Faith-based hospitals win ERISA case in high court, but debate isn't over yet
With one major win in hand, faith-based hospitals are bracing for the next legal challenge to their pension programs.
The U.S. Supreme Court last week unanimously affirmed that faith-based hospitals are exempt from pension guidelines set by the Employee Retirement Income Security Act, preserving exceptions those organizations have relied on to establish and maintain their pension plans for more than 35 years.
Although the ruling is a significant milestone, faith-based health systems aren't in the clear yet. Lawyers representing the plaintiffs in cases against Advocate Health Care Network, Dignity Health and St. Peter's Healthcare System said they will continue to challenge the ERISA exemptions by focusing on 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 their internal benefits committees do not count as principal purpose organizations.
The Supreme Court ruled that faith-based hospitals are exempt from federal pension regulations, but further challenges are expected.
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, said Tess Gee, an ERISA attorney at Miller & Chevalier.
"That question may breed a new wave of litigation to further complicate this already complicated area of ERISA," added Michael Graham, chairman of Michael Best & Friedrich'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 the Internal Revenue Service denied an exemption to the Little Sisters of the Poor.
In last week's ruling, the high 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. Justice Neil Gorsuch did not participate in the decision because he wasn't yet on the bench when the court heard the case earlier this year.
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 systems involved in the case have assured the courts that their plans are stable and well-funded.
If the ERISA exemptions were overturned, systems collectively could have been liable for billions of dollars in additional funding liability and penalties for not complying with ERISA. 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."
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.
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're also exempt from ERISA's pre-emptive provisions, 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.
"There is too much money on the line for litigation to cease," said Brian Netter, an ERISA attorney for Mayer Brown.
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