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Plans Established by Church-Affiliated Organizations May Be Exempt From ERISA

Publications - Client Alert | June 6, 2017

Yesterday, the United States Supreme Court issued its ruling in Advocate Health Care Network v. Stapleton, the long-awaited “church plan” case. The Court held that the employee benefit plans of a church-affiliated organization—such as a hospital or a school—may qualify as church plans, even though the plans were not established by an actual church. This ruling concludes three years of uncertainty and delivers a decisive victory to church-affiliated employers seeking exemption from the Employee Retirement Income Security Act of 1974 (ERISA).

ERISA generally requires employers that sponsor employee benefit plans to adhere to a comprehensive set of rules, including minimum funding, eligibility, disclosure and reporting requirements. “Church plans,” however, are exempt from these rules. ERISA originally defined a “church plan” as “a plan established and maintained . . . for its employees . . . by a church.” However, Congress amended ERISA in 1980 to expand this definition. Under the expanded definition, a church plan is not only a plan established and maintained by a church, but it also includes a plan maintained by an organization controlled by or associated with a church (a “church-affiliated” organization).

The three federal agencies responsible for administering ERISA—the Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation—have long interpreted Congress’s amended definition of “church plan” to exempt plans of organizations controlled by or associated with churches from ERISA’s mandates. This includes plans established by the “good works” ministries of churches, such as religiously affiliated hospitals and schools.

Despite this long-standing interpretation, in 2013, participants began to file class-action lawsuits claiming that the plans maintained by their religiously affiliated employers (typically Catholic health care institutions) were not church plans and therefore were subject to ERISA. Several appellate courts (the Third, Seventh and Ninth Circuits) ruled in favor of the employees, triggering millions of dollars in funding liabilities for employers. At the same time, district courts in other circuits ruled differently. This led to several years of uncertainty as to whether a plan established by a church-affiliated organization would be exempt from ERISA.

Advocate Health Care Network began as three distinct cases. The defendants in each case were church-affiliated not-for-profit hospitals that offered their employees a defined benefit pension plan. The hospitals established the plans and administered them by way of employee benefits committees. Employees of the hospitals sued, alleging that the plans did not fall within ERISA’s church plan exemption, because they were not established by a church. While the lower courts agreed with the plaintiffs, the Supreme Court held that a plan maintained by a church-affiliated organization qualifies as a church plan, regardless of whether an actual church established it.

Action Items

The Court’s ruling has wide-reaching implications. While the plans at issue in Advocate Health Care Network were all defined benefit pension plans, the ruling affects defined contribution retirement plans and welfare plans as well. We recommend that religiously affiliated employers consider the following actions:

  • Employers should first consider whether they maintain a church plan. A church plan is a plan maintained by a church or association of churches for its employees and is exempt from taxes. An organization is “associated with” a church if it shares common religious bonds and convictions with the church.
  • If you maintain a church plan, a number of ERISA requirements do not apply
    • Providing participants with summary plan descriptions and other disclosures
    • Broad fiduciary duties and mandatory claim procedures
    • Providing continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”)
    • Minimum funding and an obligation to make premium payments to the Pension Benefit Guaranty Corporation
  • If you fit the church-affiliated organization profile, it may still be in your best interest to opt in to ERISA. This is particularly important in the welfare plan context, as you may wish to enjoy ERISA’s preemption of state law and the favorable judicial review of claim denials afforded ERISA plans. Absent an election otherwise, a church plan may be subject to state law causes of action, such as breach of contract or negligence, as well as punitive damages.
Additional Information

If you have any questions regarding the establishment or maintenance of church plans, please contact your Kutak Rock attorney or a member of the Kutak Rock employee benefits group.