Pension obligations vs. religious exemptions: Does this make sense?

(This article was originally published by the Chicago Daily Law Bulletin on December 23, 2015 and is reprinted here with permission of the Law Bulletin)

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.

Pension plans consist of contractual promises made by employers to reward employees for their faithful and devoted service and also serve as a retention incentive to encourage employees to remain with their employers.

However, the traditional defined benefit pension plan that promises a monthly lifetime annuity to workers and their spouses has been rapidly disappearing, as employers find it increasingly difficult to maintain the funding necessary to continue their plans in an era of low investment returns.

One segment of the economy where this issue has been brought to the fore involves retirement plans sponsored by religiously affiliated health-care organizations. Several recent lawsuits challenge whether such plans have to follow the same rules that govern private-sector employers.

The question raised in this recent wave of litigation asks whether religiously affiliated health-care organizations are subject to the reporting, disclosure and funding regime established by the Employee Retirement Income Security Act. Those entities argue they are exempt from ERISA as church plans. The issue was recently the subject of a lengthy summary judgment ruling issued in Medina v. Catholic Health Initiatives, 2015 WL 8144956 (D. Colo., Dec. 8, 2015).

In Medina, the court ruled that Catholic Health Initiatives was a church plan exempt from the requirements of ERISA. Other cases, including one that was recently argued before the 7th U.S. Circuit Court of Appeals on interlocutory appeal, have ruled to the contrary.

The cases that have been litigated present two issues - are plans sponsored by religiously affiliated health-care systems "church plans," and if so, does the church plan exemption to ERISA violate the establishment clause of the First Amendment to the U.S. Constitution. Medina answered the first question in the affirmative and rejected the constitutional challenge.

The ERISA statute defines "church plan" as "a plan established and maintained (to the extent required in clause (ii) of subparagraph (B)) for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under Section 501 of Title 26." 29 U.S.C.A. Section 1002(33)(A).

"For purposes of this paragraph," the statute continues: " ... [a] plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches 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 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." Section 1002(33)(C)(i).

The court in Medina had ruled in an earlier decision that a plan qualifies for the church plan exemption if it meets either Subsection (A) or (C). Thus, under the court's reasoning, the church plan exemption is not limited merely to a place of worship or an entity such as an archdiocese, but extends to plans sponsored by organizations that are associated with or controlled by a church or convention of churches.

Applying that reasoning to the facts presented, the court examined the history of Catholic Health Initiatives, which showed that CHI developed out of the establishment of health-care ministries by the Catholic church as early as the Middle Ages to care for the sick and the poor.

CHI was formed in 1996 through the consolidation of three health-care systems established by 10 congregations of Catholic sisters, all of which were established under canon law and "organized and operated ... exclusively for the benefit of, to perform the functions of, and/or to carry out the religious, charitable, scientific and educational purposes ... of Catholic Health Care Federation."

The court also noted that CHI was listed in The Official Catholic Directory, "the definitive compilation of Roman Catholic institutions in the United States." (Citing Hartwig v. Albertus Magnus College, 93 F.Supp.2d 200, 202-03 (D. Conn. 2000).)

The court also cited an interpretation issued by the Internal Revenue Service ruling that "[a]ny organization listed in [The Official Catholic Directory] is considered associated with the Roman Catholic Church in the United States," and an employee of any such organization "is considered as an employee of the Roman Catholic Church of the United States for purposes of the church plan rules." IRS General Counsel Memorandum 39007, 1983 WL 197946 (July 1, 1983).

The IRS also issued a private letter ruling to CHI in 2002 confirming the CHI plan was a church plan.

Although the plaintiffs focused their argument on the fact that CHI was not a house of worship, the court found the plaintiffs' interpretation too constrained and deemed CHI "a constituent part of the Catholic Church." Hence the court determined that the retirement plan sponsored by CHI was a church plan.

The court then turned to the plaintiffs' second argument - whether the church plan exemption is constitutional.

The plaintiffs asserted that the exemption violated the First Amendment's establishment clause. The court examined the exemption in the context of the test established in Lemon v. Kurtzman, 403 U.S. 602 (1971), which looks to whether the challenged action "(1) has a secular purpose, (2) does not have the principal or primary effect of advancing or inhibiting religion, and (3) does not foster an excessive entanglement."

The court found the church plan exemption met the Lemon test and expressed concern that requiring compliance with ERISA's fiduciary duties could conflict with church doctrine.

While the Medina ruling focused on statutory interpretation, it never addressed the fundamental issue that is at stake in these cases. The entire purpose of ERISA's enactment was to protect promised pension benefits. The intricate statutory scheme encompassed by the various components of the ERISA statute offers such protection by mandating reporting, disclosure and funding necessary to insure the soundness and transparency of retirement plans and by creating the Pension Benefit Guaranty Corp. to insure pension plans against default.

While entities such as CHI may initially have been established by churches and may even continue in some measure to fulfill religious principles by refusing to perform medical procedures that would conflict with church doctrine, CHI is in almost all respects no different from any other health-care provider.

CHI does not limit its services to providing charity care - it contracts with insurers for reimbursement of health-care costs - and CHI also undoubtedly receives government grants for residency programs and research. Nor are CHI's employees clergy or even all Catholic - CHI is subject to other laws such as Title VII of the Civil Rights Act of 1964 and may not discriminate in its employment practices.

It must also comply with the Internal Revenue Code and file tax returns, although it is given certain preferences as a nonprofit organization. Thus, organizations such as CHI differ fundamentally from churches.

As a result of this ruling, CHI and similar entities that are considered "church plans," have been granted a license to underfund their pension plans, avoid paying premiums to the Pension Benefit Guaranty Corp. and to disregard promises made to employees that their retirement benefits will be funded.

Contrary to the court's concern that ERISA fiduciary duties may conflict with church doctrine on issues such as social investing, ERISA's rules are neutral and based solely on the intent that employers be held to their promises by imposing fiduciary obligations comparable to Judeo-Christian religious precepts.

Favoring religiously affiliated plans over other nonprofit health-care plans thus raises a legitimate question under the establishment clause even if such plans are found to fit within the statutory "church plan" definition.