In early December, the United States Supreme Court announced that it will hear three consolidated cases to decide whether pension plans established by religiously affiliated employers are entitled to the same treatment as plans established by churches. All three cases involve defined benefit pension plans maintained by church-affiliated healthcare systems; in each case, lower courts have ruled that the plans are not exempt from ERISA and must comply with all plan qualification requirements.
A provision has been included in ERISA since its enactment in 1974 exempting from most requirements pension plans established and maintained by churches for their own employees. In 1980, Congress amended the law, expanding the exemption to include plans maintained by religiously-affiliated groups, including church-affiliated hospitals, schools and other nonprofit organizations. Based on this expansion, the IRS has issued rulings to hundreds of organizations recognizing church plan status. Defined benefit pension plans that received these rulings and were deemed to be church plans are exempt from plan funding requirements and other mandates of ERISA and need not pay premiums to the Pension Benefit Guaranty Corporation (PBGC) to insure benefits.
Three years ago, participants, concerned about their benefits (and knowing that PBGC guarantees will not be available), began to file lawsuits claiming that the plans maintained by their religiously-affiliated employers should not be church plans and should not be exempt from ERISA. The Supreme Court agreed to hear these cases because the appellate courts in the Third, Seventh and Ninth Circuits have ruled in favor of the plaintiff employees, while district courts in other circuits have taken the contrary position.
The issue to be considered by the Supreme Court is largely one of statutory interpretation. Under ERISA, an exempt church plan is defined as one established and maintained "by a church or by a convention or association of churches which is exempt from tax." What the Court must determine is whether the exemption applies if a plan is maintained by a (tax exempt) church-affiliated organization or is available only when a church, per se, established the plan. The opinion of the IRS, which dates back to a 1983 General Counsel Memorandum, is that church plan status extends to plans maintained by church-affiliated organizations, regardless of the entity that established the plan. The United States Department of Labor and the Pension Benefit Guaranty Corporation have subscribed to interpretation consistent with that of the IRS.
While the plans at issue in these consolidated cases are defined benefit pension plans, the question of whether ERISA applies is much broader, as it has implications for defined contribution retirement plans, welfare benefit plans, and even for health care continuation obligations under COBRA, which similarly exempts church plans. A decision that plans maintained by religiously-affiliated employers are not church plans reportedly could affect millions of employees across the country and trigger pension funding liabilities in the billions of dollars.
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