Issue: Winter 2021

God's (Pension) Plan: ERISA Church Plan Litigation in the Aftermath of Advocate Health Care Network v. Stapleton

By: Rebecca Miller, 3L, Boston College Law School

In 2018, Karen Bradley learned that the entire pension on which she was relying for retirement was gone. Ms. Bradley was a nurse for twenty-four years at St. Clare’s Hospital of Schenectady, New York (St. Clare’s), where her father had previously worked as a pharmacist. Time and time again, St. Clare’s promised her a pension, and she planned her retirement believing that she would have this source of income. Ms. Bradley was not the only employee operating under this mistaken belief. Another St. Clare’s employee, Mary Hartshorne, purchased a small home on a lake for her retirement. She, too, based her decision on the promise of receiving pension funds. When Ms. Hartshorne discovered that she lost thirty percent of her anticipated pension, she sold her home because she was unable to maintain the mortgage payments. In 2018, St. Clare’s revealed that it would no longer be able to meet its pension obligations due to underfunding of the plan. As a result, Ms. Bradley and Ms. Hartshorne, along with over 600 participants in the St. Clare’s pension plan, lost their entire pension, and an additional group of participants over the age of sixty-two lost some part of it. Soon thereafter, the AARP Foundation filed suit against the Roman Catholic Diocese of Albany, New York (Albany Diocese) on behalf of the former employees of St. Clare’s in the N.Y. Supreme Court, Schenectady County, alleging a breach of contract, a promissory estoppel claim, and a breach of fiduciary duty.

In many ways, the St. Clare’s plan was similar to other defined-benefit pension plans. In a typical defined-benefit pension plan, an employer invests money on behalf of participating employees over the course of their employments, and then distributes regular monthly payments to the participating employees following their retirements. Employees’ rights to their pension benefits typically only vest, or become non-forfeitable, when they have worked for their employer for a certain length of time or reached a certain retirement age. If a defined-benefit plan terminates, a federal agency, the Pension Benefit Guaranty Corporation (PBGC), may continue to pay beneficiaries their monthly retirement benefits.

“Church plans,” however, are exempt from the Employee Retirement Income Security Act of 1974 (ERISA), the federal law that creates and enforces rules for pension plans, including funding, vesting, insurance, and fiduciary obligations. Generally, employers that are churches or church-affiliated organizations do not need to comply with ERISA. St. Clare’s Hospital Retirement Income Plan (St. Clare’s Plan), because of its oversight by the Catholic Diocese, fell into the category of a church plan. As a result, many of its employees lost their entire pension plans and were left with no recourse in federal court when St. Clare’s dissolved.

St. Clare’s employees are not alone; according to one estimate, around a million Americans are participants in or beneficiaries of church plans run by Catholic-affiliated institutions, and consequently are left equally as vulnerable. Part I of this Note discusses the political and social history of ERISA. Part I also examines the protections of ERISA as they apply to covered retirement plans and the church plan exemption. It then explores the U.S. Supreme Court’s 2017 decision in Advocate Health Care Network v. Stapleton (Stapleton II), where the Court adopted a broad reading of the church plan exemption. Part II outlines litigation post-Stapleton II, narrowing in on several representative case studies. These case studies demonstrate the possible recourses available to litigants, including attempting to dispute church plan status in federal court, filing in state court, and settling outside of court altogether. Finally, Part III argues that the options left for litigants post-Stapleton II offer little to no protections against misuse of their relied-upon pensions. Part III proposes to resolve this problem through congressional legislative reform and a state-law response.

I. The Development of ERISA and Its Church Plan Exemption

ERISA regulates the provision of private employee-benefit plans, including retirement plans, through several different standards and requirements. When enacting ERISA, however, Congress chose to exempt certain types of employee-benefit plans from coverage, including church plans. Debate about the definition of a church plan led to extensive litigation and many administrative rulings, culminating in the Supreme Court’s 2017 decision in Stapleton II. Section A of this Part briefly discusses the legislative and political history behind the enactment of ERISA, as well as the basic protections it provides for typical private pension plans in federal courts. Section B then focuses on the church plan exemption, including its purpose, function, and evolution over time. Finally, Section C examines Stapleton II and explains that the Supreme Court adopted a broad interpretation of the definition of a church plan. It also provides an overview of state-law claims remaining for church plan litigants post-Stapleton II. Section C focuses on legislation in Rhode Island from 2019 that brought church plans under the annual reporting requirement of ERISA.

