ERISA ruling is a win for church-affiliated organizations

On Monday, in Advocate Health Care Network v. Stapleton, 2017 DJDAR 5290 (June 5, 2017), the U.S. Supreme Court held in an 8-0 opinion (Justice Neil Gorsuch abstaining) that for purposes of the Employee Retirement Income Security Act of 1974 (ERISA), a "church plan" that is exempt from ERISA's funding, reporting and disclosure requirements includes the pension plans of church-affiliated organizations regardless of whether a church established the plans. This decision reverses the decisions of the 3rd, 7th and 9th U.S. Circuit Courts of Appeals, each of which held that an ERISA-exempt church plan must be "established" by a church.

For the petitioners - three large church-affiliated nonprofits that run hospitals and other health care facilities that offer their employees defined-benefit pension plans - this opinion maintains their status quo of not being subjected to ERISA's requirements. If the court went the other way, some of these organizations would have faced potential financial ruin with the cost of being retroactively forced to comply with ERISA.

For the respondents - current and former hospital employees - their pension benefits remain outside of the protections afforded by ERISA. For this huge number of workers, their pension benefits are not insured by the Pension Benefit Guaranty Corporation (PBGC), so they may be left with less retirement money than they were promised due to a lack of proper funding of the organizations' future pension liabilities.

The issue before the Supreme Court was a seemingly simple one: whether a church must have established a pension plan in order for the plan to qualify as a church plan under ERISA. The answer to this question turns on an interpretation of the statutory language. As the court notes, the statutory definition of "church plan" came in two distinct stages. From its enactment, Section 1002(33)(A) defined a church plan as "a plan established and maintained ... by a church." Then, as part of the Multiemployer Pension Plan Amendments Act of 1980, the church plan definition was revised. Under subparagraph (C)(i), "[a] plan established and maintained ... by a church ... includes a plan maintained by an organization ... 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 control by or associated with a church or convention or association of churches." The italicized description is what the court described shorthand as a "principal-purpose organization."

It was undisputed that a church plan may be maintained by a principal-purpose organization. The parties' disagreement focused on whether a church plan maintained by such organization must still have been established by a church to qualify for the exemption. The 3rd, 7th and 9th Circuit Courts of Appeals agreed with the employees in concluding that the plain text requires that a pension plan be established by a church to qualify for the church-plan exemption. As the courts explained, Paragraph A set out two requirements for the exemption: establishment and maintenance. Only the latter - maintenance - was expanded by the use of "includes" in subparagraph (C)(i).

The Supreme Court disagreed. It explained that subparagraph (C)(i) is a new definition "piggy-backing" on the existing definition. The term church plan initially meant only a plan established and maintained by a church. Subparagraph (C)(i) provides that the original definition will now "include" another type of plan, that is, a plan maintained by a principal-purpose organization. Had Congress sought to only alter the maintenance requirement, it could have easily provided that "a plan maintained by a church includes a plan maintained by." Instead, Congress added language that enables a plan maintained by a principal-purpose organization to substitute for a plan both established and maintained by a church. To read "established and" into subparagraph (C)(i) runs aground on the surplusage canon, which presumes that each word Congress uses is there for a reason.

The court also examined legislative history but noted that there were only excerpts from committee hearings and scattered floor statements by individual lawmakers which are among the least illuminating forms of legislative history. Nonetheless, extra-statutory sources about Congress' purpose also supports the court's reading of the text. Congress desired to get rid of any distinction between churches and church-affiliated organizations under ERISA. The motivation behind the 1980 amendment was protests stemming from the IRS decision holding that pension plans established by orders of Catholic Sisters did not qualify as church plans because the orders were not carrying out the Church's religious functions. A church-establishment requirement necessarily puts the IRS in the business of deciding what a church is and is not. The amendment was designed to ensure that all groups associated with church activities would receive comparable treatment.

Though not stated explicitly in the opinion, the court's holding appears to be influenced by the fact that the three federal agencies responsible for administering ERISA - the IRS, Department of Labor, and PBGC - have long read the relevant provisions to confer ERISA-exempt status on the principal-purpose organizations regardless of whether a church initially established the plan. Petitioners and other organizations relied on many private letter rulings and opinion letters issued since 1982 on this subject.

The principal-purpose organizations that have awaited this decision with bated breath are certainly having a "thank you Lord" moment as some experts estimated the potential financial ramifications of a contrary holding to be over $1 billion. For their pension plan participants, however, the resulting impact is that their pension benefits will not be subjected to ERISA's funding, reporting, and disclosure requirements. When an unregulated church plan fails, the PBGC is not be there as a safeguard. The potential fallout is a concern of Justice Sonia Sotomayor who wrote a concurring opinion noting that petitioners operate for-profit subsidiaries, employ thousands of employees, earn billions in revenue, and compete in the secular market with companies that must bear the cost of complying with ERISA. I think the big question following this decision is one I hope we never have to consider: whether we as a society can ultimately bear the cost of the failure of these unregulated church plans.