Unanimous Supreme Court Backs Exemption for Church Affiliated Hospitals Under ERISA
On June 5, 2017, in Advocate Health Care Network et al. v. Stapleton et. al, the Supreme Court unanimously held that employee benefit plans maintained by church-affiliated hospitals were exempt from the Employee Retirement Income Security Act (the “ERISA”), regardless of whether the plan was actually established by a church. The plaintiffs consisted of current and former employees of three church-affiliated non-profits who ran hospitals and healthcare facilities that offered their employees defined benefit pension plans established by the hospitals and managed by internal hospital employee benefits committees. The plaintiffs filed class actions in three different federal districts alleging that the hospital defined benefit pension plans were not entitled to an exemption under ERISA because they were not established by a church and therefore should be required, among other things, to meet the minimum-funding obligations of ERISA. The pension plans at issue were severely underfunded and ERISA would have required the hospitals to potentially contribute billions of dollars to satisfy the ERISA minimum-funding standards.
Under ERISA, private employers that offer pension plans must abide by a set of rules created to protect plan participants and ensure plan solvency. Section 4(b)(2) of ERISA, however, specifically exempts the employee benefits plans of churches. Section 3(33) of ERISA originally defined a church plan to mean a plan “established and maintained” for its employees by a church or by a convention or association of churches. In 1980, Congress expanded the church-plan definition to state that an “employee of a church” would include an employee of a church-affiliated organization and to add that a church plan includes a plan “maintained” by a “principal-purpose” organization. A “principal-purpose” organization is an organization controlled by or associated with a church or a convention or association of churches the principal purpose or function of which is the administration or funding of a plan or program providing retirement or welfare benefits to employees of such organizations. The Supreme Court found that, under the best reading of the statute, Congress intended that the church plan exemption under ERISA include plans adopted by principal-purpose organizations, even if not established by the church to which the principal-purpose organization is affiliated. In a concurring opinion, Justice Sotomayor agreed with the interpretation of ERISA but cautioned that Congress, when enacting the 1980 amendment, probably did not envision that this exemption would apply to large organizations that employ thousands of employees, operate for-profit subsidies, earn billions of dollars in revenue, and compete in the secular market with companies that must bear the cost of compliance under ERISA. Although she agreed with the majority’s conclusion, she wondered whether the current reality may prompt Congress to make changes.
The Supreme Court’s decision provides assurances to church-affiliated organizations that have treated their employee benefit plans as exempt church plans under ERISA. The organizations should be mindful, however, that as the Court specifically noted, the issue of whether the hospitals qualified as “principal-purpose” organizations was not brought before it. Therefore, it remains to be seen how the lower courts address the level and quality of a relationship that must be maintained between a church and a health care provider to qualify it as a “principal-purpose” organization.