A. ERISA: “A Minor Miracle”

Before Congress enacted ERISA in 1974, the federal government regulated pensions and employee benefits through several laws that were narrow in scope. Initially, the Internal Revenue Service (IRS) indirectly regulated private pension plans through the Revenue Acts of 1921 and 1926, which both offered tax incentives to plan sponsors. These statutes allowed employers to deduct their contributions to employee pension funds and enabled employees to defer recognition of the income from the growth of the fund until they received the money through a distribution upon retirement. For a plan to receive this special tax treatment, it must meet tax qualification status by adhering to certain coverage and contribution requirements. Under the Revenue Act of 1942, the IRS imposed stricter requirements for plan sponsors to receive tax qualification, including a disclosure mandate. Congress subsequently passed the Welfare and Pension Plans Disclosure Act (WPPDA) in 1958, which required plan administrators to disclose certain information about the plan to beneficiaries.

Although Congress had several motivations for enacting ERISA, one was the infamous story of Studebaker-Packard Corporation’s (Studebaker-Packard) plant closing. In 1963, Studebaker-Packard closed an automotive assembly plant in South Bend, Indiana. At the time of the closing, the company’s pension plan liabilities exceeded its assets by fifteen million dollars. When United Auto Workers (UAW), a powerful labor union representing auto workers, negotiated the pension plan with Studebaker-Packard in 1949 and 1950, the parties decided that the plan should not give any vested rights to employees until they were eligible for retirement. These limited vesting rights allowed the corporation to pay higher pensions to eligible employees because fewer employees would qualify. The negotiated contract did not obligate Studebaker-Packard, however, to actually pay out these retirement benefits; the contract simply required Studebaker-Packard to make regular contributions to the pension trust. As a result, although retirement-age workers received their full pension in 1963, younger hourly workers received only a fraction of their contributions, and some received nothing. In the end, Studebaker-Packard laid off 2,900 employees with no vested rights to the pension plan, and an additional 4,000 employees who received only a portion of their accrued benefits.

An oft-discussed aspect of the Studebaker-Packard incident was that employees had no recourse under existing federal and state law. Studebaker-Packard had lawfully contracted away any obligation to pay out retirement benefits, ensuring that the corporation could not be liable for a breach of contract claim under state law. The company also did not engage in blatantly fraudulent or criminal behavior. Some scholars have concluded that the underfunding of the Studebaker-Packard plan was a predictable consequence of what were common pension management practices at the time.

The closing of the Studebaker-Packard plant became a catalyst for pension reform, including encouraging lawmakers to seriously consider creating a federal termination insurance system. Additionally, although the UAW was previously reluctant to promote federal termination insurance, union leaders saw the Studebaker-Packard shutdown as an example of the dangers of the pension law status quo. Union officials worked alongside Senator Vance Hartke of Indiana to introduce the Federal Reinsurance of Private Pensions Act in 1964. As a result, when President Gerald Ford signed ERISA into law in 1974, the concept of termination insurance was a firmly established element of pension reform. Yet, the story of Studebaker-Packard also helped eventually lead to the signing of ERISA, even in the face of initial opposition from labor unions as well as employers. Consequently, in 1974, the New York Times called these reform measures a “minor miracle.”

ERISA, in its broadest sense, creates a federal standard for employer-provided retirement and health plans, preempts state laws related to employee benefits, provides consistent remedies, and gives litigants access to the federal court system. The statute begins with a statement of congressional findings and policy emphasizing that employee-benefit plans can affect the well-being and economic security of millions of Americans. According to Congress, these plans do not just affect their beneficiaries; they also affect labor relations and the national public interest at large. Therefore, Congress believed it had a legitimate interest in imposing reporting requirements, setting standards of conduct, and ensuring remedies.

ERISA contains four separate titles. First, Title I encompasses the bulk of ERISA’s requirements, provides for a civil statutory enforcement mechanism, and sets forth provisions regarding preemption of state law. Specifically, ERISA requires plan sponsors to furnish plan participants with a Summary Plan Description (SPD), to file annual reports with the Secretary of Labor, and to provide notice of modifications or changes to the plan. ERISA also specifies the length of service an employer can require before an employee may begin to participate in a benefit plan or gain a vested interest in the employee’s accrued benefits. ERISA requires employee-benefit-plan sponsors to have a written document naming at least one officer who is bound by fiduciary obligations under ERISA. For single-employer-defined-benefit plans, ERISA imposes minimum funding levels as calculated by the employer’s minimum contribution amounts. Beneficiaries and participants in a plan can bring a civil action for their benefits under this Title, and the government can impose criminal penalties on plan sponsors who willfully violate certain provisions. Lastly, Title I stipulates that ERISA supersedes all state laws relating to employee-benefit plans, except laws regulating insurance.

