Supreme Court Clarifies Limits to ERISA Church Plan Exemption

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On March 27, 2017, the then 8 Supreme Court Justices heard oral arguments for three consolidated cases regarding the outer bounds of the “church plan” exception under the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, in Advocate Health Care Network, et al. v. Stapleton, the Court was asked to determine whether defined benefit pension plans maintained by religiously affiliated organizations are considered “church plans” and therefore exempt from ERISA regulation. On June 5, 2017, the Supreme Court held that the “church plan” exemption includes defined benefit pension plans maintained by religious-affiliated organizations, whether or not the plan was originally established by a church. Until the Supreme Court’s recent decision, there was a split among the federal circuit courts. The Supreme Court’s decision impacts possibly thousands of pension plans sponsored by religiously affiliated organizations that, until now, were in a grey area of ERISA regulation.

Definition of “Church Plan”

As background, ERISA is a set of federal laws that regulate employee benefit plans. Employer sponsored plans subject to ERISA must comply with various regulation requirements that serve to fulfill policy concerns of protection of participants’ retirement income and deter plan sponsors from making empty promises of retirement security. Under ERISA §4(b)(2), “church plans” are exempt from ERISA regulation. The statute defines a “church plan” as a plan “established and maintained… for its employees…by a church or by a convention of association of churches which is exempt from tax under Section 501 of the Internal Revenue Code.”  ERISA §3(33)(A).  

While the definition of a church plan seems pretty straightforward, it is not. The definition of “church plan” states that, “a plan established and maintained for its employees… by a church…includes a plan maintained by an organization, whether a civil law corporation or otherwise.” The interpretation of “established and maintained” has been interpreted differently by the various federal circuit courts. Under a strict interpretation of the definition as previously provided by the U.S. Courts of Appeals for the 3rd, 7th and 9th Circuits, the pension plan must be established by a church, not a church-affiliated organization, regardless of how the plan is later maintained.  Federal appeals courts in other circuits, as well as the Internal Revenue Service, have more broadly interpreted the definition, allowing for benefit plans that are established or maintained by church-affiliated organizations to fall within the church plan exemption.

Impact of the Supreme Court’s Decision

Whether a benefit plan constitutes a “church plan” has significant impact on plan design, administration, and regulation which inevitably impacts plan participants and their future retirement income. Benefit plans that are exempt from ERISA, including “church plans”, do not have to comply with ERISA’s funding, annual reporting, disclosure, and claims procedure requirements. Further, ERISA liability and civil penalties do not apply. ERISA regulation serves to fulfill policy concerns of protection of participant’s retirement income and deter plan sponsors from making empty promises of retirement security.  

The three consolidated cases heard by the Supreme Court, from each of the 3rd, 7th, and 9th circuits, have similar facts. The three petitioners are church-affiliated healthcare entities which sponsor defined benefit pension plans. The plans were established by the healthcare entities themselves, not by a church. Defined benefit plans provide retirement income for the life of the participant based on actuarial factors. In contrast to 401(k) plans, defined benefit plans place the financial risk on the employer. For that reason, it is uncommon today for an employer to offer a traditional defined benefit plan. Therefore, the church-affiliated healthcare entities argued that they were able to maintain defined benefit pension plans for their employees due to their assumed exempt status. However, if they were to comply with the myriad of ERISA regulations and requirements, they would be forced to terminate such plans.

Supreme Court’s Decision & Reasoning

The Supreme Court, after analyzing the statutory language and legislative intent, agreed with the petitioners and overturned the decision of the circuit courts. The Court held, in an opinion by Justice Kagan, that ERISA’s “church plan” exemption included not only “churches” but also religiously-affiliated organizations. While the statutory language is not clear, the best reading of the statute requires the broader interpretation of the “church plan” exemption. Justice Sotomayor concurred with this holding, but wrote separately to stress that the Court’s decision would allow for “scores of employees” to potentially be denied ERISA protections, reiterating that this body of cases stemmed from unregulated defined benefit “church plans” that had failed, leaving participants without the retirement security they were promised.  Therefore, the Court’s decision is at odds with retirement policy. Justice Sotomayor admitted that this disconnect is an issue ultimately left up to Congress to address.

Only time will tell whether or not the Court’s decision will spur changes to ERISA’s “church plan” exemption. Until then, religiously-affiliated institutions are allowed to administer their defined benefit plans without regard to ERISA regulation.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Accessing this blog and reading its content does not create an attorney-client relationship with the author or with Miles & Stockbridge. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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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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