Supreme Court Confirms Pension and Benefit Plans Maintained by Church Affiliates May Be Exempt from ERISA

By Kara Backus & Thomas I. Kramer - Bullard Law

June 16, 2017

In an 8-0 decision last week, the U.S. Supreme Court held that the exemption under the Employee Retirement Income Security Act (“ERISA”) for church-sponsored employee benefit plans extends to plans maintained by entities that are affiliated with a church (“church-affiliated entities”), even if the plan was not established by a church.  The holding comes as a huge relief to many church-affiliated entities—often hospitals and educational institutions—that sponsor benefit plans, most of which have been functioning for many years under the assumption that the stringent regulatory requirements of ERISA do not apply to their “church plans.”  Bringing such plans into compliance with ERISA would have come at a massive cost, estimated to be in the billions of dollars.

The case, Advocate Health Network v. Stapleton, involved claims by participants in pension plans sponsored by three church-affiliated hospitals.  The plan participants claimed that the plans maintained by the hospitals did not meet ERISA’s exemption for “church plans” because the plans were not established by a church.  ERISA’s church-plan exemption is significant because it exempts such plans from the rigorous requirements mandated by ERISA for pension plans, such as those related to minimum funding levels, reporting and disclosure, fiduciary liability, and vesting.

At issue in the case was a 1980 amendment to ERISA that expanded the definition of a church plan to include plans of certain church-affiliated entities by adding the following provision:

A plan established and maintained for its employees . . . by a church or by a convention or association of churches includes a plan maintained by an organization . . . the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.

Under the plan participants’ interpretation of this provision, in order for a plan maintained by a church-affiliated entity to be exempt from ERISA, it must have been established by a church.  Because none of the three plans in which they participated was established by a church, they argued, the plans are subject to ERISA.  The Court disagreed, relying on the “most natural reading” of the amended statute to conclude that any plan maintained by a church-affiliated entity is included in the definition of a plan established and maintained by a church, even if the plan maintained by the church-affiliated entity was not originally established by a church.

Even though this case involved a claim by pension plan participants, the holding extends to plans maintained by church-affiliated entities for the purpose of providing health and welfare benefits.  The case falls in line with decades of advice from regulatory agencies confirming that plans maintained by church-affiliated plan sponsors may be exempt from ERISA without having been established by a church.  Several federal circuit courts, however, including the Ninth Circuit Court here in the West, had concluded that ERISA applies to many hospital plans that were maintained but not established by a church.  The Court’s decision overturns those rulings.

The Court’s decision, however, merely eliminated the lower courts’ requirement that a church plan had to be established by a church (even if it were later maintained by a church-affiliated entity).  There remain other factors in determining whether a church-affiliated entity’s plan qualifies as a “church plan” that is exempt from ERISA.  Those factors are intended to help assess whether the church-affiliated entity is “controlled by or affiliated with a church.” The Court did not address this issue.  In general, the courts have examined “control” based on factors such as the ability to select board members and the terms of governing documents, such as articles and bylaws.  The courts have examined “association” based on factors such as shared “common bonds and convictions” with a church.

So, the Court’s decision means that employee benefit plans established by church-affiliated entities may be church plans.  A church-affiliated entity still may need to review the “association and control” factors to determine whether its plans qualify as church plans exempt from ERISA.  Alternately, such an entity might consider whether to make an affirmative election to have its plans covered by ERISA, perhaps to get the benefit of preemption of state laws.