Churches, pensions and ERISA

Chicago Daily Law Bulletin
July 7, 2014

By Mark D. DeBofsky
Mark D. DeBofsky is a name partner of DeBofsky, Sherman & Casciari, PC. He handles civil and appellate litigation involving employee benefits, disability insurance and other insurance claims and coverage . He can be reached at mdebofsky@debofsky.com.

A recent federal court ruling in Michigan outlined the scope of a provision in the Employee Retirement Income Security Act that exempts "church plans" from being subject to Employee Retirement Income Security Act funding and reporting requirements.

In Overall v. Ascension, 2014 WL 1908428, 2014 U.S.Dist.LEXIS 65418 (E.D.Mich. May 13, 2014), the plaintiff brought a class-action suit against Ascension Health Alliance alleging ERISA violations with respect to Ascension's pension plans. Ascension challenged the basis of the claim, however, asserting the church plan exemption pursuant to 29 U.S.C. Section 1003(b)(2).

The relevant provision of ERISA states:

(b) The provisions of this subchapter shall not apply to any employee benefit plan if -

(2) such plan is a church plan (as defined in Section 1002(33) of this title) with respect to which no election has been made under Section 410(d) of Title 26.

The plaintiffs countered by maintaining the exemption was only applicable to places of worship even if the organization is controlled or associated with a religious denomination.

The court disagreed.

Although ERISA, as originally enacted, limited the exemption to church organizations focused on "worshipful or priestly activities," the exemption was expanded by Section 407 of the Multiemployer Pension Plan Amendments Act of 1980 which broadened the statutory definition of church plans. Pursuant to ERISA Section 3(33) (29 U.S.C. Section 1002(33)), "[t]he term 'church plan' means a plan established and maintained ... for its employees (or their beneficiaries) by a church."

The definition further states that a church plan "includes a plan maintained by an organization, whether a civil law corporation or otherwise, 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 ... if such organization is controlled by or associated with a church. ... " ERISA Section 3(33)(C)(I).

The court thus found that the amendment expanded the church plan exemption to encompass organizations that were affiliated with churches - i.e., hospitals and schools.

The court also noted that the church plan exemption which is also codified in the Internal Revenue Code at 26 U.S.C. Section 414(e) and in IRS General Counsel Memo 39007 (Nov. 2, 1983) is recognized by the IRS to include plans sponsored by nonprofit organizations that are "controlled by or associated with a church," which was construed to encompass hospitals operated by Roman Catholic religious orders.

The IRS also explicitly deemed the plans at issue to be church plans exempt from ERISA pursuant to IRS Private Letter Rulings. The IRS also issued a determination letter on Feb. 18, 2014, finding that the Ascension Health Pension Plan met the tax qualification requirements applicable to church plans.

The court also catalogued other rulings that have come to similar conclusions, finding that so long as a nonprofit organization is controlled by or associated with a church, the exemption applies - Lown v. Continental Causality Co., 238 F.3d 543, 547 (4th Cir.2001); Catholic Charities of Maine v. City of Portland, 304 F.Supp.2d 77, 84-85 (D.Maine 2004); Welsh v. Ascension Health, 3:08CV348/MCR/EMT, 2009 WL 1444431 (N.D.Fla. May 21, 2009); Thorkelson v. Publishing House of the Evangelical Lutheran Church, 764 F.Supp.2d 1119, 1125-29 (D.Minn.2011).

As further support for its determination, the court examined Ascension's governance, which showed the Ascension plans were maintained by five Catholic religious orders with the following powers: (1) to appoint and remove Ascension Health Alliance's directors, board chair and CEO; (2) to approve the corporate documents, the bylaws and articles of incorporation of Ascension Health Alliance; (3) to approve and ensure compliance with Ascension Health Alliance's philosophy, purpose and mission to be a health ministry of the Roman Catholic Church; and (4) to approve the sale or alienation of assets and the incurrence of debt by Ascension Health Alliance, all subject to the Roman Catholic Church's canon law requirements.

Moreover, the articles of incorporation and bylaws of each entity spell out an obligation to "act in conformity with the teachings of the Roman Catholic Church including the ethical and religious directives for Catholic Health Care Services." Accordingly, the entities were deemed church plans. The court concluded by adding a "coda" to its opinion, which found that although the plaintiffs themselves were not involved in religious duties, they were employed by a religious institution managed by the Roman Catholic Church.

The court added:

"While plaintiff may not have the benefit of ERISA's protections, the pension plans are [not] wholly unregulated. They are governed by state law. See Cassidy v. Akzo Nobel Salt Inc., 308 F.3d 613, 615 (6th Cir.2002) ("Interpreting a non-ERISA contract claim requires federal courts to look only to state law principles ..." (citing Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938)))."

The church exemption is a congressional choice of historic proportion. And while it may appear to be an irrational distinction, it is a distinction mandated by law. As noted above, the record is simply insufficient to allow for a constitutional challenge. That such a challenge may have merit is for another day and another lawsuit.

Although the court referenced state law protections, one of the key features of ERISA is entirely absent under state law - the protection of pensions by the Pension Benefit Guaranty Corp. ERISA also statutorily prohibits certain transactions enumerated in 29 U.S.C. Section 1106 that prevent self-dealing and conflicts of interest with respect to plan assets. And the fiduciary obligations of the plan trustees are not uniform from state to state as they are under ERISA.

Since ERISA does not mandate that any employer provide any type of employee benefit, it seems an odd choice that Congress would have exempted church plans from ERISA since there does not appear to be any First Amendment interference with religious doctrine.

However, as this ruling noted, Congress made that choice, and any constitutional challenge will have to await challenge in a different lawsuit.