Multiple Class Action Complaints Challenge Church Plan Status of Hospital Pension Plans

Recent complaints challenging the “church plan” status of certain pension plans maintained by church-sponsored hospital systems may signal the beginning of a new wave of lawsuits challenging underfunded church pension plans.  Sponsors of church plans would be well advised to examine their church plans and assess the risk associated with the plan’s funded status and the strength of their position that the plan qualifies as a church plan.

At least five complaints have now been filed by plaintiffs’ class action law firms challenging the “church plan” status of certain pension plans maintained by church-sponsored hospital systems.  Employee benefit plans that qualify as “church plans” generally are exempt from many of the federal tax law and federal pension law requirements (largely under the Employee Retirement Income Security Act of 1974, or ERISA) that apply to other plans, including minimum vesting rules, U.S. Department of Labor reporting and disclosure rules, Pension Benefit Guaranty Corporation premium payment and insurance protection, and (most critically) minimum funding requirements for pension plans. 

The objective of these class action lawsuits is a court order or settlement that would force the targeted hospital systems to provide additional funding for the plans, part of which funding would end up as huge legal fees for the plaintiffs’ lawyers.  According to the complaints, certain of the targeted plans are notably underfunded when compared to the funding that would be required for nonchurch pension plans subject to ERISA.  The imposition of ERISA’s funding requirements on pension plans having projected liabilities that greatly exceed assets would impose a significant financial hardship on the sponsors of those plans. 

Background

ERISA generally imposes extensive requirements on the sponsors of employee benefit plans.  However, Section 33(3) of ERISA exempts from ERISA’s requirements any plan “established and maintained … for its employees (or their beneficiaries) by a church or by a convention or association of churches.”  Many nonprofit hospital systems originally founded by religious orders continue to maintain frozen or active pension plans that have been ruled by the Internal Revenue Service (IRS) to be, or are treated as being, “church plans” and thus exempt from ERISA and its funding and other requirements.  Recent complaints, filed on behalf of church plan participants by two plaintiffs’ class action firms, allege that the pension plans of the named hospital systems do not qualify as church plans, with the goal of subjecting those plans to more stringent ERISA requirements and obtaining a court order or settlement resulting in more funding of the pension benefits earned under those plans.  By way of example, plaintiffs in one of the recent complaints claim that the underfunding in that particular pension plan is around $1.2 billion.

Substance of Complaints

The complaints attempt to overturn a well-settled IRS ruling position on church plan status by making three arguments in each case.  The first argument is that church plan status should not be allowed at all for hospital-sponsored pension plans.  This argument alleges that a church plan must be established by a church or convention or association of churches, and not by a hospital or hospital system (even if that hospital or hospital system is a church-sponsored and church-affiliated organization).  For this allegation to succeed, the court reviewing the complaint would have to disagree with more than 30 years of IRS and Department of Labor rulings, as well as prior case law, holding that an entity controlled by or associated with a church can establish and maintain a church plan.  These rulings look at several factors to determine whether the organization sponsoring the church plan is controlled by or affiliated with a church, such as the power of the church to appoint and replace the members of the plan sponsor’s governing board, the common religious bonds of the plan sponsor and the church, and inclusion of the plan sponsor in a directory or other listing of church-affiliated entities.  The complaints in essence say that this is a misreading of the law and ask the court to find that a church plan may be sponsored only by a church or by a convention or association of churches.

The second argument is that, even if the church plan could be sponsored by the hospital system, the hospital system in each case is insufficiently controlled by or associated with the church.  The complaints examine what they assert to be the hallmarks of church control and church association, and allege that the hospital system entities do not exhibit these hallmarks of control and association sufficiently.  The complaints specifically allege that each hospital “purports to share only some religious convictions with the Catholic Church, while deliberately choosing to distance itself from, and/or deny, other religious convictions of the Catholic Church when it is in its economic interest to do so.”  Those economic interests include hiring non-Catholic employees, performing or authorizing medical procedures prohibited by the Catholic Church, providing spiritual support and encouragement to patients that is divergent from and contrary to the Catholic Church teachings, investing in business enterprises not related to the Catholic Church and, for certain of the named hospital systems, partnering in for-profit ventures with organizations that do not require religious convictions common to the Catholic Church.

The complaints conclude that, because the hospital systems are not “associated with” the Catholic Church in this stricter sense, “substantially all” of the employees participating in the plans are not employees of a tax-exempt organization that is controlled by or associated with a church or convention of churches, and as a result the plans are not church plans.

The third argument is that the church plan exemption under ERISA violates the First Amendment to the U.S. Constitution.  This argument essentially is that permitting an organization to avoid the requirements of ERISA because of its control by or association with a church is a means of establishing a religion in violation of the First Amendment.  This argument is worded so broadly that, if accepted, it would appear to invalidate the entire church plan exemption from ERISA.  This appears to be a “reserve” argument that plaintiffs’ lawyers might pursue even if the other two arguments are unsuccessful.

What’s Next?

These recent complaints challenging church plan status likely are the beginning of a new wave of lawsuits challenging underfunded church pension plans.  Now that the number of these lawsuits is up to five, sponsors of church plans would be well advised to examine their church plans and assess both the risk associated with the plan’s funded status and the strength of their position that the plan qualifies, and is being maintained and administered consistently, as a church plan.  In this regard it is worth noting that the IRS will rule, and is continuing to issue favorable rulings, on the status of a plan as a church plan.

Topics:  Catholic Church, Churches, Class Action, ERISA, Hospitals, IRS, Pensions

Published In: Finance & Banking Updates, Health Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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