More challenges promised despite church-plan victory

Sponsors of church-related pension plans are celebrating a Supreme Court decision upholding their right to be exempt from federal pension rules, but participant advocates vow to continue challenging them on other legal points and in new venues, including state courts.

The unexpectedly unanimous Supreme Court decision June 5 brought a collective sigh of relief from religiously affiliated health-care systems that long have operated as exempt from the Employee Retirement Income Security Act, with its detailed rules on funding obligations, vesting, reporting, disclosure and more.

Disagreeing with plan participants, who argued that there needed to be a direct church connection, the Supreme Court found pension plans did not have to be established by a church to be exempt from ERISA, as long as they are controlled by or associated with one.

For the three health-care systems consolidated into the Supreme Court case, Dignity Health, Advocate Health Care and Saint Peter's Healthcare System, an opposite conclusion by the justices would have left the sponsors and other health-care systems in related cases staring at a combined $4 billion funding shortfall for roughly 300,000 plan participants.

The Supreme Court's view of the matter, which was limited to interpreting what Congress intended when it created the exemption in 1980, is in sharp contrast to conclusions reached by three federal appellate courts in 2015 and 2016, upholding District Court rulings that only churches can set up church plans and disallowing the health systems' ERISA exemption. The trend of courts siding with plan participants led to several multimillion-dollar settlements in recent years, including the Franciscan Missionaries of Our Lady Health System, Baton Rouge, La., in May and from Providence Health & Services, Renton, Wash.; Saint Francis Hospital and Medical Center, Hartford, Conn.; and Trinity Health Corp., Livonia, Mich., all in 2016.

A ‘ringing endorsement’

In the Supreme Court opinion, Justice Elena Kagan wrote that a strict reading of the 1980 law that created the exemption allows it if a pension plan is set up for a “principal-purpose organization,” such as a board overseeing a benefit plan, that is associated with a church.

The Supreme Court decision “is a ringing endorsement of the judicial precedent that has existed since 1980, and the regulatory pronouncements” from the IRS, Department of Labor and the Pension Benefit Guaranty Corp., all of which filed an amicus brief supporting the plan sponsors, said Howard Shapiro, a New Orleans attorney with Proskauer Rose who is defending many Catholic health-care entities in stayed class actions and who submitted a Supreme Court amicus brief on behalf of eight clients.

“It is not often in our lifetime that we see a scenario like this,” he said.

Pension plans run by church-affiliated organizations can choose to be covered by ERISA, but it's not required. Those not wanting ERISA coverage get an IRS private-letter ruling allowing the exemption, a practice that also has been challenged in many of the 100 or so participant class-action lawsuits against church-affiliated plans that have sprung up since 2013.

Advocates for plan participants, devastated by the decision, say they now will focus on what the Supreme Court did not address.

“The court did not decide whether the plans involved in the cases before it are maintained by the type of organization envisioned by Congress when it enacted the law,” said Karen Ferguson, director of the Pension Rights Center in Washington. Ms. Kagan's opinion held a footnote that the question of direct association with a church was not before the court.

Vows to continue

Plan participants will continue filing these cases “to ensure that the 'church plan' exemption is claimed only in appropriate circumstances,” promised Karen L. Handorf, partner at Cohen Milstein Sellers & Toll and co-counsel for many of the plaintiffs.

“It's going to be a long road but we are optimistic,” said Ms. Ferguson. “It was only the first round. We are optimistic that the courts will realize that the only organizations intended by Congress were these church pension boards and that there is nothing in the legislative history that they intended to exempt a freestanding pension plan established by a hospital,” she added. She worries that the Supreme Court decision could wind up hurting millions of workers if other non-profits associated with churches, such as social services agencies and universities, also seek church-plan status.

Supreme Court Justice Sonia Sotomayor raised that question in a concurring opinion. While the decision correctly interprets the statutory text, she wrote, “I am nonetheless troubled by the outcome of these cases,” which she said were spurred by the failure of unregulated church plans. “It is not at all clear that Congress would take the same action today with respect to some of the largest health-care providers in the country” that compete with companies subject to ERISA, she wrote.

Answering those questions is likely to be the focus of the next wave of plaintiff lawsuits, which legal experts on both sides see taking place increasingly in state courts under laws covering contractual promises, fiduciary standards and the right to bring claims, all of which would not be preempted by ERISA.

“There are a lot of other things that are often significant. Those questions were not before the court and the court did not answer them,” said Ronald Cluett, of counsel to tax law firm Caplin & Drysdale in Washington, who specializes in employee benefits compliance. “I think that the people who did not prevail will seek other ways,” including scrutinizing how closely plan sponsors are affiliated with churches, and how the benefits committees are structured, he said.

Brian Netter, co-leader of law firm Mayer Brown's Supreme Court and appellate practice in Washington, agreed. “Participants will have to be a lot more careful of how they connect these hospital plans to ERISA, and most will not succeed. Whenever one door closes another window somewhere opens up. There's too much for people to give up,” he said.

Mr. Shapiro of Proskauer Rose also expects plan participants and their lawyers to continue to put pressure on church plan sponsors, but he said the Supreme Court ruling “very much strengthens the positions of the church-plan community. It will give the (plan sponsor) defendants an upper hand.”