Since the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Service (IRS) and the Department of Labor have interpreted the so-called “church plan exemption” to permit religious-affiliated organizations such as hospitals, colleges and charities to establish and maintain retirement plans exempt from ERISA requirements. In Stapleton v. Advocate Health Care Network, decided by the Seventh Circuit of the U.S. Court of Appeals on March 17, 2016, the Court interpreted ERISA’s definition of “church plan” to include only benefit plans actually established by churches, although such plans could be administered by organizations associated with or controlled by churches. Although this shift in authority has been on the horizon, the Seventh Circuit’s decision should cause church-affiliated entities to take stock of their retirement plans and past positions.
ERISA, the federal law governing employee benefit plans, imposes certain administrative requirements on employee benefit plans and, in conjunction with the Internal Revenue Code, requires compliance with minimum funding, vesting and nondiscrimination rules applicable to qualified retirement plans. Nevertheless, ERISA exempts “church plans” from its requirements and defines a church plan as a plan “established and maintained … for its employees … by a church or by a convention or association of churches which is exempt from tax under section 501 of the Internal Revenue Code.” ERISA further states that plans established and maintained by churches include plans administered by organizations “affiliated with or controlled” by churches. In recent years, plaintiffs attempting to assert claims under ERISA have challenged the exemption of organizations that are not actual “steeple” churches.
In Stapleton v. Advocate Health Care Network, the Court’s focus on the “actually established” language of the church plan exemption requires a much closer look at the process by which a plan was established. The decision pertained to the benefit plans maintained by Advocate Health Care Network, based in Illinois, and affiliated with the Metropolitan Chicago Synod of the Evangelical Lutheran Church and the Illinois Conference of the United Church of Christ, but not owned or financially supported by either church. Advocate operates 12 hospitals and numerous other healthcare locations and employs 33,000 employees. Advocate operated its benefit plans, including its defined benefit retirement plan, as exempt from ERISA, largely relying upon letter rulings from the IRS affirming the exemption.
Prior to this decision by the Seventh Circuit and a similar December 2015 decision by the Third Circuit, the main concern of religious-affiliated organizations that were not actual “steeple” churches was whether or not they were sufficiently “associated with or controlled by” an actual church, i.e., whether they were church-governed enough to be entitled to the ERISA exemption. With these decisions on the books, however, the ERISA church plan exemption for all organizations that are not actual churches (or other houses of worship, such as synagogues and mosques) is effectively discontinued in the states covered by the Seventh (Illinois, Indiana and Wisconsin) and Third (Delaware, New Jersey and Pennsylvania) Circuits. For such organizations that maintain defined benefit pension plans, loss of the ERISA exemption may require the contribution of millions of additional dollars to remedy a shortfall in ERISA funding requirements, as well as impose greater administrative burdens in the form of certain nondiscrimination testing, reporting and disclosure obligations required by ERISA. For such entities that maintain defined contribution plans, the concerns will be of a more administrative compliance nature but will be problematic nonetheless.
We anticipate that either (1) a conflict among the courts that have yet to address the issue may develop and will ultimately need to be resolved by the U.S. Supreme Court; (2) that the Department of Labor and/or the IRS will address the enforcement of the ERISA and Internal Revenue Code requirements for plans that are no longer considered church plans; or (3) that a statutory remedy will be created by Congress. In the meantime, religious-affiliated organizations operating benefit plans that may lose ERISA exemption are encouraged to consult with legal counsel regarding the possible risks resulting from these decisions and options moving forward.