Justices to weigh religious hospital exemption

On Dec. 2, the U.S. Supreme Court granted writs of certiorari in Advocate Health Care Network v. Stapleton, St. Peter's Healthcare System v. Kaplan, and Dignity Health v. Rollins, which center on interpretation of the "church plan" exemption from the Employee Retirement Income Security Act (ERISA) as applied to the retirement plans of massive, religiously affiliated hospital systems. Affirmation of the appellate courts' unanimous rejection of the exemption in this setting would close a loophole that many religiously affiliated hospital systems have used to avoid spending billions of dollars they would otherwise have been obligated to spend to protect their employees' retirement security, a loophole not available to their secular competitors.

Principally at stake are whether workers at religiously affiliated hospital systems are entitled to the same retirement protections as are workers at other private-sector entities. ERISA was enacted in 1974 in the wake of the failure of the Studebaker Motor Company's pension plan, which left thousands of workers, including some who had worked their whole career for the company, with either no pension or a fraction of the pension benefits they'd earned. These workers had foregone higher wages in exchange for the long-term security afforded by a pension, but were ultimately left with little to nothing to show for it. To protect workers from similarly losing their retirement benefits in the future due to no fault of their own, Congress implemented several key mandates with ERISA. For example, the minimum funding requirement obligates pension plans to have sufficient assets to pay for the benefits employers have promised their workers. As a backstop, the PBGC insurance requirement safeguards workers and retirees against termination of a plan with insufficient assets to pay out the promised retirement benefits.

However, many massive, religiously affiliated hospital systems have, for years, failed to provide their workers with these protections, relying on ERISA's church plan exemption in doing so. Since its enactment, ERISA has included an exemption for plans "established and maintained" by churches. In 1980, Congress clarified that a plan maintained by a church-affiliated principal-purpose organization, such as a pension board, would qualify as a plan maintained by a church. The IRS subsequently issued a nonprecedential General Counsel Memorandum (GCM) that found that a plan maintained by a church-affiliated organization could qualify for the church plan exemption regardless of whether it was established by a church.

The period following issuance of the 1983 GCM saw an explosion of the health care industry, with many religiously affiliated hospitals growing into massive, multi-billion dollar companies. The defendants at issue in these and other church plan cases currently pending in the lower courts include Dignity and Catholic Health Initiatives (CHI), the fourth- and fifth-largest nonprofit health systems in the nation, respectively, the two of which are in merger talks that could result in a company with $27.8 billion in annual revenue. Combined, the two companies employ over 100,000 people. For context, Facebook had revenue of $17.9 billion in 2015 and approximately 15,000 employees.

Unlike Facebook (or, for that matter, secular hospital systems), religiously affiliated hospital systems have largely avoided compliance with ERISA, to potentially disastrous results for their employees. For example, one recent lawsuit contended that the potential bankruptcy of the Daughters of Charity Health System, which had a pension plan underfunded to the tune of $229 million, would jeopardize thousands of employees' retirement security. Adding particular urgency to the matter is the uncertain fate of the health care sector in light of the federal election. If Obamacare is repealed or substantially altered, many predict substantial upheaval in the health care industry, potentially including hospital closures, layoffs and bankruptcies. To the extent religiously affiliated hospitals with underfunded, uninsured retirement plans fail in this turmoil, their employees will likely be surprised to see their retirement balances may not have been worth the paper they were printed on. The Supreme Court's consideration of the matter thus comes at a particularly important juncture

Also at stake in these cases is the principle of fairness in the economy. Here, religiously affiliated hospital systems have been avoiding paying for the retirement security of their employees, effectively giving them a competitive advantage over their secular nonprofit and for-profit competitors. As Judge Michael Kanne's concurrence in the underlying 7th U.S. Circuit Court of Appeals opinion points out, provision of retirement security does not implicate religious belief. To the contrary, the plaintiffs in these cases have argued that giving economic preference to religiously affiliated hospitals by exempting them from ERISA's requirements would violate the establishment clause of the Constitution.

Lastly, at stake are issues of statutory interpretation and administrative deference. The appellate courts have so far unanimously determined that ERISA's statutory text and legislative history compel a finding that the church plan exemption only applies to plans that are not only maintained by a church or church-affiliated organization but also established by a church. They have unanimously rejected the defendant plans' argument that the GCM is owed deference on this question. These cases could be an opportunity for the Supreme Court to provide guidance on bread and butter statutory interpretation and administrative deference issues.

No matter what the Supreme Court decides, both sides have several additional arguments left unresolved by the courts of appeal, including whether the defendant plans' "principal purpose" qualifies for the exemption, the extent to which the parties' conflicting interpretations of the exemption violate the Constitution, and whether the plan sponsors - generally massive, religiously affiliated hospital systems - are, in fact, a "church" within the meaning of ERISA with plans thus "established by" a church. One additional question is the appropriate remedy in these cases. Right or not, the plans have been structured and financed based on certain assumptions about plan liability that may no longer be accurate. However, the same could have been said about ERISA's initial implementation, when various plans had to adjust to the new reality of regulation. At the end of the day, it's not an employee's fault when their employer gambles with their retirement, so hopefully any resolution would reflect that reality.