Church Plans at the Supreme Court: Employee Benefit Plans of Church-Affiliated Healthcare Organizations May Still Qualify as Church Plans Under ERISA

The Court’s decision is a welcome development for organizations that have historically treated their employee benefit plans as church plans. Church plans are exempt from Title I of ERISA, including ERISA’s reporting requirements, funding requirements, and fiduciary protections.³ Plans that have been treated as church plans do not comply with all of ERISA’s requirements and may find it difficult or costly to begin doing so. Thus, retaining church-plan status is often important to the organizations that sponsor the plans. However, the Court’s decision addresses only one of the issues that must be resolved in determining whether a plan maintained by a church-affiliated organization is a church plan.

The Dispute

The litigation in Advocate Health Care involved church-affiliated nonprofit organizations that operate hospitals and other healthcare facilities. They sponsor retirement plans for their employees that have been treated by the organizations as church plans for purposes of ERISA.⁴ The plans are established and maintained by the organizations themselves, not the churches with which the organizations are affiliated. The plans are managed by internal committees appointed by the organizations.⁵

Participants in the pension plans sued the nonprofit organizations contending that the plans failed to qualify as church plans and, thus, should be covered by the more stringent requirements applicable to non-church plans under ERISA. The participants argued that to qualify as church plans, the plans had to be “established” by a church, even if maintenance of the plans was later transferred to a church-affiliated organization.⁶

The participants succeeded with this argument at the district-court level, as well as in appeals to the Third Circuit,⁷ Seventh Circuit,⁸ and Ninth Circuit,⁹ but the Supreme Court reversed these lower-court decisions.

Statutory Definition of a Church Plan

Under ERISA Section 3(33)(A), “the term ‘church plan’ means a plan established and maintained . . . for its employees . . . by a church or by a convention or association of churches.”¹⁰ A 1980 amendment to ERISA Section 3(33) added the following two provisions:

1.       An “employee of a church” includes “an employee of an organization . . . . which is exempt from tax under section 501 of the Internal Revenue Code of 1986 and which is controlled by or associated with a church or a convention or association of churches.”¹¹ Thus, a church plan can include a plan that covers employees of a church-affiliated nonprofit organization, so long as the organization is “controlled by or associated with” the church.

2.       A church plan “includes a plan maintained by 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, if such organization is controlled by or associated with a church or a convention or association of churches.”¹² Thus, a church plan can include a plan maintained by a church-affiliated organization, so long as the plan covers church employees (including deemed church employees, as described above) and the organization is “controlled by or associated with” the church.

The interpretation of the second of these two provisions was the focus of the dispute in Advocate Health Care. However, for many years before the litigation commenced, the Internal Revenue Service (IRS) and the federal Department of Labor (DOL) relied on this provision to rule that plans established and maintained by church-affiliated organizations, such as local church pension boards¹³ and nonprofit healthcare organizations established by Catholic religious orders,¹⁴ qualified as church plans for purposes of ERISA and the Internal Revenue Code.

For example, in General Counsel Memorandum 39007 (Nov. 2, 1982), the IRS ruled that a plan established by a healthcare organization associated with a Catholic religious order and administered by an internal benefits committee that shared common religious bonds and convictions with the Catholic church would qualify as a church plan. Many subsequent DOL advisory opinions and IRS private letter rulings followed this same line of reasoning.¹⁵ These rulings and opinions did not evaluate whether the plans at issue had first been established by a church but rather focused on (1) whether the sponsoring organizations were controlled by or associated with a church so their employees could be deemed church employees, and (2) whether the plans were administered by a committee or other organization that had as its principal purpose the administration of the plans and that was controlled by or associated with a church.

“Principal-Purpose Organizations” Can Maintain Church Plans

The Supreme Court began its analysis in Advocate Health Care by endorsing the term “principal-purpose organization” as a short-hand reference for the type of church-affiliated organization that was at issue in the case – namely an organization “the principal purpose or function of which is the administration or funding of a [benefit] plan or program.”

Having ascribed a useful name for these organizations, the Court went on to parse the statutory language in ERISA Section 3(33)(C)(i), with particular focus on the lead-in language that says a church plan “includes a plan maintained by [a principal-purpose] organization.” The key question was whether the plans “included” within the definition of a church plan were just those plans that were previously established by a church and handed off to a principal-purpose organization for maintenance (a narrow and literal interpretation) or whether the plans “included” within the definition of a church plan could include plans that were maintained by a principal-purpose organization regardless of whether they were established by a church (a broader interpretation).

