Court Finds Plan Sponsored by Catholic Hospital is NOT a Church Plan

In a forceful and well reasoned opinion, the judge in Rollins v. Dignity Health has ruled that the pension plan sponsored by the defendant hospital cannot be a church plan as a matter of law and thus is fully subject to ERISA. This is the first major substantive decision in the 5 church plan cases filed earlier this year and it is a resounding victory for the plaintiff participants. (see also our recent summary of the 5 cases)

Some background provides important context for the decision. The pension plan is sponsored by a hospital associated with the catholic church. They have maintained that because they are associated with a church, they are entitled to sponsor a “church plan” exempt from ERISA. The plaintiffs made three arguments against this: (1) only churches can establish a church plan, (2) even if organizations associated with churches can sponsor church plans, this hospital is not associated with the church because it doesn’t have the same mission, and (3) if those two arguments are wrong, then giving such an exemption to a defendant like this violates the constitution.

In the order, the Honorable Thelton Henderson held that a nonprofit healthcare organization “does not have the statutory authority to establish its own church plan, and is not exempt from ERISA as a matter of law.”  The Court explained that “both the text and the history” of ERISA § 3(33) “confirm that a church plan must still be established by a church.”  Thus, the Court agreed with plaintiffs’ first argument.

The Court rejected the defendants’ argument that any organization associated with a church can establish a church plan. “Although Dignity’s proposed reading of the statute is not unreasonable on its face, it violates long-held principles of statutory construction and therefore cannot be the meaning of the statute.” The Court provided the following reasons among others: (1) if any organization associated with a church can establish a church plan, then that makes meaningless or superfluous the statutory language that a church can establish a church plan. Stated another way, the exception swallows the rule. Principles of statutory construction seek to avoid such outcomes. (2) The subsection about associated organizations only uses the word “maintain” not “establish and maintain” like the subsection about churches establishing church plans. This necessitates a reading that an organization associated with a church can maintain a plan, as long as it was established first by a church. (3) Defendants’ reading is unsupported by the legislative history of the amendment that added the language regarding associated organizations.

The Court made two other important conclusions. First, the Court “decline[d] to defer to the IRS’s interpretation of the ERISA statute” because the IRS’s private letter rulings “are not entitled to judicial deference.” The result is that 30 years of IRS interpretation is ignored and the Court started from square 1 in interpreting the statute. Second, the Court acknowledged that the position it takes runs contrary to several other courts, however, the Court stated quite explicitly, with specific arguments, why those other decisions were wrong.

Our Thoughts

Like we stated at the beginning, this is a resounding victory for the plaintiffs as the only real issue at controversy was whether the plan was entitled to be considered a church plan or not. With that question answered, it stands now that this plan is in clear violation of ERISA as it’s never been a contested issue that the plan does not follow ERISA’s rules such as minimum funding or providing premiums to the PBGC.

So what happens next? Clearly the defendants will want to appeal this decision to the 9th Circuit Court of Appeals, but they don’t have the right to appeal a motion to dismiss without permission. If they don’t get it, instead, the rest of the case must be litigated and it seems to me that the defendants will want that to happen as fast as possible.

So what does this mean for other “church plans” not sponsored by churches? You need to be calling your ERISA counsel. Although this decision does not directly apply to any plan but the one sponsored by Dignity Health, this could change everything if it becomes the law of the land, rather than just the law of this case.

 

One thought on “Court Finds Plan Sponsored by Catholic Hospital is NOT a Church Plan”

  1. Please have Judge Henderson direct our attention to where in the Internal Revenue Code or ERISA the word “church” is defined. That is, what is a “church” that can establish a “church plan.” But, Code section 414(e)(3)(A) does not require that a plan be technically established by a church because a plan “maintained by an organization, whether a civil law corporation or otherwise, 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 controlled by or associated with a church or a convention or association of churches” is deemed to be “A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches”. That does not mean that a hospital itself is a church; rather we have to see if the plan is maintained by an organization (which could be a committee of the board of directors of the hospital) whose principal function or purpose is the administration or funding of a retirement and/or welfare benefit plan for employees of a church, and that organization “is controlled by or associated with a church or a convention or association of churches.” If we find an organization with this principal purpose or function maintaining a plan for church employees, and with that relationship to a church, then the plan is in fact established and maintained by a church. A “church employee” is an “employee of an organization, whether a civil law corporation or otherwise, which is exempt from tax under section 501 and which is controlled by or associated with a church or a convention or association of churches (e.g., a hospital controlled by or associated with a church). For the organization maintaining the plan and for the purpose of who are employees of a church, being associated with a church means that the maintaining and employing organizations are “associated with a church or a convention or association of churches if [they]t shares common religious bonds and convictions with that church or convention or association of churches.” I don’t know if the defendants pointed to or established these organizations and relationships but if they did, then Judge Henderson simply got it wrong.

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