Supreme Court Helps to Clarify Definition of ERISA “Church Plans”

The Employee Retirement Income Security Act (ERISA) was signed in to law in 1974 and was designed to protect the beneficiaries of retirement plans. However, due its strict funding rules and required fees for the PBGC (Pension Benefit Guaranty Corporation), certain plans are given exclusion from ERISA to help them save money. There are several groups that have been provided these exclusions, one of which is church organizations. Originally only churches themselves fell under this category, but eventually Congress felt the need to expand on this definition, so in 1980 they made an amendment to ERISA. From this point on, a “church plan” has been defined as:

  • A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or convention or association of churches.. 1002(33)(C)(i)

However, there is some ambiguity in this definition that has led to controversy on exactly how it should be interpreted. These controversies came to an end as a result of the recent Supreme Court case of Advocate Health Care Network et al. v. Stapleton et al.

The final Supreme Court ruling for this case took place on June 5, 2017.  The Defendants’ argument was unanimously upheld, stating that “a non-church—such as a church-affiliated hospital or school—may establish a church plan so long as the plan is maintained by an organization qualifying under section 3(33)(C)(i) that is controlled by or associated with a church.” Considering that this definition had already been used by the U.S. Department of Labor (DOL), Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) for over 30 years, this ruling came as a relief to plan sponsors who had already been operating under this definition.

Although this was a huge win for plan sponsors who have “avoided millions of dollars in penalties, attorney fees, back fees, and PBGC premiums,” (Every word matters: Supreme Court finds “church plans” include those established by church-affiliated organizations), it may leave the retirement of thousands in jeopardy. Participants in these plans are less secure in their retirement because ERISA’s funding, vesting, and fiduciary requirements will not apply to them. This could potentially end in hospital employees spending their entire careers contributing to pension plans that will be insolvent by the time they retire. This is not the only problem people are having with the court’s ruling.

Of the arguments against the ruling, the most popular is that it is unfair to secular organizations that have to compete with non-ERISA church affiliated organizations, despite the fact that these “church-affiliated” organizations run more like a secular ones. According to Justice Sotomayer, “Church-affiliated organizations operate for-profit subsidiaries, employee thousands of people, earn billions of dollars in revenue, and compete with companies that have to comply with ERISA.” Many have argued that this gives an unfair and undue edge to church-affiliated hospitals over the non-church-affiliated ones.

For these and several other reasons, this will almost certainly not be the end of legislation concerning ERISA church-affiliated plans. Not only is there disagreement over the fairness of the ruling as a whole, but the Court has also left many questions unanswered, such as: “What exactly constitutes a ‘principle purpose organization’ that may attain a church plan?”; “What does it mean to be ‘controlled by’ or ‘associated with’ a church?”; and “Exactly how close must the connection between hospitals and the church be?” The Court may have clarified the general definition of “church plans” to some extent, but the exact guidelines as to what qualifies as a “church-affiliated organization” may not be as clear as hoped. Stay tuned for updates on this ongoing discussion.

 

For further reading:

Religious Institution Client Alert, June 2017: U.S. Supreme Court Interprets ERISA Church Plan Exemption In Favor of Religious Charities: http://www.stradley.com/insights/publications/2017/06/religious-institution-client-alert-june-2017

Unanimous Supreme Court Decision In Favor of “Church Plan” Defendants: http://www.lexology.com/library/detail.aspx?g=d4d30826-3328-425d-8926-e8f3c3b39532

Every word matters: Supreme Court finds “church plans” include those established by church-affiliated organizations: http://www.ilntoday.com/2017/06/every-word-matters-supreme-court-finds-church-plans-include-those-established-by-church-affiliated-organizations/

By Chandler Julian, CPA, QKA, AIF

Chandler serves as the firm's Chief Financial Officer.

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