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Industry Voices

Commentary: 5 questions church pension plan sponsors should ask to avoid legal trouble

The U.S. Supreme Court ruled in June that certain religiously affiliated organizations can continue to operate their pension funds as church plans and so are exempt from some Employee Retirement Income Security Act rules.

That was great news for health systems that were dragged through the courts in recent years. However, executives at other organizations operating church pension plans — everything from universities to YMCAs — should not get complacent.

Employees challenged the hospital systems arguing the church plan designation left their pensions with less protection regarding funding requirements, vesting rights and federal insurance protection in case the plans became insolvent. The petitioners had won three previous lower court rulings.

The high court's ruling in Advocate Health Care Network vs. Stapleton reversed the lower courts and provided clarity for hospitals, but it still falls short of offering a blanket exception. The ruling said: "A plan maintained by a principal-purpose organization qualifies as a 'church plan,' regardless of who established it." That means, in essence, that so long as the organization is controlled by a religious organization, it qualifies for an exemption.

Church plans are exempt from some ERISA rules if they are "established and maintained for its employees by a church" or "maintained by an organization ... controlled by or associated with a church." Plans exempt from ERISA also are exempt from certain provisions of the Internal Revenue Code and regulations. This means certain government filings, such as the Form 5500 and the underlying audit, are not required; participation and funding rules are also different from what would be required for private-employer retirement plans. Also, the insurance protections of the Pension Benefit Guaranty Corp. are not available to defined benefit retirement plans that are church plans.

Key questions

To determine whether the retirement or welfare benefit plan of a sponsoring organization is a church plan, ask these questions:

1. Who is on your board? The constitution of an organization's board offers a clear indication of its affiliation. For example, the articles of incorporation might state that a majority of the board must be "members in good standing of the congregation."

2. Who are your employees and customers? If none of your employees or customers have to be of a particular religion, you might have a problem. Dubuis Health System Inc. lost its church plan status after a court ruled its employees and patients did not have to be of any religious affiliation and that it operated without any church oversight. Conversely, Concord Baptist Church of Christ won its case and kept its exemption after a court ruled it was an extension of the Concord Church because its senior pastor played an active role in setting school policies, and in hiring and firing decisions.

3. What is your mission? The IRS says church plans are for organizations that share "common religious bonds and convictions with that church or convention of association of churches." If the mission of an organization is in keeping with those of a religious organization, such as feeding the hungry or providing health care to those without insurance, it might be on solid ground. If your organization's mission is primarily to provide a good workout, the foundation of a common religious bond might be difficult to argue.

4. Is your organization on a church registry? Being listed on a church registry helps to justify a church plan exemption. For example, the Roman Catholic Church maintains a treatment center to help priests and nuns through addiction. That center is operated with lay staff, everyone from counselors to cafeteria staff, but it is listed on the National Catholic Register, as its work is arguably in keeping with the church's mission.

5. Do you receive church funding? Sometimes a group was started by a religious group but over time becomes a stand-alone organization, perhaps more cultural or athletic than religious. For example, many hospitals started in the late 1800s by religions seeking to offer welfare to the poor, but those religious links might have been lost over time. If an organization receives no funding whatsoever from any religious community, it might be hard to argue the organization is affiliated with a church.

Potential headache

Plan sponsors concerned they don't qualify as a church plan should seek legal help immediately, and maybe even seek a determination from the IRS. While maintaining a plan as a church plan provides big benefits to plan sponsors, losing that status creates huge headaches and can add significant costs.

A plan that has historically held itself to be a church plan might face penalties and fines — usually in terms of late or missed annual form filings — if that determination is overturned. The change can also cause a liquidity crisis, especially for defined benefit plans. For example, if an organization has a defined benefit church plan with liabilities of $40 million that funds $2 million annually, and it's determined it doesn't qualify as a church plan, the organization could face increased liabilities of $65 million and have to accelerate funding substantially. Defined benefit plans and defined contribution plans also will have to undertake audits and file annual Form 5500s. That process will require the help of a forensic accounting service, and there could be other operational challenges, too.

Thoughtful reflection of church plan status requires plans sponsors to first ask some sensible questions — and getting those answers early can save a lot of hassle in the long run.

Joe Rankin is based in Detroit and leads Plante Moran's employee benefits consulting practice. This content represents the views of the authors. It was submitted and edited under P&I guidelines, but is not a product of P&I's editorial team.