Title II amends the Internal Revenue Code to align with the standards set forth in Title I, including its mandates for vesting and benefit accrual. Title III establishes dual authority to enforce Titles I and II between the Department of Labor (DOL) and IRS, a bureau of the Department of Treasury (DOT). Finally, Title IV addresses termination insurance and creates the PBGC to operate as a new federal pension insurance program.

Just a few years after ERISA’s enactment, President Jimmy Carter submitted the Reorganization Plan No. 4 of 1978 to the Senate. The goals of the Reorganization Plan were to make division of enforcement authority over ERISA between the IRS and DOL more streamlined and to avoid bureaucratic confusion. Specifically, this plan gave the DOT authority to regulate minimum standards for beneficiary vesting rights, participation, and funding, with the DOL maintaining veto power. The DOL also obtained authority over fiduciary standards, such as enforcing prohibitions on certain transactions which would be a conflict of interest for the employer. In general, both the DOL and DOT share the power to carry out the requirements of Titles I and II of ERISA.

B. The Church Plan Exemption

The provisions of ERISA apply to the vast majority of private pension plans. A notable exception is the church plan exemption. Scholars have proposed several rationales to help explain what motivated Congress to include a church plan exemption in ERISA. First, a 1973 Senate report suggested that governmental control or examination of church finances could violate the Establishment Clause of the U.S. Constitution. The Establishment Clause enshrines the principle of separation of church and state as well as forbids Congress from making laws with respect to the establishment of religion. The report concluded that there could be an Establishment Clause issue if the federal government had the right to review records regarding a church organization’s pension fund. At least one commentator has also posited that legislators may have thought churches had a moral incentive to honor their promises to employees, and were therefore more likely to manage their pension plans responsibly. Another potential factor contributing to Congress’s decision to include a church exemption in ERISA was the improbability that a church in the 1970s would run into such serious financial trouble and cause it to inadequately fund its employee pensions.

In its original form, the exemption for church plans only applied to plans “established and maintained . . . by a church. It also stipulated—as it still does today—that churches could choose to accept ERISA coverage and forego the exemption when electing to be a church plan. Once a church makes this irrevocable decision, its plan is subject to some Internal Revenue Code and ERISA provisions. Otherwise, the church is exempt from Title I provisions, such as minimum vesting and disclosure requirements. Further, PBGC termination insurance under Title IV does not apply to church plans, unless the churches elect coverage.

As originally written, this exemption applied narrowly to clergy and other direct church employees, but not to employees of agencies affiliated with a church, such as church-affiliated hospitals. Additionally, a grandfather provision permitted plans covering employees of church agencies to be exempt until 1982. Churches, worried by the 1982 exemption end date, began to lobby Congress for an extension of this provision. To support these efforts, twenty-five churches formed a coalition called the Church Alliance for Clarification of ERISA. The coalition argued that after 1982, churches would be forced to divide their pension plans between church employees and agency employees, which would be a cumbersome process and lead to different pension protections for various employees. Adding fuel to the fire, in 1977, the IRS and DOT proposed changes to the Internal Revenue Code that would make religious organizations eligible for the church plan exemption only if they did not maintain the plan primarily for employees working in an “unrelated trade or business.

In response to such lobbying, Congress amended ERISA’s definition of a church plan in 1980 as part of the Multiemployer Pension Plan Amendments Act (MPPAA). Following the enactment of the MPPAA, subsection (A) of the church plan definition states that church plans include those plans that are both “established and maintained” by a tax-exempt church. Subsection (C) clarifies that plans “established and maintained” by churches include plans maintained by organizations with the principal purposes of administering the plans, as long as the organizations are sufficiently associated with churches.

The interplay between these two subsections spurred debate regarding whether a plan maintained by a church-affiliated organization could be a church plan even if a church did not establish the plan itself. District courts that adopted a broad interpretation of both subsections held that church-affiliated organizations can maintain a church plan not established by a church. On the other hand, circuit courts that construed a narrow interpretation held that subsection (A) read alone suggests that a church must have established a plan maintained by a church-affiliated organization for it to qualify as a church plan.

