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Third Circuit Court of Appeals Rejects Hospital’s Religious Exemption from ERISA

On December 29, 2015, the U.S. Court of Appeals for the Third Circuit decided in Kaplan v. Saint Peter's Healthcare SystemNo. 15-1172 (3d. Cir. Dec. 29, 2015) that the pension plan for Saint Peter’s Healthcare System in New Brunswick, NJ, was not a church plan exempt from the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. §1001 et seq. (ERISA).

A Church Plan Exemption Will Be Reserved for Churches

The Third Circuit said in its precedential ruling that the Saint Peter’s plan was not entitled to the church plan exemption because it was not established by a church. As such, Saint Peter's should have been complying with ERISA for the entire time its plan was in existence. Financially, the consequences of the ruling are significant since New Jersey state law, which Saint Peter's believed governed its plan, has no requirements relating to funding, unlike ERISA.

In the litigation brought against Saint Peter's, the plaintiffs charged that the Saint Peter's plan was grossly underfunded. Assuming this ruling stands, the plan sponsor will be obligated to pay Pension Benefit Guarantee Corporation (PBGC) premiums going back in time.

The Third Circuit recognized that ERISA permits a "church" to establish a church plan. But the Court held in Saint Peter's that while a church agency can maintain a plan, it cannot, however, under the law establish a plan. Since Saint Peter’s Healthcare System, the plan sponsor, is not a church, it could not establish a "church plan" and avoid ERISA requirements.

Substantial Reservations & Misapplication of IRS PLR

Commentators reviewing this decision have noted that buried in a footnote to the opinion, the Court expressed "substantial reservations" over whether Saint Peter's can even maintain an exempt plan.  

In the footnote, the Third Circuit noted that for a plan to be maintained by an organization that is not a church, the "principal purpose" of such an organization must be one of administering or funding of a plan or program for the provision of retirement benefits for the employees of the church. However, it was found that Saint Peter's did not appear to meet the "principal purpose" test since its principal purpose was the provision of health care and "not the administration or funding of the retirement plan."

If the Court were to enforce its perspective as to who can maintain a plan, it would seem to suggest that the only entities entitled to use the "church exemption" would be plans sponsored by actual churches or plans maintained by a church pension board.

The Third Circuit also affirmed the District Court's rejection of the invocation by Saint Peter’s of the Internal Revenue Service’s (IRS’s) private letter ruling (PLR) stating that Saint Peter's was entitled to the exemption from ERISA. The Third Circuit agreed with the District Court’s conclusion that the IRS private letter was wrong in its application of ERISA’s church plan exemption to Saint Peter's.

It remains to be seen if Saint Peter’s seeks review of the decision by the United States Supreme Court. The issue also may be addressed further by Congress, which has the ability to create legislation to resolve this issue.

© 2020 Wilson ElserNational Law Review, Volume VI, Number 36


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