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Benefit Plans of Church-Affiliated Organizations May Have to Comply with ERISA

Since the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Service (IRS) and the Department of Labor have interpreted the so-called “church plan exemption” to permit religious-affiliated organizations such as hospitals, colleges and charities to establish and maintain retirement plans exempt from ERISA requirements. In Stapleton v. Advocate Health Care Network, decided by the Seventh Circuit of the U.S. Court of Appeals on March 17, 2016, the Court interpreted ERISA’s definition of “church plan” to include only benefit plans actually established by churches, although such plans could be administered by organizations associated with or controlled by churches. Although this shift in authority has been on the horizon, the Seventh Circuit’s decision should cause church-affiliated entities to take stock of their retirement plans and past positions.

ERISA, the federal law governing employee benefit plans, imposes certain administrative requirements on employee benefit plans and, in conjunction with the Internal Revenue Code, requires compliance with minimum funding, vesting and nondiscrimination rules applicable to qualified retirement plans. Nevertheless, ERISA exempts “church plans” from its requirements and defines a church plan as a plan “established and maintained … for its employees … by a church or by a convention or association of churches which is exempt from tax under section 501 of the Internal Revenue Code.” ERISA further states that plans established and maintained by churches include plans administered by organizations “affiliated with or controlled” by churches. In recent years, plaintiffs attempting to assert claims under ERISA have challenged the exemption of organizations that are not actual “steeple” churches.

In Stapleton v. Advocate Health Care Network, the Court’s focus on the “actually established” language of the church plan exemption requires a much closer look at the process by which a plan was established. The decision pertained to the benefit plans maintained by Advocate Health Care Network, based in Illinois, and affiliated with the Metropolitan Chicago Synod of the Evangelical Lutheran Church and the Illinois Conference of the United Church of Christ, but not owned or financially supported by either church. Advocate operates 12 hospitals and numerous other healthcare locations and employs 33,000 employees. Advocate operated its benefit plans, including its defined benefit retirement plan, as exempt from ERISA, largely relying upon letter rulings from the IRS affirming the exemption.

Prior to this decision by the Seventh Circuit and a similar December 2015 decision by the Third Circuit, the main concern of religious-affiliated organizations that were not actual “steeple” churches was whether or not they were sufficiently “associated with or controlled by” an actual church, i.e., whether they were church-governed enough to be entitled to the ERISA exemption. With these decisions on the books, however, the ERISA church plan exemption for all organizations that are not actual churches (or other houses of worship, such as synagogues and mosques) is effectively discontinued in the states covered by the Seventh (Illinois, Indiana and Wisconsin) and Third (Delaware, New Jersey and Pennsylvania) Circuits. For such organizations that maintain defined benefit pension plans, loss of the ERISA exemption may require the contribution of millions of additional dollars to remedy a shortfall in ERISA funding requirements, as well as impose greater administrative burdens in the form of certain nondiscrimination testing, reporting and disclosure obligations required by ERISA. For such entities that maintain defined contribution plans, the concerns will be of a more administrative compliance nature but will be problematic nonetheless.

We anticipate that either (1) a conflict among the courts that have yet to address the issue may develop and will ultimately need to be resolved by the U.S. Supreme Court; (2) that the Department of Labor and/or the IRS will address the enforcement of the ERISA and Internal Revenue Code requirements for plans that are no longer considered church plans; or (3) that a statutory remedy will be created by Congress. In the meantime, religious-affiliated organizations operating benefit plans that may lose ERISA exemption are encouraged to consult with legal counsel regarding the possible risks resulting from these decisions and options moving forward. 

©2022 MICHAEL BEST & FRIEDRICH LLPNational Law Review, Volume VI, Number 98

About this Author

Charles Stevens, Michael Best Law Firm, Labor and Employment Attorney

A persuasive advocate, Charlie vigorously defends employers and benefit plans in courts and other forums. He excels at assessing and fixing problems that arise with employee benefit programs and providing a strategically driven approach to benefits compliance and risk management planning.

As exclusive employee benefits counsel to many nationwide employers, Charlie’s practice focus extends to:

  • Counseling on Affordable Care Act (ACA) compliance and strategic planning, particularly with respect to contingent...

Martin Tierney, Michael Best Law Firm, Employee Benefits Attorney

Clients turn to Martin for his tenacious problem-solving approach to all areas of employee benefits law. He is particularly valued for his track record of untangling and simplifying complex executive compensation matters. Clients seek his counsel with respect to retirement and executive compensation plan design, ongoing compliance with tax and regulatory requirements, and benefits issues in mergers and acquisitions.

Martin has spoken frequently on employee and retirement benefits topics. He has written more than a dozen articles for the...

Jorge Leon, Michael Best Law Firm, Labor and Employee Benefits Attorney
Partner, Diversity and Inclusion Committee Chair

Plan sponsors, administrators, fiduciaries, and third-party recordkeepers turn to Jorge for strategic counsel on designing, establishing, and maintaining retirement plans. Clients laud his responsiveness and meticulous approach to matters ranging from plan establishment and design to government investigations and inquiries, ongoing compliance and qualification, ERISA litigation, and mergers and acquisitions.

Before joining Michael Best, Jorge practiced for 15 years at a premiere Chicago-based AmLaw 100 firm, where he was the lead partner...

Kirk Pelikan, Michael Best Law Firm, Labor and Employment Attorney

Kirk’s practice focuses on legal issues related to all aspects of the employment cycle, from hiring through termination and severance. Substantially experienced in both benefits and employment law, Kirk is well positioned to help clients respond to the opportunities, vulnerabilities and benefit ramifications of particular employment decisions.

Kirk’s focus includes:

  • Developing and maintaining effective compliance strategies related to defined benefit plans, defined contribution plans, executive...

Mark Lotito, Michael Best Law Firm, Labor and Employment Attorney

Mark assists clients in a range of employee benefits matters, including legal compliance, transaction due diligence, and litigation. He brings a multifaceted, big picture outlook to helping clients unravel the challenges of complex benefits-related problems.

He has established a strong track record in achieving successful outcomes for clients confronted by employee benefits litigation and arbitration claims. Mark has also successfully litigated patent and trade secret litigation claims, as well as employment non-compete claims.