Historically, the IRS interpreted this provision in its Private Letter Ruling (PLR) process. PLRs are statements that the IRS issues to taxpayers upon request that apply tax law to the taxpayer’s purported situation. The IRS has consistently endorsed the broad interpretation of the church plan definition through the PLR process. For example, in 2008, the IRS concluded in a PLR that a church plan must be “established and maintained” for its employees by a church or must be administered by a church-affiliated organization.

Some employers seeking a PLR had previously operated as if their pension plans were subject to ERISA and had consequently paid premiums to the PBGC to insure their plans. These employers could seek a refund of the premiums they had paid to the PBGC through a written request. The IRS purportedly refunded nearly eighteen million dollars in premiums between 1999 and 2007 to eighty-six employers seeking exemption. Under the era of PLR interpretation of church plans, employers could receive an exemption determination letter and not notify participants, even if participants had originally been told that the plan was subject to ERISA and insured by the PBGC.

In 2009, the IRS announced a moratorium on new church plan PLRs. Prior to such moratorium, the IRS consistently determined that a church plan did not need to be established by a church, and one could be maintained by an administrative committee rather than the employer.

C. The U.S. Supreme Court Responds: Advocate Healthcare Network v. Stapleton

Following the IRS’s mortarium on church plan PLRs, there was a rise in church plan litigation, which ultimately culminated in the 2017 Supreme Court case Stapleton II. Before the Supreme Court’s decision, federal district courts were inconsistent in their treatment of how narrowly or broadly to define church plan; over thirty lawsuits disputing this point were filed between 2013 and 2016.

Each circuit court to address the church plan definition question chose to adopt the narrow interpretation. For example, in 2015 in Kaplan v. Saint Peter’s Healthcare System, the U.S. Court of Appeals for the Third Circuit affirmed The United States District Court for the District of New Jersey’s denial of a motion to dismiss on behalf of the defendants. The Third Circuit held that the plain language of § 1002(33)(A) and (C) mandates a narrow interpretation, where (A) is a threshold, or a gatekeeper, for (C). In 2016, the U.S. Court of Appeals for the Seventh Circuit came to the same conclusion in Stapleton v. Advocate Health Care Network (Stapleton I), again looking to the plain meaning of the statute, and emphasizing that the word “includes” in subsection (C) only modifies who may maintain a church plan. Finally, the U.S. Court of Appeals for the Ninth Circuit also came to the same conclusion in Rollins v. Dignity Health in 2016. Beginning with an analysis of the plain language of the statute, the Ninth Circuit also considered the legislative history of this provision. According to the Ninth Circuit, the legislative history of subsection (C) lacked any indication that Congress intended to remove the requirement that churches establish church plans. In conclusion, the Third, Seventh, and Ninth Circuits all held that a plan maintained by a church-affiliated organization under subsection (C) must also have been established by a church under subsection (A) to be exempt from ERISA.

After years of debate among circuit and district courts, the Supreme Court finally spoke to the issue of what constitutes a church plan in its 2017 decision in Stapleton II. In a unanimous opinion authored by Justice Kagan, the Supreme Court embraced the broad interpretation of a church plan and held that a church plan need not have been established by a church to qualify for the ERISA exemption. In this case, the employers from the three circuit court decisions appealed from the adverse circuit decisions that denied their inclusion in the church plan exemption. The Court began by emphasizing that the amended version of § 1002(33)(C)(i) expanded the specific plans that could qualify for the church plan exemption. Turning to statutory language, the Court leaned on a simplified portrayal of the logic problem central to interpreting the statute: “If A is exempt, and A includes C, then C is exempt. The Court indicated that if Congress intended to merely qualify the requirement of subsection (A) that a church organization maintain the plan, it could have easily said so.

The petitioners, employers who had been denied an exemption, offered a hypothetical scenario in their brief that the Court thought to be persuasive. Theoretically, the government could offer a free insurance program to those who are disabled and veterans, with an amendment that a person who is disabled and a veteran consists of someone in the National Guard. Therefore, a non-disabled member of the National Guard would likely be ineligible. In the same way, the petitioners argued, a plan maintained by a church-affiliated organization but not established by a church is not eligible for church plan status. The majority distinguished this hypothetical from the amendments to the church plan definition, and noted as in the hypothetical scenario, the two categories of “disabled and a veteran” are highly dissimilar, whereas plans “established and maintained . . . by a church” are not. Further, the Court believed that the background knowledge in the hypothetical situation suggested that having a disability is a non-negotiable aspect of what Congress would have meant in that scenario, whereas in ERISA, it is not so clear.

