November 11, 2019

November 11, 2019

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November 08, 2019

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Supreme Court Rules in Favor of Church-Affiliated Hospitals in Church Plan Litigation

Summary

In a major victory for church-affiliated hospitals, the US Supreme Court overturned three appellate court rulings and decided unanimously that church-affiliated hospitals can maintain their pension plans as "church plans" exempt from the Employee Retirement Income Security Act of 1974, as amended (ERISA), regardless of whether a church actually established the plan. Impacted health systems, and especially their management, should evaluate how best to document and demonstrate their common religious bonds and convictions with the church.

In Depth

In a major victory for church-affiliated hospitals, the US Supreme Court overturned three appellate court rulings and decided unanimously (Justice Neil Gorsuch did not participate in the decision) that church-affiliated hospitals can maintain their pension plans as "church plans" exempt from the Employee Retirement Income Security Act of 1974, as amended (ERISA), regardless of whether a church actually established the plan.

Background

The Supreme Court granted certiorari to Advocate Health Care, et al. v. Stapleton, Maria, et al., St. Peter’s Healthcare, et al. v. Kaplan, Laurence and Dignity Health, et al. v. Rollins, Starla. The US Courts of Appeals for the Seventh, Third and Ninth Circuits, respectively, had ruled that while ERISA clearly provides that church-affiliated entities can maintain ERISA-exempt church plans, only a church could actually establish such plans. The hospitals in those cases, and other similar institutions throughout the country, had relied on decades-old Internal Revenue Service (IRS), US Department of Labor (DOL) and Pension Benefit Guaranty Corporation (PBGC) interpretations that church-affiliated hospitals could both establish and maintain such plans. Relying on those rulings, the hospitals believed themselves exempt from ERISA's funding requirements, which would allow them to fund their pension plans at levels below those permitted under ERISA.

Ruling

Writing for the majority, Justice Elena Kagan applied a textual analysis of ERISA's church plan provisions to find that a pension plan maintained by a church-affiliated hospital need not have been established by that hospital to qualify as a church plan. Justice Kagan analyzed those statutory provisions as follows:

Premise 1: A plan established and maintained by a church is an exempt church plan.

Premise 2: A plan established and maintained by a church includes a plan maintained by a principal-purpose organization (i.e., an organization whose "principal purpose . . . is the administration or funding of a plan or program for the provision of retirement benefits . . . for the employees of a church . . . if such organization is controlled by or associated with a church or a convention or association of churches") per ERISA § 3(33)(C)(i).

Deduction: A plan maintained by a principal-purpose organization is an exempt church plan.

Premise 2 and the resulting Deduction were the points which formed the basis of the controversy in the three circuit court cases.

The Court specifically did not opine on other church plan requirements, including:

  • Whether the hospital system maintaining the plan maintains a sufficient nexus with a church (i.e., shares common religious bonds and convictions with that church); and

  • Whether each hospital system's benefits committee is a "principal purpose" organization.

Next Steps

Though the Supreme Court's decision is unquestionably a positive result for health systems, health systems remain vulnerable. Health systems maintaining a church plan must still demonstrate (1) that they maintain a sufficient nexus with the church and (2) that their benefits committees are "principal purpose organizations." Impacted health systems, and especially their management, should evaluate how best to document and demonstrate their common religious bonds and convictions with the church.

Because church plans are exempt from ERISA, they are also exempt from ERISA's provisions preempting state laws, meaning that plan sponsors may be exposed to claims made under state law. Given the media scrutiny and heightened awareness surrounding this matter, it is possible that some states may evaluate their statutes to determine if specific causes of action might be warranted to address participant concerns in this area.

© 2019 McDermott Will & Emery

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About this Author

Joseph K. Urwitz, Employee Benefits Lawyer, McDermott Will Emery Law Firm
Associate

Joseph K. Urwitz is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Boston office.  He focuses his practice on employee benefits, executive compensation and ERISA matters.  Joe’s experience includes ERISA fiduciary issues, benefits issues faced by non-profit entities, executive compensation and deferred compensation arrangements, equity award plan design, employment and severance arrangements, qualified plan work and employee benefits matters arising in mergers and acquisitions.

Joe received his J.D. from the University of Chicago Law School...

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Mary K. Samsa, Corporate Lawyer, Executive Compensation Attorney, McDermott Will Emery, Law firm
Partner

Mary K. Samsa is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.

Mary has more than 15 years of experience and has represented a wide range of organizations including, but not limited to, Fortune 100 public companies, privately held companies, multinational organizations and not-for-profit hospital systems as well as educational institutions.  Mary’s primary practice focuses on executive compensation (for both taxable and tax-exempt entities) where she regularly advises on nonqualified deferred compensation arrangements, executive employment arrangements (including the rebuttable presumption of reasonableness for tax-exempt entities), equity compensation arrangements, reporting and disclosure of compensatory arrangements, severance arrangements and change in control issues, to name just a few.

Mary is involved in the Tax and International Sections of the American Bar Association, Empowering Women Network (EWN), Founder of the Midwest Chapter of the Global Equity Organization, the Employee Benefits Section   of the Illinois State Bar Association, National Association of Stock Plan Professionals, and the Society for Human Resource Management (SHRM).

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