The Employee Retirement Income Security Act (ERISA) is extremely broad in its scope. It affects both retirement benefits and other employee benefits such as health insurance in the majority of workplaces in the United States.

However, there are exceptions – government employees are exempted from ERISA, meaning that benefits involving federal, state and municipal employees are not subject to ERISA’s funding and notice rules. Further, claims by such employees are exempted from the arcane rules and procedures imposed in ERISA claims and litigation practice.

Another group of employees exempted from ERISA are participants in “church plans.” But what is a church plan? That question was answered by the U.S. Supreme Court recently in Advocate Healthcare Network v. Stapleton, 2017 WL 2407426 (U.S. Supreme Court, June 5, 2017).

The Supreme Court agreed to hear three cases from the 7th, 3rd and 9th U.S. Circuit Courts of Appeal (Stapleton v. Advocate Health Care Network, 817 F.3d 517 (7th Cir. 2016); Kaplan v. Saint Peter’s Healthcare System, 810 F.3d 175 (3rd Cir. 2015); and Rollins v. Dignity Health, 830 F.3d 900 (9th Cir. 2016)) on the issue of whether religiously affiliated nonprofit organizations that manage hospitals and other health-care facilities can take advantage of the church plan exemption to ERISA (29 U.S.C. Section 1003(b)(2)) with respect to their employee benefit plans.

Although all three lower appellate courts found the nonprofit organizations failed to meet the exemption because their retirement plans were not established by a church or congregation of churches, the Supreme Court reversed the unanimous conclusion reached by all three circuits.

The Supreme Court concluded the ERISA statute did not require a church to have originally established such a plan to qualify for the exemption. The court did, however, set aside a related but somewhat different issue for another day.

The court noted the plan participants’ alternative argument “that the hospitals’ pension plans are not ‘church plans’ because the hospitals do not have the needed association with a church and because, even if they do, their internal benefits committees do not count as principal-purpose organizations.”

The court explained that “principal-purpose organizations” are described in the ERISA statute as “a church-associated organization whose chief purpose or function is to fund or administer a benefits plan for the employees of either a church or a church-affiliated nonprofit.”

The court reiterated that the scope of that term, and whether it includes hospitals’ internal benefit committees, was outside the purview of its ruling. Thus, the plaintiffs in these cases may still have an alternate means of challenging church plan status by some of the organizations involved in the Advocate litigation.

However, with respect to the issue before the court, the problem the Supreme Court saw with the lower courts’ rulings was that a “church-establishment requirement necessarily puts the IRS in the business of deciding just what a church is and is not.”

Thus, if such a requirement existed, it would “disfavor [ ] plans created by church affiliates, as compared to those established by (whatever the IRS has decided are) churches.” The establishment requirement would have also “prevented some plans run by pension boards – the very entities the employees say Congress most wanted to benefit – from qualifying as ‘church plans’ under ERISA.”

Accordingly, the court held: “ERISA provides (1) that a ‘church plan’ means a ‘plan established and maintained … by a church’ and (2) that a ‘plan established and maintained … by a church’ is to ‘include [ ] a plan maintained by’ a principal-purpose organization. Under the best reading of the statute, a plan maintained by a principal-purpose organization therefore qualifies as a ‘church plan,’ regardless of who established it. We accordingly reverse the judgments of the Courts of Appeals.”

Although all eight of the justices agreed with the outcome (Justice Neil Gorsuch joined the court after oral argument), Justice Sonia M. Sotomayor issued a concurrence with the majority ruling that was authored by Justice Elena Kagan that expressed concern with the implications of the decision.

She began by pointing out the principal problem with the ruling: “Today, by holding that ERISA’s exemption for ‘church plan[s],’ 29 U.S.C. Section 1003(b)(2), covers plans neither established nor maintained by a church, the court holds that scores of employees – who work for organizations that look and operate much like secular businesses – potentially might be denied ERISA’s protections. In fact, it was the failure of unregulated ‘church plans’ that spurred cases such as these.”

Although Sotomayor expressed concern about the outcome, she agreed with the court’s interpretation of the statutory text. Nonetheless, Sotomayor questioned whether Congress today would have exempted some of the largest health-care providers in the U.S., many of whom operate for-profit subsidiaries, earn billions of dollars in revenue and compete with other health-care organizations that have to bear the cost of complying with ERISA.

This ruling significantly weakens the retirement security of participants in benefits plans managed by religiously affiliated health-care organizations. Those organizations are exempted from ERISA’s funding requirements and the obligation to pay insurance premiums to the Pension Benefit Guaranty Corp. to protect against a default in their retirement plans.

However, the ruling does have a perversely beneficial effect for the same group of employees. Insured health, disability and life programs administered by the same organizations that have been exempted from ERISA as church plans will regain the protection of state laws that protect consumers, including the right to sue for damages and penalties for bad faith claim handling.

Participants in such plans also regain the right to try their cases before juries and to conduct extensive discovery in litigation, all of which is denied when claims arise under plans governed by ERISA.

I have been involved in litigating church plan cases with counsel who represented the plan participants in this matter.

This article was initially published in the Chicago Daily Law Bulletin.

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