Justice Sotomayor filed a concurrence because she agreed with the statutory interpretation of the majority, but felt that the outcome had the potential for broad and unfortunate implications. She emphasized that the current size and scope of large religiously-affiliated hospital organizations are different from those that existed at the time of ERISA’s enactment. Further, the scant legislative history of the exemption and its amendment worried Justice Sotomayor; she emphasized the impact of a church plan exemption that includes plans neither established nor maintained by an actual church. She ended her concurrence by noting that, although the plain language of the statute requires the broad interpretation of the definition of a church plan, the wording in subsection (C) mandating that the church-affiliated agency maintaining the church plan be a “principal-purpose organization” could be subject to future litigation.

D. Current State-Law Remedies for Church Plan Participants

After the Supreme Court adopted a broad interpretation of the definition of a church plan in Stapleton II, participants and beneficiaries of these plans have faced a higher bar when challenging the status of church plans in federal court. If ERISA exempts a plan from coverage as a church plan, however, participants in the plan still have several traditional state-law remedies available to them. Some scholars have argued that the most viable state-law claims are breach of contract, tortious breach of contract, fraud, and intentional infliction of emotional distress (IIED). Subsection 1 briefly examines the elements of each of these claims and their viability for church plan litigants. Subsection 2 discusses another emerging option: state-statutory-law responses, tailored to bring church plans in a given state into compliance with narrow provisions of ERISA.

1. Traditional State-Law Causes of Action

Breach of contract is currently the most viable state-law claim for church plan litigants, as they can typically satisfy each element of the claim. Although it can vary by jurisdiction, there are traditionally three elements that must be satisfied for a breach of contract claim to succeed: the formation of a valid contract, a breach of the promise, and a resulting injury. In the case of pension plans, typically the employer promises in an employment contract that it will maintain the employee pension fund in exchange for the employee’s service, with a promise to pay those funds to the employee upon retirement.

A breach of contract can rise to the level of a tortious breach if it involves bad faith. About half of all states recognize this cause of action. If available, this cause of action can be particularly applicable to church plan litigants, as anyone with a fiduciary duty over the plan must act with a high standard of care. Because this cause of action is a tort, more expansive types of damages—including punitive damages—are available.

Another potential cause of action for church plan litigants is fraud. The elements of fraud include misrepresentation, scienter, intent, reliance, and resulting injury. This cause of action may be applicable to church plan litigants, as exemption from ERISA’s reporting and disclosure requirements has allowed several church plan sponsors to misrepresent the level of funding of their plans. A wide range of damages are available in the context of fraud, including punitive damages.

Finally, for a claim of IIED, litigants generally need to demonstrate extreme and outrageous conduct, a level of intent, and injury as a result. Scholars have regarded this cause of action as the most far-fetched for church plan litigants because litigants must show serious lack of regard for the interests of plan participants. It may nevertheless be viable for those who can demonstrate that the sponsor of the plan had the requisite intent and that sponsor’s conduct was extreme.

2. Emerging State-Law Legislation

Aside from these common-law remedies, states can also create statutes that directly speak to church plans. ERISA exempts church plans not only from the provisions in Title I, but also from state-law preemption. Therefore, states have an open door to create legislation that places affirmative duties on church plan sponsors.

At least one state—Rhode Island—has already tried to enact this type of legislation. Passed in 2019, the Rhode Island law mandates that all defined-benefit plans exempt from ERISA (except governmental plans) follow a specific disclosure requirement of ERISA that obligates employers to provide employees with an annual report about the plan fund. The passage of this law appears to have gone by with little fanfare, but constitutes a new way of regulating church plans outside of ERISA. As Rhode Island General Treasurer Seth Magaziner put it, this law works by closing a narrow loophole to ensure that plan sponsors must at least inform participants and beneficiaries about the financial status of the plan.

II. Post-Stapleton II Litigation

In the years since the U.S. Supreme Court’s 2017 decision in Advocate Health Care Network v. Stapleton (Stapleton II), church plan pensioners have continued to face underfunding of their pension plans and a lack of disclosure about the financial health of the plan fund from their employers. As a result of the Supreme Court’s decision, they also face a higher bar to argue that their pension plan is not a church plan in order to sue under ERISA in federal court. Part II of this Note examines a few examples of litigation post-Stapleton II, with an emphasis on litigation strategies, new and unresolved issues, and success rates. As these representative case studies demonstrate, litigants are now pursuing creative arguments in court, such as challenging the definition of a “principal-purpose organization,” settling with their plan sponsors, and pursuing traditional state-law claims.