The Court concluded that the statutory language should not be read literally. Use of the word “includes” in the statute was not intended to reference a subset of plans previously established by a church but rather a different category of plans that should also be treated as church plans.¹⁶ Congress effectively said that a new category of plans (plans maintained by principal-purpose organizations) can “stand in” for the old category of plans (plans established and maintained by churches).¹⁷

The Court illustrated this interpretation with the following logical analysis: “[I]f A is exempt, and A includes C, then C is exempt.”¹⁸ In other words, church plans are exempt from ERISA, and church plans “include” plans maintained by principal-purpose organizations, so plans maintained by principal-purpose organizations are also exempt from ERISA.

The Court also reasoned that interpreting the statute in this manner more fully implements the purpose of the 1980 amendments to ERISA Section 3(33) by ensuring that a broad range of plans maintained by church-affiliated organizations could qualify as church plans without needing to determine whether the organizations meet the definition of a “church.”¹⁹ Indeed, the Court observed that distinguishing plans based on whether they were established by a church likely would exclude some plans maintained by local pension boards that were specifically intended to be included within the definition of a “church plan” after the 1980 amendments.²⁰

In a concurring opinion, Justice Sotomayor voiced her agreement with this reading of statutory language but noted one of the broader underlying concerns related to the church plans: By allowing plans maintained by principal-purpose organizations to qualify for exemption from ERISA, employees of those church-affiliated organizations will be denied the ERISA protections that apply to similarly situated employees of organizations that are not affiliated with a church but otherwise operate in much the same manner as church-affiliated healthcare organizations. She characterized this outcome as troubling and speculated that Congress might have taken a different approach to the statute if it fully understood the types of organizations it was exempting from ERISA’s protections.²¹

Is This the End, or Just the Beginning?

The Court’s decision in Advocate Health Care is significant because it resolves the threshold question of whether a plan maintained by a principal-purpose organization can qualify as a church plan even if it is not first established by a church. But there is more to the church-plan analysis that the Court did not address.

The Court assumed for purposes of its analysis that the healthcare organizations in the case were, in fact, controlled by or associated with a church or other religious organization.²² In making this assumption, the Court left unresolved the ultimate question of whether the plans actually qualified as church plans. Specifically, the Court did not address:

1.       Whether the nonprofit organizations that sponsor the plans are sufficiently “controlled by or associated with” a church or what standards should be applied to determine whether an organization is “controlled by or associated with” a church.²³

2.       Whether or when the internal benefits committee of a nonprofit organization can qualify as a “principal-purpose organization.” For example, there may be a question whether a committee has adequately established that it shares common religious bonds and convictions with a church and, thus, is treated as controlled by or associated with the church.²⁴

In her concurring opinion, Justice Sotomayor suggested that resolution of these issues in favor of the healthcare organizations may not automatically follow from the Court’s favorable conclusion in this case. Perhaps reflecting her concern about the potential risks to employees that do not benefit from ERISA’s protections, she suggested that “other” statutory provisions impacting the scope of the church-plan exemption should be strictly construed “with a view toward effecting ERISA’s broad remedial purposes.”²⁵

This may foreshadow that there are still battles to be fought over the status of plans sponsored by church-affiliated healthcare organizations. The organizations have won the first confrontation, and it is a significant victory. But it may not end the war as much as it merely allows the organizations to survive to fight another day.

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¹ Advocate Health Care Network v. Stapleton, 137 S. Ct. 1652 (2017).

² The decision was 8-0. Justice Gorsuch did not participate.

³ ERISA § 4(b)(2) (29 U.S.C. § 1003(b)(2)).

⁴ Although this case specifically involved pension plans, the principles at issue in the case apply equally to other types of employee benefit plans, including health and disability plans.

⁵ Advocate Health Care, 137 S. Ct. at 1656.

⁶ Id. at 1657.

⁷ Kaplan v. Saint Peter’s Healthcare System, 810 F.3d 175 (3d Cir. 2015).

⁸ Stapleton v. Advocate Health Care Network, 817 F.3d 517 (7th Cir. 2016).

⁹ Rollins v. Dignity Health, 830 F.3d 900 (9th Cir. 2016).

