Courts Address ERISA’s Church Plan Exemption:

On December 29, 2015, the United States Court of Appeals for the Third Circuit (the “Court”) issued its decision in the case of Kaplan v. St. Peter’s Healthcare System. The case involved ERISA’s provisions that exempt certain church plans from its coverage (e.g., reporting and disclosure rules; rules governing fiduciaries’ conduct).

By way of background, Section 3(33)(A) of ERISA defines a church plan as a plan “established and maintained…for its employees (or their beneficiaries)” by a tax-exempt church. Section 3(33)(C)(i) of ERISA adds that a “plan established and maintained” by a tax-exempt church includes a plan maintained by certain agencies of a tax-exempt church. The specific question in this case was whether a church agency that is itself not a church, in addition to being permitted to maintain a church plan, can establish a church plan.

Key facts in this case were as follows:

  • St. Peter’s is a nonprofit healthcare entity that runs a variety of facilities. Although it has ties to the Roman Catholic Diocese, it is not a church.
  • St. Peter’s established the defined benefit plan at issue in 1974, which covers most employees of St. Peter’s who were hired before July 1, 2010.
  • From the plan’s inception until 2006, St. Peter’s administered the plan in accordance with ERISA, and it informed employees that the plan complied with ERISA.
  • In 2006, St. Peter’s filed an application with the IRS to seek a ruling that ERISA’s church plan exemption applied to the plan.
  • In May of 2013, the plaintiff (a former St. Peter’s employee) filed this lawsuit and alleged that in the years after St. Peter’s filed the IRS application for a church plan exemption, St. Peter’s did not comply with certain ERISA rules. Specifically, St. Peter’s did not provide plan participants with summary plan descriptions or benefit statements, and the plan was underfunded by more than $70 million as of the end of 2011.
  • In August of 2013, St. Peter’s received a private letter ruling from the IRS stating that the plan was an exempt church plan for Internal Revenue Code purposes. (The Internal Revenue Code uses ERISA’s definition of the term “church plan.”)

The Court ruled that “Per the plain text of ERISA, only a church can establish a plan that qualifies for an exemption under [ERISA]…Because no church established St. Peter’s Healthcare System’s retirement plan, we hold that it is ineligible for a church plan exemption.” As further support for its ruling, the Court noted that because ERISA is a law that should be “liberally construed in favor of protecting the participants in employee benefit plans,” the Courts’ failure to interpret the church plan exemption narrowly would result in excluding the St. Peter’s plan from ERISA and thus the protections ERISA affords to employees. Additionally, with respect to the IRS guidance St. Peter’s received in 2013, the Court stated that because such guidance was not a “formal adjudication or notice-and-comment rulemaking,” and because it conflicted with ERISA’s plain language, the Court was not persuaded by that guidance. The Courts’ decision can be accessed here:

However, note that the Kaplan case conflicts with a December, 2015 court opinion in the case of Medina v. Catholic Health Initiatives, which was decided by the United States District Court for the District of Colorado. In Medina, the main defendant (CHI) was a Catholic nonprofit health care system but not itself a church. The plaintiff alleged that CHI’s defined benefit plan did not qualify for ERISA’s church plan exemption because the plan was established by CHI, and CHI is not a church. Therefore, the plaintiff alleged that the plan had to comply with applicable ERISA requirements.

The Medina court ruled that the defined benefit pension plan sponsored by CHI was a church plan under federal law and thus was exempt from ERISA. More specifically, the court opined that a plan does not have to be established by a church to qualify as a church plan. Rather, a plan also constitutes a church plan if it is maintained by an organization that is controlled by or associated with a church, where the organization’s principal purpose or function is the administration or funding of the benefit plan. Furthermore, according to the court, that rule applies to a plan sponsored by a church-affiliated nonprofit organization and administered by such an organization’s plan committee, if the principal purpose or function of the committee is administering the plan and if the committee is controlled by or associated with a church. This case can be viewed via the following link:

These cases differ in terms of the respective court’s extremely technical reading of statutory language providing for the church plan exemption. These differing opinions have hugely different consequences for the defendants, given the severity of ERISA’s applicable rules if the church plan exemption does not apply. It will be interesting to see how many future courts side with the court in Kaplan, and how many side with the court in Medina.