Faith-based hospitals not out of the woods over ERISA exemptions

Faith-based hospitals scored a major win on Monday when the U.S. Supreme Court upheld their exemption from federal pension regulations, but the legal battles over the policy are far from over, legal experts said.

The high court ruled unanimously Monday that providers like Dignity Health, Advocate Health Care and St. Peter's Healthcare System do not have to meet pension guidelines set by the Employee Retirement Income Security Act, preserving the exceptions those organizations have relied on to establish and maintain their pension plans for more than 35 years. But the eight justices' decision didn't address a legal argument that the plaintiffs already plan to bring up in the next wave of litigation.

"There is too much money on the line for litigation to cease," said Brian Netter, an ERISA attorney and co-leader of Mayer Brown's Supreme Court and appellate practice group. "I just think it will be redirected to the definition of a principal purpose organization."

The Supreme Court dismissed three appellate court rulings that the "church plan" exemption did not apply to faith-based organizations based on the fact that those plans were not established by a church. The eight justices determined that Congress intended for a broader interpretation of the rule when it amended ERISA in the 1980s.

ERISA–which has been described as "bubble wrap for benefits"–requires companies to fully fund their pensions, pay premiums to the Pension Benefit Guaranty Corp. and comply with the law's disclosure agreements. Essentially, employees at faith-based organizations are at risk of losing their pension benefits if their employer becomes insolvent, although the organizations involved in the case have assured the courts that their plans are stable and well-funded. Employees expressed concern over non-ERISA compliant plans that had longer vesting periods, failed to clarify rights to future benefits and didn't require financial reports on the plan's investments.

If the ERISA exemptions were overturned, systems collectively could have been liable for billions of dollars in penalties for not complying with ERISA and additional funding liability. Health systems argue that complying with ERISA would mean they would have to significantly cut back their charity care or drop their pension benefits altogether.

"Health systems would've been in for a world of hurt," said Joseph Urwitz, a partner at McDermott Will & Emery. "This is unequivocally positive for health systems."

But faith-based health systems aren't in the clear yet. Lawyers representing the plaintiffs in the Advocate, Dignity and St. Peter's cases said they will continue to challenge the ERISA exemptions by focusing on another argument: whether the health systems are "principal purpose" organizations. According to ERISA, a principal purpose organization is a church-associated organization whose "chief purpose or function is to fund or administer a benefits plan for the employees of a church or church-affiliated nonprofit."

Employees argued in federal district courts that the hospitals' pension plans are not "church plans" because the hospitals' internal benefits committees do not count as principal purpose organizations.

"What is left for plaintiffs to figure out is a way of challenging whether the organization administering or funding the plan is a principal purpose organization," said Tess Gee, an ERISA attorney at Miller & Chevalier. "That is going to be the next wave."

Courts will have to determine what the structure of the internal plan committee is and how it operates, who its members are, what functions the plan performs and the systems' relationship to their affiliated churches, Gee said.

"That question may breed a new wave of litigation to further complicate this already complicated area of ERISA," said Michael Graham, chairman of Michael Best's ERISA litigation practice group in Chicago.

Congress expanded the church plan exemption in the 1980s to include the pension plans of church-affiliated organizations after an exemption to the Little Sisters of the Poor was denied by the Internal Revenue Service.

The debate is part of a broader discussion surrounding tax exemptions that apply to not-for-profit health systems. Critics argue that ERISA and tax exemptions create an unfair competitive advantage while not-for-profit system executives contend that they use the tax breaks to provide charity care and other community benefits.

"I find it troubling to suggest that because these entities succeed and grow that somehow that implies they do not continue a religious mission and do not fulfill the purposes they were started for," said Howard Shapiro, a partner at the law firm Proskauer Rose and an ERISA expert. "These clients spend hundreds of millions a year collectively providing high levels of subsidized and charity care to the uninsured, underinsured and impoverished individuals."

Although there has been some "bad actors" among the faith-based organizations, that doesn't mean a system that has worked effectively for so long should be thrown out, he added.

Justice Sonia Sotomayor expressed concerns in her concurring opinion that there is an uneven playing field between faith-based and secular organizations.

"To the extent that Congress acted to exempt plans established by orders of Catholic Sisters, it is not at all clear that Congress would take the same action today with respect to some of the largest healthcare providers in the country. These organizations thus bear little resemblance to those Congress considered when enacting the 1980 amendment to the church plan definition," she wrote. "This current reality might prompt Congress to take a different path."

The wave of recent lawsuits against faith-based organizations may open the door to future litigation against church plan exemptions, particularly through state law, Urwitz said. Since church plans are exempt from ERISA, they are also exempt from ERISA's provisions pre-empting state laws, so plan sponsors may be exposed to claims made under state law, he said. Some states may evaluate their statutes to determine if action is warranted, Urwitz said.

"Even though it wasn't successful, now people may think these plans are another avenue for litigation," he said. "These strike-suit firms are going to be looking for potential deep-pocketed defendants and these hospital systems certainly fit the bill."