Church pension plan status being tested by IRS, class-action lawsuits

The IRS' long-term trend of allowing church-affiliated defined benefit pension plans to be exempt from federal pension rules could reverse course after an unusual decision by the agency and a flurry of lawsuits.

One sign of that change came in late March when the Internal Revenue Service took the unusual step of revoking a church plan status ruling issued a decade ago to the now-closed Hospital Center at Orange in Orange, N.J., whose plan had a $30 million funding deficit. The IRS move led the Pension Benefit Guaranty Corp., whose officials supported the reversal, to announce May 10 that it would cover the pension benefits for nearly 800 former employees.

Between March and now, five major class-action lawsuits were filed in separate jurisdictions against some of the biggest names in health care — Dignity Health, San Francisco; Ascension Health Alliance, St. Louis; Catholic Health Initiatives, Englewood, Colo., Catholic Health East, Newtown Square, Pa.; and Saint Peter's Healthcare System, New Brunswick, N.J. — now operating their pension plans under church plan status.

The lawsuits, filed by ERISA law firms Keller Rohrback LLP in Seattle and Cohen Milstein Sellers & Toll PLLC in Washington, are collectively seeking more than $2 billion in missed pension contributions and other damages. Among other claims, the lawsuits challenge the interpretations made by the IRS and the Department of Labor that allowed the hospitals, which have varying degrees of church associations, to be exempt from the Employee Retirement Income Security Act.

St. Peter's Healthcare System spokesman Phil Hartman said officials there consider the lawsuit to be without merit because the hospital was established by nuns more than a century ago and is affiliated with a local Catholic diocese. Despite having operated as an ERISA plan until seeking church plan status in 2006, “we've always been overseen by a religious entity,” Mr. Hartman said.

Dignity Health spokeswoman Tricia Griffin declined to comment on the lawsuit, but said in a statement, “We remain committed to ensuring our retirees and beneficiaries receive the benefits they have earned. We believe we have complied with the law, including the applicable requirements for our retirement plans.”

Catholic Health Initiatives spokesman Michael Romano and Ascension Health spokeswoman Trudy Hamilton declined to comment. Calls to Catholic Health East and attorneys for the plaintiffs were not returned.

The lawsuits could be changing the tide of plans seeking to be exempted from ERISA. “It's certainly plausible there will be more cases filed if success is seen as likely,” said Thomas E. Clark Jr., chief compliance officer at FRA PlanTools, a fiduciary consulting firm in Charlotte, N.C. “The stature of the plaintiffs' (law) firms involved, combined with the amount of alleged damages, and the severity of the long-term harm to the participants makes this a hot topic,” said Mr. Clark, a former ERISA litigator.

Pension plans run by church-affiliated organizations are not required to be covered by ERISA. In recent years, opting out of ERISA coverage has appealed to many such organizations.

Liz Sweeney, health-care credit analyst at Standard & Poor's Rating Services in Timonium, Md., said church plan status means the organizations “have substantially more flexibility as to how and when they fund their plans.” But, she added, “They take their stewardship seriously.”

An April 22 S&P report on pension funding in the non-profit health-care sector showed 2012 funding levels for Ascension Health Alliance, Catholic Health Initiatives and Dignity Health at 93.1%, 75.2% and 65.5%, respectively, down from 94.1%, 88.6% and 75% in 2011. The report also noted a general downward trend in funding status despite higher contributions, mainly because of lower discount rates.

Plans opting for church plan status can stop paying premiums to the PBGC and can get up to six years of PBGC premiums refunded.

One indicator of the trend comes from PBGC documents obtained by the Pension Rights Center, Washington, which show that 85 plan sponsors, at least 60% of them not-for-profit health-care companies, received premium refunds from 1999 until 2007.

That level of activity raised alarms among pension advocates that the church-affiliation status was being too loosely interpreted, and in some cases, abused.

“I have been concerned for years that companies only loosely affiliated with religious institutions are trying to use a loophole in federal law to get out of having to fund their plans,” said Sen. Tom Harkin D-Iowa, chairman of the Senate Health, Education, Labor, and Pensions Committee. “ERISA was put in place for a reason — to protect participants. In the past, there have been too many instances where pensions went broke, leaving employees and retirees with nothing,” Mr. Harkin said.

“We were the poster child for the most egregious example,” said Mary Rich, a former hospital vice president and nurse with the Hospital Center at Orange, who helped wage a 10-year campaign by former employees and the Pension Rights Center to challenge the IRS ruling and put the participants back under PBGC protection.

The unique circumstances at Hospital Center at Orange — a defunct employer; a pension plan likely to run out of assets by the end of this year; and an unusual collaboration between the IRS, the PBGC and the Pension Rights Center — make further IRS reversals unlikely in the short term. But many observers think it does put pressure on the IRS to take a stronger position, rather than just issue individual rulings.

“It certainly casts a shadow,” said James Keightley, a former PBGC general counsel and IRS official now a partner in the Washington law firm Keightley & Ashner LLP. He believes the IRS' shift in the Hospital Center at Orange case will be seen as setting a precedent, but IRS officials are “not going to take on this issue until the courts step in.”

IRS officials declined to comment. .