Wrong All Along? Court Holds Church Plan Exemption Improperly Claimed by Catholic Hospital

A recent district court decision may leave many religious affiliated organizations uncertain as to whether their employee benefit plans are subject to the demands of ERISA. ERISA exempts “church plans” from its requirements, allowing plans established and maintained for the benefit of church employees, or the employees of church affiliated organizations, to operate outside the confines of ERISA. However, in early 2013, five class action complaints were filed throughout the country against Catholic-affiliated hospital systems, alleging that the employee benefit plans of these hospitals were improperly classified as church plans. Defendants in each of these cases have filed motions to dismiss, and on December 12, 2013, Judge Thelton Henderson of the Northern District of California issued the first ruling on these issues in Rollins v. Dignity Health. In a somewhat surprising decision, Judge Henderson denied a motion to dismiss filed by Dignity Health (“Dignity”) , and categorically held that Dignity’s pension plan was not eligible for ERISA’s church plan exemption.

The Church Plan Exemption

Since its enactment by Congress in 1974, ERISA has specifically exempted church plans from its requirements. A church plan has always been defined under ERISA as “a plan established and maintained…for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax” under the Internal Revenue Code. 29 U.S.C. § 1002(33)(A). In plain English, this means that a benefit plan created by a tax-exempt church for the benefit of its employees is exempt from ERISA. Initially, ERISA also permitted a church plan to cover the employees of church agencies or church-affiliated organizations, although this allowance was to expire in 1982.

In 1980, Congress amended ERISA to permanently allow employees of church-affiliated organizations to be covered by church plans. The amended language still defines a church plan as a plan established and maintained by a church or a convention or association of churches. However, the amendments revised ERISA to include as exempt plans maintained by church-affiliated organizations that are controlled by or associated with a church or convention of churches. The definition of a “church employee” was also altered to include any employees of church-affiliated organizations, so long as those organizations are also tax exempt and controlled by a church or association of churches.

These amendments have been widely interpreted over the past three decades to permit church-affiliated organizations such as hospitals, schools and charities to establish their own ERISA-exempt “church plans,” so as to provide their employees with benefits. The Department of Labor and the Internal Revenue Service have confirmed the exempt status of numerous such plans, and courts have largely affirmed the exempt status of these plans when challenged judicially.

The Rollins Decision

The plaintiff in Rollins took a bold stand against 30 years of practice and interpretation regarding church plans. The Rollins plaintiff alleged that Dignity’s plan was not exempt from ERISA or its requirements, and that the pension plan was underfunded by approximately $1.2 billion. In support of this contention, the complaint, as well as the opposition to Dignity’s motion to dismiss, asserted that a plain reading of ERISA, together with a review of the legislative history of the 1980 church plan amendment, clearly indicates that only a church could establish a church plan. In other words, while a church-affiliated organization may maintain a church plan for the benefit of its employees, the plan must have been established by a church or an association of churches or it does not qualify as an exempt church plan. It was undisputed that Dignity was not a church or an association of churches. Thus, reasoned the plaintiff, Dignity’s pension plan could not, as a matter of law, be subject to the church plan exemption.

Plaintiff provided two further arguments in support of the assertion that Dignity’s plan was not properly exempt as a church plan. First, plaintiff argued that Dignity is not, in fact, a church-affiliated organization as required under ERISA. Dignity is a non-profit healthcare provider with dozens of hospitals in sixteen states that (according to Dignity) maintains an association with the Catholic Church’s healing ministry. The Rollins plaintiff argued that Dignity did not maintain the proper “common religious bonds and convictions” sufficient to be “associated with” the Catholic Church as required under ERISA. Second, plaintiff argued that even if the court found the plan was properly exempt as a church plan, such a finding would violate the Establishment Clause of the First Amendment of the United States Constitution.

The court did not reach either of plaintiff’s secondary arguments, as it found dispositive plaintiff’s position that the plain language of ERISA did not qualify Dignity’s plan as a church plan. The court held that the amendments allowing church-affiliated organizations to maintain church plans did not obviate the requirement that only a church may establish a church plan. In reaching this conclusion, the court employed basic principles of statutory construction and determined that the plain meaning of the relevant sections of ERISA, when read as a whole, mandates that a church plan may only be established by a church. The court was further swayed by the legislative history of the church plan amendment, which demonstrated that it was intended to permit churches to delegate the administration of their benefit plans to specialized church pension boards without losing their exempt status. The court found no support in the legislative history for Dignity’s contention that it was intended to allow church-affiliated organizations to establish their own exempt plans, distinct from the church, for the benefit of the organization’s employees.

The court was not swayed by the myriad of contrary interpretations from federal agencies presented by Dignity, nor was the court persuaded by several district court decisions finding to the contrary. Instead, the court rejected the majority opinion (all of which was non-binding), and adopted what it believed to be the proper interpretation of ERISA. While the Rollins plaintiff is no doubt pleased with the result, this decision is a major issue to Dignity and to other church-affiliated organizations with exempt plans.

Aftermath of Rollins

With the court’s order in Rollins only a few days old, it is unclear what lies ahead for Dignity Health or for church plans generally. Dignity cannot appeal the decision at this time, as it is not a final order or judgment. They must either proceed with the litigation, or seek an extraordinary writ with the 9th Circuit that will not likely be granted. In all likelihood, the court’s decision will be appealed immediately upon conclusion of the litigation. The other four cases similar to Rollins (each filed by the same plaintiff’s attorneys) have yet to be decided, and it will be interesting to see if conflicting judicial opinions are issued.

Rollins may end up as an outlier opinion or be reversed upon appeal, or it may be a harbinger of change for plans established by church-affiliated organizations. Should this order stand on appeal, it would disrupt thirty years of accepted practices for many plans. Trustees and sponsors of plans covering employees of hospitals, schools, and other organizations that utilize their church-affiliated status for ERISA exemption should study their plans’ language carefully. If the plan was not established directly by a “church or association of churches,” there is the possibility that the current ERISA exempt status may no longer be available. Such plans may want to analyze their status with regard to ERISA compliance, which could include meeting minimum funding levels. While the final act has not been written on church plan exemption, Rollins certainly presents an intriguing first act in what will likely be a hard fought conflict.