Yesterday, December 29, 2015, the 3rd Circuit Court of Appeals decided in favor of the plan participants in Kaplan v. Saint Peter’s Healthcare System. In the first circuit court opinion in the dozen+ cases that have been filed, the court ruled that the defined benefit plan sponsored by Saint Peter’s Healthcare System is not eligible for the church plan exemption from ERISA. Stated simply, this ruling holds the plan should have been complying with ERISA the entire time, but wasn’t. The consequences are staggering considering state law, which applied in the absence of ERISA, usually has little or no requirements related to funding. The plaintiffs have alleged the plan is severely underfunded. If the decision is enforced, it also means the plan sponsor will need to pay PBGC premiums going back in time. (see our previous coverage on the district court’s opinion that agreed with the plan’s participants: Court Finds St. Peter’s Pension Plan is NOT a Church Plan & A New Case is Filed in Chicago)
The 3rd Circuit’s decision answered this straight forward question: while the law allows a church agency to maintain a church plan, does it also allow an agency to establish one? The court’s decision ultimately said no, only a church can establish a church plan, and Saint Peter’s Healthcare System, which sponsors the plan, is not a church. The court based their decision on the plain reading of the statute and the remedial purposes of the ERISA statute to provide protection to plan participants, rather than exclude them from protection. In so deciding, the court rejected Saint Peter’s arguments that the 1980 amendment to the church plan exemption allows any plan maintained, even if not established, by a church agency to be exempt. In doing so, the court referenced a hypothetical from oral arguments that clarifies the issue and is worth repeating here:
Indeed, St. Peter’s essentially conceded the problem with its reading at oral argument when presented with the following scenario: Congress passes a law that any person who is disabled and a veteran is entitled to free insurance. In the ensuing years, there is a question about whether people who served in the National Guard are veterans for purposes of the statute. To clarify, Congress passes an amendment saying that, for purposes of the provision, “a person who is disabled and a veteran includes a person who served in the National Guard.” Asked if a person who served in the National Guard but is not disabled qualifies to collect free insurance, St. Peter’s responded that such a person does not because only the second of the two conditions was satisfied. This correct response only serves to highlight the fatal flaw in the construction of ERISA advanced by St. Peter’s.
An even more concerning issue for sponsors of church plans where a church established the plan, but a church agency is maintaining it, is the court’s footnote on who can properly be considered a church agency (or church pension board) as they are commonly known:
Although we need not decide the issue, we have substantial reservations over whether St. Peter’s can even maintain an exempt plan. Subsection 3(33)(C)(i) requires that if a plan is to be maintained by an organization that is not a church, it must be 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 . . . .” In addition, the same subsection requires that the organization be “controlled by or associated with a church or a convention or association of churches.” Setting aside whether St. Peter’s is controlled by or associated with a church (as that depends on disputed facts not properly resolvable at the motion-to-dismiss stage), St. Peter’s itself does not appear to meet the principal purpose test, as its principal purpose is the provision of healthcare and not the administration or funding of the retirement plan. St. Peter’s contends, however, that its Retirement Plan Committee qualifies because the Committee’s principal purpose is to maintain the plan. However, this may be insufficient. See Rollins, 19 F. Supp. 3d at 914 (“[T]he statute does not say that the organization may have a subcommittee who deals with plan administration. Rather, the statute dictates that [the] organization itself must have benefits plan administration as its ‘principal purpose,’ which Dignity plainly does not.”).
If this interpretation would be enforced, it would seriously undermine the use of the church plan exemption in almost all instances except those involving plans sponsored by actual churches or plans maintained by traditional church pension boards, which are far fewer in number than the church affiliated schools and agencies that claim this exemption.
Like the district court before it, the 3rd Circuit also rejects the IRS private letter ruling received by Saint Peter’s on the grounds that the IRS is simply wrong and it should not be given deference because it is based on a memo from the IRS general counsel and not based on a formal adjudication or notice-and-comment rulemaking.
Finally, the court rejected all other arguments of Saint Peter’s regarding legislative history and constitutional grounds. A review of the decision by the interested reader is worth it.
This is a significant victory for those who have challenged the broad interpretation of the church plan exemption. It should be given serious persuasive consideration by the other circuit and district courts with similar cases. It is worth noting that this decision comes on the heels of the district court in Medina v. Catholic Health Initiatives deciding in favor of the church affiliated hospital system and against the plan participants. In the decision, decided on December 8, the court came to the opposite conclusion of the 3rd Circuit in Kaplan and held that plans that are just maintained church agencies can use the church plan exemption, as long as they also meet the affiliated and controlled test noted above. The court not only found the plan in that case did, but also strongly suggested the hospital system itself may meet the definition of a church itself.
As I have predicted all along, ultimately this issues will be decided by the Supreme Court or Congress. We are rapidly approaching the former, if Saint Peter’s seeks review. We may also see the latter, as my understanding is that proposed legislation is out there to address these cases.
Finally, the parties in Lann v. Trinity Health Corporation and Chavies v. Catholic Health East have filed notices in their respective cases that they have reached a tentative settlement. We will post on those settlement when they are filed.