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Pension Funds

High court set to rule on church-plan status

Judge William Fletcher ruled against health-care affiliates in a San Francisco appellate court.

ERISA exemption question over health-care affiliates to be answered by justices

The U.S. Supreme Court has agreed to resolve whether church-affiliated retirement plan sponsors are covered by the ERISA, a decision that could have wide implications for all benefit plans.

The court agreed Dec. 2 to consolidate three cases brought by church-affiliated plan sponsors: Dignity Health, Advocate Health Care and Saint Peter's Healthcare System. The health-care systems are appealing lower court decisions that they are bound by federal pension law, including its funding and reporting rules. Arguments are expected to be heard in March, with a decision by June.

Pension plans run by church-affiliated organizations may choose to be covered by the Employee Retirement Income Security Act, but they are not required to be. Many of the class-action lawsuits filed in recent years involve plan sponsors that followed ERISA for years but later received private letter rulings from the IRS exempting them from the law as church plans.

The three consolidated cases before the Supreme Court involve defined benefit plans, but the question of whether ERISA applies will have wider consequences for all benefit plans, legal experts said.

“It's much bigger than DB plans. It's also DC and welfare benefit plans, and you would also find yourself having to deal with the IRS,” said attorney G. Daniel Miller of Conner & Winters LLP in Washington, who is representing the Church Alliance, a coalition of 37 church-related benefit programs' CEOs and directors.

Requiring church-affiliated plans to be covered by ERISA also would make sponsors vulnerable to class-action claims related to investment and other decisions, legal experts point out.

Lawyers for the three health-care systems said in their Supreme Court petition that the systems' “will face claims for billions of dollars in retroactive liability” if forced to convert to ERISA plans, while other religious non-profits in the rest of the country “would face paralyzing confusion and uncertainty.”

Status questioned

The cases wound up at the Supreme Court because three appellate courts — in the 3rd, 7th and 9th circuits — sided with the plaintiffs, while several district courts in other circuits favored plan sponsors. There are potentially hundreds more cases in the wings, but they might be put on hold until the Supreme Court weighs in, legal experts say.

The key issue for the Supreme Court to decide is whether benefit plans not established by a church — such as those offered by an affiliated health-care system — can claim church plan status. As U.S. Circuit Judge William Fletcher with the U.S. Court of Appeals in San Francisco wrote in the July 26 Dignity Health decision: “a church plan must be established by a church or convention or association of churches and must be maintained” by them.

But in dismissing a challenge to Ascension Health Alliance's church plan status in May 2014, U.S. District Court Judge Avern Cohn in Detroit said that while the exemption from ERISA “may appear to be an irrational distinction, it is a distinction mandated by law.”

As the Supreme Court petitioners noted in their brief, “even the courts that have interpreted the statute to contain a church-establishment requirement have conceded that there is substantial ground for disagreement.”

The Becket Fund for Religious Liberty, a non-profit, public-interest law firm that filed an amicus brief in the Supreme Court case, argues “it is not the job of lawyers to decide that hospitals can't be part of a church, and the IRS has rightly viewed these ministries as part of a larger church for over 30 years,” noted Eric Rassbach, deputy general counsel, who said that faith-driven hospitals “provide generous benefits to their employees.”

Constitutional question?

The case could additionally raise a constitutional question, said Mr. Miller with the Church Alliance. “We think if you say it has to be established by a church, you're going to foreclose congregational churches' ability to have one,” he said, because they don't have the same hierarchy as formal religious orders.

The Supreme Court also will be scrutinizing the role that the IRS has played in the church plan status debate.

“Whether you look at the (ERISA) statute itself or the legislative history of the evolution of the church plan definition, the IRS position (in its private letter rulings) was just wrong,” said Drexel University law professor Norm Stein, a senior policy adviser to the Pensions Rights Center in Washington.

Part of the reason behind the flurry of class-action lawsuits in recent years is that until September 2011, plan sponsors did not have to tell participants the IRS had allowed them to leave ERISA protection, and many participants found out the hard way, after plans reduced benefits or ran out of money.

Complaints from plan participants and activists like the Pension Rights Center convinced IRS officials to impose a moratorium on issuing the private letter rulings from 2007 until September 2011, when plan sponsors had to start notifying participants that the “protections and rights” applicable to ERISA-covered plans would no longer apply, including Pension Benefit Guaranty Corp. insurance in the case of a defunct plan.

The IRS said in 2011 that a plan would qualify for a ruling if it is “established and at all times maintained” by church-affiliated entities.

Companies that switch to a church pension plan designation can petition the PBGC for a refund of up to six years' worth of any premiums paid while the plan was under ERISA and paying premiums. From 1999 until 2007, the PBGC received 85 requests for premium refunds, many from hospitals, including Dignity Health, which received a $1.43 million refund, according to the Pension Rights Center.

Since 2013, the PBGC has refunded an additional $2 million, an agency official said. If the Supreme Court rules that the plans should have been covered by ERISA all along, the refund agreements dictate that the money must be returned to the PBGC.

Despite the IRS' role in the church plan debate, it could help find a balanced way out by not imposing retroactive funding demands or penalties on plan sponsors that relied on its rulings, said Pension Rights Center Director Karen Ferguson. “The court could decide in favor of the retirees and direct the lower courts to give relief to the hospitals in the remedy phase,” said Ms. Ferguson.

“If the Supreme Court says that the IRS interpretation is correct, the impact will be devastating for the hundreds of thousands of retirees whose plans received church plan rulings as well as those in plans that are still protected by the PBGC,” Ms. Ferguson said.

Settle vs. fight

An increasing number of plan sponsors operating as church plans have settled class-action lawsuits instead of fighting in court and changed the way they manage their plans.

On Oct. 20, Providence Health & Services, Renton, Wash., agreed to contribute $350 million to its pension plan over seven years, and fully fund the plan by the end of 2029, as well as pay any vested benefits if the pension fund assets are insufficient, and provide participant benefit statements and annual reports according to ERISA guidelines. Providence spokeswoman Adrienne Webb said the not-for-profit Catholic health-care system operating in five Western states has been committed to making contributions, and settled “as a good financial steward.”

Other recent settlements triggered by class-action lawsuits include Saint Francis Hospital and Medical Center, Hartford, Conn., which in May agreed to contribute $107 million to its pension plan, and Trinity Health Corp., which in August agreed to contribute $75 million to nine different pension funds as part of a settlement agreement in two similar class-action lawsuits.

Despite its victory in the 6th Circuit, which dismissed the class-action lawsuit, Ascension Health Alliance settled with plan participants after court-sponsored mediation to avert an appeal. The settlement brought participants changes that mimicked ERISA provisions on disclosure and plan funding, and participants are guaranteed full benefits through 2022.

A note to clients from Groom Law Group in Washington advises that before the Supreme Court issues a decision, church plan sponsors should review the status of their plans “and whether steps can be taken to mitigate risk.”

This article originally appeared in the December 12, 2016 print issue as, "High court set to rule on church-plan status".