It is well-established that ERISA contains what is commonly referred to as a “church-plan exemption” which provides that plans established by churches are not required to abide by ERISA’s many rules and regulations. For many years, a number of courts have held that this exemption also applied to plans that were established by organizations that are affiliated with churches, such as schools (think Notre Dame or Georgetown) or hospitals. In two major decisions a couple of months apart, the Third and Seventh Circuits have held that the exemption is not as broad as other courts have concluded. These cases signal a major new area of ERISA litigation.
In Kaplan v. Saint Peter’s Healthcare Sys., 810 F.3d 175, 177 (3d Cir. 2015), the court held: “Per the plain text of ERISA, only a church can establish a plan that qualifies for an exemption under § 4(b)(2).”
St. Peters is a non-profit healthcare entity that is affiliated with the Catholic Church, with, for example, all but two members of its Board of Governors appointed by the Bishop of Metuchen. The plaintiff filed a putative class action, claiming that the St. Peter’s retirement plan failed to comply with ERISA. During the pendency of the action, St. Peter’s received a private letter ruling from the IRS affirming the plan’s status as exempt for tax purposes. St. Peter’s moved to dismiss the suit, but the district court denied the motion, finding that St. Peter’s could not prove its plan was an exempt church plan.
As amended in 1980, 29 U.S.C. § 1002(33)(A) defines a “church plan” as “a plan established and maintained … for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under section 501 of Title 26.” That is a relatively straightforward definition, and is plainly limited to churches or groups of churches. Subparagraph (C)(i) arguably expanded that definition, stating: “A plan established and maintained for its employees … by a church or by a convention or association of churches includes a plan maintained by an organization … 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 a convention or association of churches.”
The Third Circuit noted that various decisions in prior years had concluded that entities that are not churches, but which had strong ties to churches – typically referred to as church-affiliated organizations – could establish church plans. But the court stated that “a new wave of litigation” has pressed an argument not considered in the prior cases – “that the actual words of the church plan definition preclude this result.”
The court held that the plain language of 1002(33) compelled the conclusion that a plan must be established by a church to qualify for the exemption: “Subsection 3(33)(A) requires that all exempt plans be established by a church. Prior to 1980, a plan needed to be established and maintained by a church. The 1980 amendments provided an alternate way of meeting the maintenance requirement by allowing plans maintained by church agencies to fall within the exemption. But they did not do away with the requirement that a church establish a plan in the first instance.”
The court continued: “St. Peter’s responds by arguing that the language of § 3(33)(C)(i), which says that a plan ‘established and maintained’ by a church ‘includes’ a plan ‘maintained’ by a qualifying church agency, means that any plan maintained, even if not established, by such an agency is exempt. This would be persuasive if there were only one requirement—maintenance—for an exemption. But here we have two requirements—establishment and maintenance—and only the latter is expanded by the use of ‘includes.’”
The court illustrated the flaw in St. Peter’s argument with an example: “Indeed, St. Peter’s essentially conceded the problem with its reading at oral argument when presented with the following scenario: Congress passes a law that any person who is disabled and a veteran is entitled to free insurance. In the ensuing years, there is a question about whether people who served in the National Guard are veterans for purposes of the statute. To clarify, Congress passes an amendment saying that, for purposes of the provision, ‘a person who is disabled and a veteran includes a person who served in the National Guard.’ Asked if a person who served in the National Guard but is not disabled qualifies to collect free insurance, St. Peter’s responded that such a person does not because only the second of the two conditions was satisfied. This correct response only serves to highlight the fatal flaw in the construction of ERISA advanced by St. Peter’s.”
Moreover, the court found that, if St. Peter’s reading were correct, then the requirement in (33)(A) that a plan be established by a church would be superfluous, because any plan would be a church plan as long as it was maintained by a church or a church-affiliated organization.
The court rejected St. Peter’s argument that legislative history favored an expansive interpretation. Similarly, the court found unpersuasive the fact that the IRS, which interpreted the ERISA exemption as applying to plans maintained by church-affiliated organizations, because that interpretation was only in a general counsel memorandum, not a formal rule. Similarly, the court rejected the argument that Congress ratified the IRS’ interpretation by incorporating the church plan definition into other laws. Finally, the court rejected an argument based on the Free Exercise Clause, finding that the exemption, as interpreted by the court, did not impermissibly entangle the government in determining what is, and is not, a church.
In Stapleton v. Advocate Health Care Network, 817 F.3d 517 (7th Cir. Mar. 17, 2016), the Seventh Circuit “explored the question that has been brewing in the lower federal courts: whether a plan established by a church-affiliated organization, such as a hospital, is also exempt from ERISA’s reach. We conclude that it is not.” Stapleton cited, and relied upon, the Third Circuit’s recent decision in Kaplan (summarized above).
The case involved a proposed class action against Advocate (which operates multiple hospitals in Illinois) alleging that it breached fiduciary duties in its retirement plan. There was no dispute that Advocate did not comply with ERISA, because it claimed it was exempt. Advocate is a non-profit that is affiliated with two churches, pursuant to contracts by which they “affirm their ministry in health care and the covenantal relationship they share with one another.” Neither church owns or provides financial support to Advocate.
The court stated: “Subsection (33)(A) of ERISA defines a church plan as a ‘plan established and maintained’ by a church. 29 U.S.C. § 1002(33)(A). In short, two separate elements must both be met for the exemption to apply: (1) a church must first create or establish the plan and then (2) maintain the plan.” The court held that “Advocate would clearly lose” under this test, because its plan was not established by a church.
Advocate argued, however, that subsection 33(c) enlarges the definition of church plan by providing (in language simplified by the court): “A church plan includes a plan maintained by a church-affiliated organization.”
The district court had held, and the Seventh Circuit agreed, that subsection (c) applies only when a plan is established by a church but maintained by a church-affiliated organization: “Advocate’s position—that a plan qualifies as a church plan merely by being maintained by a church-affiliated organization—has a fatal flaw. If a plan could qualify solely on the basis of being maintained by a church-affiliated organization, the ‘established by a church’ requirement of subsection (33)(A) would become meaningless. And we know that this is not so, for subsection (33)(A) is a separate, independent requirement of the statute.”
The court noted that legislative history showed that this choice of words was intentional: “We simply cannot gloss over the fact that Congress included the word ‘established’ in subsection (33)(A) but excluded it in subsection (33)(C)(i). In the latter subsection, Congress could have said that a plan ‘established and maintained’ by a church includes a plan ‘established and maintained’ by a church agency,” but despite an earlier proposal to do just that (which we will discuss in more detail below), the final legislation did not say that. [quotation marks omitted]”
The court also rejected the argument that subsection 33(C)(ii) expanded the church exemption to its plan, holding that the subsection merely “states that employees of a qualifying church-affiliated organization may be considered employees of a church for purposes of the exemption.” But “[t]he fact that an established church plan may include employees of a church-affiliated organization does not mean that the church-affiliated organization may establish the plan in the first place.”
The court also observed the importance of ERISA protections, and noted that there were numerous examples of hospitals underfunding pension plans after obtaining an IRS ruling that their plans were exempt church plans.
Like the Third Circuit, the court found that legislative history supported its interpretation; that the IRS interpretation of the exemption did not alter the analysis; and that the restrictive interpretation did not violate the First Amendment.