Faith-based hospitals could lose decades-old ERISA exemptions

For 35 years, faith-based hospitals have been exempt from federal pension regulations imposed on their secular competitors that include hefty insurance premiums to safeguard employees' retirement benefits. But the U.S. Supreme Court will soon weigh in on whether they'll keep that competitive advantage.

The high court last week considered three cases that question whether faith-based health systems—ranging from large providers like Dignity Health and Advocate Health Care to one-hospital systems like St. Peter's Healthcare System of New Jersey—should be exempt from the Employee Retirement Income Security Act. The court's decision, which will be released by late June, could cost faith-based organizations billions of dollars and affect the retirement benefits of more than a million workers across the country.

“Just from plan asset size, several of my clients between them have over $10 billion in plan assets,” said Howard Shapiro, a partner at the law firm Proskauer Rose and an ERISA expert. “This is a major issue for these religiously affiliated hospitals.”

Under ERISA, all private employers except faith-based organizations must fully fund their pensions, pay premiums to the Pension Benefit Guaranty Corp. and comply with the law's disclosure requirements. In the 1980s, Congress expanded the church plan exemption to include the pension plans of church-affiliated organizations after the Internal Revenue Service denied an exemption to Little Sisters of the Poor in the 1970s.

But are the hospitals really arms of their founding churches? Three federal appeals courts have said they're not, nixing long-standing IRS, PBGC and Labor Department policies for going beyond what Congress intended with the church plan exemption and providing companies a regulatory loophole if they have seemingly tangential connections to churches.

“I don't think anyone would say there's no connection between a church agency and a church,” said Tess Gee, an ERISA attorney at Miller & Chevalier. “But is a church agency a church? I think for a lot of legal reasons it's not.”

While churches receive special treatment under the law to protect their religious rights, Gee noted that church agencies are treated differently under tax law and other regulations.

Some of the eight justices on the Supreme Court bench expressed similar skepticism during oral arguments, even though the federal government has asked the court to keep the ERISA exemption in place.

Justice Sonia Sotomayor noted that Dignity Health, one of the nation's largest health systems, isn't even formally affiliated with the Catholic Church, although portions of the company were established by nuns.

“Do you believe that Congress' vision was to let, what is essentially a corporate entity, opt out of protecting all of those employees?” she asked.

The health systems have been sued by current and former employees with vested claims for benefits under the retirement plans. Although Dignity, Advocate and St. Peter's all maintain that their plans are adequately funded, the employees have voiced concerns that the systems are injuring beneficiaries by failing to meet ERISA standards due to long vesting periods, not providing financial reports on the plan's investments and failing to clarify rights to future benefits. More than 30 similar cases are pending against other faith-based health systems in federal courts across the country.

Still, the justices recognized that the IRS, Labor Department and PBGC reassured faith-based organizations hundreds of times over 35 years that they were not subject to ERISA. Although the employees suing Dignity, Advocate and St. Peter's have asked for tens of billions of dollars in civil penalties for ERISA violations, that type of award is unlikely and the request concerned Justice Samuel Alito.

But coming into compliance with ERISA could take six months to a year for faith-based organizations, even if their pension plans are funded up to the law's standards, Gee said. All of the organizations would need to evaluate their plan funding levels and make any necessary catch-up contributions, create new disclosure mechanisms, identify plan fiduciaries and conduct a full plan audit. It's unclear whether some faith-based health systems, especially smaller providers like St. Peter's, might freeze or eliminate their plans entirely due to the regulatory burden.

“The administrative part of dealing with the plan and the reporting and disclosure regime is very robust,” Gee said. “That will be very difficult.”

The trouble may be worth it, both for the providers and their employees. “If they are fully funded and they managed to maintain that over the years, they may scream and yell about having to comply with ERISA, but for the sake of their employees it's a very valuable benefit they offer,” Gee said. “They may bite the bullet and keep going with the plan.”