¹⁰ 29 U.S.C. § 1002(33)(A). Section 414(e) of the Internal Revenue Code (26 U.S.C. § 414(e)) contains a parallel definition of “church plan” that is effectively identical to the definition in ERISA § 3(33). The two provisions have been interpreted similarly by the Department of Labor (ERISA) and the Internal Revenue Service (Internal Revenue Code). See, e.g., DOL ERISA Opinion Letter 2004-11A (Dec. 30, 2004) (“Conditioned on . . . the Plans not being materially different from [the] facts on which the IRS based its October 22, 2003, private letter ruling, the Department sees no reason to disagree with the IRS’s conclusion.”)

¹¹ ERISA § 3(33)(C)(ii)(II) (29 U.S.C. § 3(33)(C)(ii)(II)) (emphasis added).

¹² ERISA § 3(33)(C)(i) (29 U.S.C. § 3(33)(C)(i)) (emphasis added).

¹³ E.g., IRS Priv. Ltr. Rul. 8318082 (Feb. 3, 1983).

¹⁴ E.g., IRS Priv. Ltr. Rul. 8315054 (Jan. 13, 1983). Before the 1980 amendments to the “church plan” definitions in ERISA and the Internal Revenue Code, the IRS had ruled that a Catholic religious order did not qualify as a “church” because it was not performing church functions (sacerdotal functions), so its employee benefit plans could not qualify as “church plans.” See IRS Gen. Couns. Memo. 37266 (Sept. 22, 1977).

¹⁵ See, e.g., DOL ERISA Opinion Letter 2004-11A (Dec. 30, 2004); DOL ERISA Opinion Letter 95-08A (Jun. 16, 1995); DOL ERISA Opinion Letter 95-07A (Jun. 16, 1995); DOL ERISA Opinion Letter 94-15A (Apr. 20, 1994); DOL ERISA Opinion Letter 85-14A (Mar. 26, 1985); DOL ERISA Opinion Letter 85-01A (Jan. 9, 1985); IRS Gen. Couns. Memo. 39793 (Jul. 6, 1989); IRS Priv. Ltr. Rul. 201442072 (Jul. 21, 2014); IRS Priv. Ltr. Rul. 201308033 (Nov. 26, 2012); IRS Priv. Ltr. Rul. 201230031 (May 3, 2012); IRS Priv. Ltr. Rul. 200816031 (Jan. 25, 2008); IRS Priv. Ltr. Rul. 200236046 (Jun. 12, 2002); IRS Priv. Ltr. Rul. 200023057 (Mar. 20, 2000); IRS Priv. Ltr. Rul. 199951050 (Sep. 30, 1999); IRS Priv. Ltr. Rul. 9525061 (Mar. 28, 1995); IRS Priv. Ltr. Rul. 9409042 (Dec. 8, 1993); IRS Priv. Ltr. Rul. 8734033 (May 26, 1987); Priv. Ltr. Rul. 8606038 (Nov. 12, 1985); IRS Priv. Ltr. Rul. 8318082 (Feb. 3, 1983); IRS Priv. Ltr. Rul. 8315054 (Jan. 13, 1983). See also Pension Benefit Guaranty Corporation Op. Ltr. 78-1 (Pension Benefit Guaranty Corporation (PBGC) deference to IRS determination of church-plan status).

¹⁶ Advocate Health Care, 137 S. Ct. at 1658.

¹⁷ Id.

¹⁸ Id. at 1659 (quoting Overall v. Ascension, 23 F. Supp. 3d 816, 828 (E.D. Mich. 2014)).

¹⁹ Id. at 1661-62.

²⁰ Id. at 1662.

²¹ Id. at 1663.

²² Id. at 1656, n.1.

²³ Some courts have determined that nonprofit organizations claiming a religious mission and a historical association with a church no longer had a close enough relationship with the church to be treated as “controlled by or associated with” the church. See Chronister v. Baptist Health, 442 F.3d 648 (8th Cir. 2006); Lown v. Continental Casualty Co., 238 F.3d 543 (4th Cir. 2001).

²⁴ See ERISA § 3(33)(C)(iv) (“An organization . . . is associated with a church or a convention or association of churches if it shares common religious bonds and convictions with that church or convention or association of churches.”)

²⁵ Advocate Health Care, 137 S. Ct. at 1664.