain such plans, they asserted that the definition still requires that a “church plan” be established by a church, which was not the case for the hospital plans.

The Court rejected the respondents’ argument, holding that a plan maintained by a principal-purpose organization does not require establishment by a church to qualify as a “church plan.”

In coming to this conclusion, Justice Kagan, who delivered the opinion, focused on the plain reading of the statute. Justice Kagan noted that the “most natural reading [of the added language] is to enable a plan ‘maintained’ by a principal-purpose organization to substitute for a plan both ‘established’ and ‘maintained’ by a church” and if Congress wanted to only alter the maintenance requirement but keep the requirement that the plan be established by a church, it could have done so easily.

Although Advocate resolves the split among federal courts on whether an employee benefit plan established by a principal-purpose organization may be considered a “church plan,” it does not address the issues of what degree and quality of connection between an organization and a church creates the necessary association and whether an internal benefits committee is considered a principal-purpose organization.

Because those issues were not before the Court, the Court did not opine on them. This leaves open the possibility for future suits by employees against church-affiliated health-care providers or similar institutions based on those alternative theories.

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Retirement benefits Employment and benefit-related court cases ERISA Employment and benefit-related legislation Retirement planning DoL SCOTUS