Every word matters: Supreme Court finds “church plans” include those established by church-affiliated organizations
Lawyers and students of every type are often taught that every single word in a written document or a speech matters. This idea does not end in school; the Supreme Court also often interprets federal statutes in this way, via a strict analysis of every word in a statute. In an opinion that focused on straight textual, statutory interpretation, the Supreme Court issued its decision in Advocate Health Care Network v. Stapleton, et al., yesterday (Case No. 16-74), interpreting a provision in the amended version of the Employee Retirement Income Security Act of 1974 (ERISA) to mean that church-affiliated organizations – and not just “churches” in the most traditional sense of the term – can establish “church plans.” ERISA was the statute passed by Congress to provide protections to participants in qualified retirement plans. Church plans are employee retirement plans that have elected to be exempt from these otherwise stringent funding, notice and disclosure, and other standards and fiduciary duties imposed under ERISA. In addition, exempt plans are not covered by the Pension Benefit Guaranty Corporation (PBGC), saving such plan sponsors substantial dollars that would be incurred by paying premiums for such coverage. These exemptions can result in substantial savings to sponsors of such church plans that would be incurred were they to sponsor a non-exempt plan.
Original definition of a church plan
As originally enacted, a “church plan” was simply defined in ERISA as an employee benefit plan “established and maintained” by a tax-exempt church or convention of churches. The exception was originally developed to reflect the separation of church and state and to prevent the federal government from intruding into a church’s private books records. To qualify for the “church plan” exemption in ERISA and obtain other tax benefits, organizations could obtain a letter ruling from the IRS stating that the organization qualified for the exemption. Unfortunately, this required the IRS to interpret which entities were churches. When an adverse IRS letter ruling determined that a retirement plan established by a group of nuns was not a “church plan,” Congress amended ERISA in 1980 to include plans “maintained” by church-affiliated organizations. This permitted church-affiliated nonprofits, such as parochial schools and faith-based hospitals, to avail themselves of the church plan exemption. Over 500 church-affiliated organizations obtained private letter rulings from the IRS stating that their retirement plans qualified for the exemption over the next 25 years.
Controversy over who can establish a church plan
Beginning in 2013, however, a wave of lawsuits were filed across the country, alleging that employees of these nonprofit hospitals and other “church-affiliated organizations” were improperly deprived of the protections of ERISA in their retirement plans. The claims were that the organizations’ retirement plans – many of which were multimillion-dollar retirement plans – while, perhaps maintained by church-affiliated entities, were not church plans under ERISA because they were not actually established by a “church.” Eventually, a number of federal circuit courts ruled in favor of the employees of the nonprofit hospitals, finding that these church-affiliated organizations should not be able to rely on the “church plan” exception to avoid the requirements of ERISA. The issue was accepted for review by the United States Supreme Court, and oral hearings were conducted earlier this year.
How the Supreme Court ruled on the definition of a church plan
In the opinion delivered by Justice Elena Kagan yesterday, the Supreme Court focused on the mechanics of the 1980 amendment, noting that the amendment did not just leave the ability to establish a church plan to a “church,” but added that a church plan includes a plan “established” by a church-affiliated organization, such as a nonprofit hospital, and that “[t]he church-establishment condition thus drops out of the picture.” The court even considered logic problems to emphasize its point, noting that “if A is exempt, and A includes C, then C is exempt.” By a simple analysis of the statute, the Supreme Court held that the category of plans “established and maintained by a church” “includes” plans “maintained by” church-affiliated organizations, and held that “all those plans are exempt from ERISA’s requirements.” By leaving the words “established and” in the statute, Justice Kagen noted that the effect of the 1980 ERISA amendment was to essentially broaden, not limit, the number of organizations eligible for the exemption. The court further noted that elsewhere in the statute, ERISA uses the words “established” and “maintained” interchangeably, adding that limiting the church plan exemption to only plans “established” by the church – even though church-affiliated organizations have the right to “maintain” church plans – would lead to untenable results. While both parties submitted extensive analysis of what little legislative history was available on this point, the court found this support to be of little use, given that no legislative comment or floor statement specifically addressed the issue in this case.
The justices of the Supreme Court were unanimous in their decision (with Justice Neil Gorsuch, who was not a sitting justice at the time of the oral argument, abstaining). However, Justice Sonia Sotomayor submitted a concurring opinion, noting that while she “is persuaded” that the court’s opinion “correctly interprets the statutory text,” she is troubled by the outcome and the lack of legislative history supporting the nonprofit hospitals’ point. As Justice Sotomayor notes, the nonprofit hospitals in this case are nothing like the group of nuns that spurred the 1980 ERISA amendment – while they are still affiliated with churches, some of them operate for-profit subsidiaries that have a financial advantage over their for-profit competitors, and thousands of employees that will lose the protections afforded by ERISA as a result of the “church plan” exemption. Sotomayor notes that “[t]his current reality might prompt Congress to take a different path.”
Impact of the decision in Advocate Health Care Network v. Stapleton
Ultimately, yesterday’s Supreme Court decision in Advocate Health Care Network v. Stapleton may prompt church-affiliated organizations to breathe a huge sigh of relief – these organizations’ retirement plans are still exempt from ERISA as “church plans.” Such a decision has potentially averted adverse decisions against “church plans” across the country, and these sponsoring organizations may have avoided millions of dollars in penalties, attorney fees, back fees, and PBGC premiums. Most importantly to these sponsoring organization that have underfunded pension plans, they will not be required to meet ERISA’s stringent funding requirements; a requirement that would have forced many of them to contribute large amounts of contributions to their plans.
The Supreme Court decision averts what would have potentially been a cataclysmic result to many faith-based hospitals, nursing homes and schools that were counting on being exempt from having their retirement plans subject to the requirements of ERISA. However, some questions remain, because the court did not address the question of the scope of the definition of a “church-affiliated organization” (or the technical term used in the statute), which could also have an impact on which organizations may operate an ERISA-exempt church plan. Justice Sotomayor also noted in her concurring opinion that “Congress may take a different path” now that multi-million dollar hospitals are relying on and litigating the “church plan” exemption, instead of the nuns’ retirement plan that the “church plan” exemption was originally intended to protect. Thus, the Supreme Court has spoken. However, Congress may still ultimately have the last word.
What to do if your organization has a church planWhile the decision in Advocate Health Care provides some temporary relief to organizations relying on the church plan exemption, organizations with “church plans” should still be conducting a comprehensive analysis of their plans; in particular considering how they will fund their future potential liabilities, as the future of the “church plan” exemption may still be unknown.
For questions, please contact one of the McDonald Hopkins attorneys listed below.