LABOR & EMPLOYMENT
SCOTUS Overturns Circuit Courts’ Interpretation of ERISA Church Plan Exemption for Church-Affiliated Employers
O O
n June 5, 2017, the U.S. Supreme Court decided Advocate Health Care Network v. Stapleton, No. 16-74, resolving the question of whether church-affiliated hospitals’ employee defined-benefit pension plans qualify for the ERISA church plan exemption, despite those plans not having been originally “established” by a church. Under ERISA, the Employee Retirement Income Security Act of 1974, most private employers and employee benefit plans must adhere to specific requirements to ensure plan solvency. These requirements include minimum funding and vesting thresholds and insuring pension funds through the federal Pension Benefit Guaranty Corporation (PBGC), as well as specific reporting, disclosure and fiduciary responsibilities implemented by a plan administrator. These safeguards apply not only to pension funds, but also to 401(k), 403(b) and employee health and welfare benefit plans. However, ERISA provides an exemption for “church plans” that are established and maintained by a church. If an organization’s employee benefit plan meets the statutory definition of a “church plan”, they are exempt from the requirements of ERISA. The church plan exemption provision of the ERISA statute as originally drafted by Congress provided that only plans established directly by a church could qualify for the exemption. In 1980, Congress amended the section to include church-affiliated organizations in the definition of an exempt church plan. Under the new section of the statute, an employee benefit plan maintained by a church-affiliated organization would also be permitted to take the exemption and would not be obligated to comply with the ERISA requirements. The IRS and the Department of Labor had always considered such organizations exempt from ERISA for many years, when the Supreme Court accepted the case to resolve differing lower court interpretations of the ERISA church plan exemption language. In 2014, employees and former employees of Advocate Health Care Network as well as employees of other large health systems filed class actions under ERISA, claiming that the health systems were not entitled
14
Dayton Bar Briefs Summer 2017
to take advantage of the church plan exemption because they had not been originally established by a church. They specifically argued that the church plan exemption was never meant to include “giant businesses” like the health systems involved, many of which employed over 35,000 people. The employees also accused the health systems of underfunding their pension plans. Advocate Health in the Ninth Circuit, and other health systems in the Third and Seventh Circuit courts separately argued that their status as church-affiliated principal purpose organizations under ERISA Section 33 entitled them to the church plan exemptions from compliance with the ERISA requirements. The lower courts initially ruled in favor of the employees, rejecting the hospitals’ argument that they had relied upon opinions from the IRS allowing them to take the church plan exemption, and holding that the ERISA church plan exemption would only apply to employee benefit plans that had been established directly by a church. The U.S. Supreme Court agreed with Advocate (and the other two hospital systems involved in the litigation) regarding their interpretation of the ERISA statutory language. In the opinion written by Justice Kagan, the Court held that the 1980 revisions to the ERISA statute regarding the church plan exemption merely expanded the definition of a church plan to include a plan that was administered by an organization with the “principal purpose” or function to administer or fund a plan. As long as the organization is controlled by or associated with a church, the Court held, it would be exempt from ERISA. The Court disagreed with the lower courts’ statutory analysis, as well as their reliance upon the legislative history involving the amendments to the church plan exemption section of ERISA. A plain reading of the statutory language would lead to the legal conclusion that Congress meant to include church-affiliated organizations within the definition of a church plan. The Court held that the hospital systems were exempt from all ERISA continued on page 15
937.222.7902