A. The Principal-Purpose Debate: Boden v. St. Elizabeth
Medical Center, Inc.

St. Elizabeth Medical Center, Inc. (St. Elizabeth) is a non-profit health care provider headquartered in Kentucky that operates throughout Northern Kentucky, Ohio, and Indiana. The Franciscan Sisters of the Poor established St. Elizabeth in 1861. In 2016, several former nurses who worked for St. Elizabeth and continued to participate in its defined-benefit pension plan sued St. Elizabeth, as well as members of the St. Elizabeth Medical Center Employee’s Pension Plan Administrative Committee (Committee). Unlike other church plan cases, the employer did not actually deny any employees of their pension benefits. Rather, the participants sued because St. Elizabeth underfunded the plan by more than $166 million. Prior to Stapleton II, the plaintiffs filed suit in the U.S. District Court for the Eastern District of Kentucky in 2016, claiming federal jurisdiction under the basis that St. Elizabeth did not have an ERISA-exempt church plan. In their original complaint, the plaintiffs argued that the plan was neither established nor maintained by a church, but rather by St. Elizabeth, a church-affiliated health care organization. After the plaintiffs filed an amended complaint, the district court granted a stay until the Supreme Court decided Stapleton II. They argued that the plan, even under Stapleton II’s broad definition, was not a church plan because an organization maintained it whose principal purpose was the delivery of health care, and not the administration of pension funds.

This argument did not persuade the district court. The Supreme Court in Stapleton II clarified that a pension plan could simply be maintained by a principal-purpose organization controlled by or associated with a church, but it did not specify what qualified as a “principal-purpose organization. The Boden district court adopted a three-part test, to determine whether a plan maintained by a principal-purpose organization met the Stapleton II church plan requirements. First, the court must ask whether the entity in question is tax-exempt under I.R.C. § 501(c)(3) and affiliated with a church. If so, the court must ask whether an organization—with the principal purpose of administering the plan—maintains the entity’s plan. Finally, the court asks whether the principal-purpose organization is affiliated with a church.

As a threshold matter, the Eastern District of Kentucky found that St. Elizabeth satisfied the first prong of the test, as a tax-exempt non-profit with sufficient ties to the Catholic Church. In addressing the second prong, the court decided that the Committee counted as an “organization,” even though it was comprised of internal committees. It found that the Committee indeed “maintained” the plan within the meaning of ERISA’s church plan definition. Based on the plain meaning of the word “maintained,” as well as statutory structure and additional case law, the court determined that “maintained” meant something more than administered, but did not require the “ability to amend or terminate the plan. Instead, the court concluded that “maintenance” included all the actions necessary to continue the plan. Finally, the court determined that the Committee was associated with a church. Accordingly, the court held that the Committee was a principal-purpose organization within the meaning of the church plan exemption.

In the end, the court re-affirmed that St. Elizabeth’s pension plan was an ERISA-exempt church plan. This conclusion was largely based on the broad interpretation of a church plan adopted in Stapleton II. The court dismissed the plaintiffs’ claims, and as a result, waived jurisdiction over any additional claims, noting that the plaintiffs could re-file in state court if they so choose.

B. Settling Out of Court: Owens v. St. Anthony Medical Center, Inc.

In 2012, St. Anthony Medical Center, Inc. (St. Anthony) notified employees that it was terminating its employee pension plan. Although the trust funding plan would continue to pay distributions, it would reduce benefits by up to forty percent for certain participants. St. Anthony is associated with the Franciscan Sisters of Chicago Service Corporation, a non-profit corporation that runs assisted living and hospice facilities through a network of affiliates. In or around 1989, the IRS sent St. Anthony a PLR verifying its church plan status, a determination that authorized St. Anthony to stop complying with ERISA’s disclosure, insurance, and funding requirements. In response to the plan termination, a group of former employees filed suit in 2014 against St. Anthony in the U.S. District Court for the Northern District of Illinois (Eastern Division). The plaintiffs alleged that the plan was not a church plan under ERISA, along with other ERISA violations including a breach of fiduciary duty. The defendant employer filed a motion to dismiss, which the court suspended pending resolution of Stapleton II.

In 2018, the court reconsidered a new motion to dismiss by the defendants, with additional state-law claims. This case was short-lived, however; in 2019, the parties reportedly settled for four million dollars. According to the plaintiffs, one million dollars of the settlement went to attorneys’ fees and incentive awards for the named pensioners, and the other three million dollars went to the 1,900-member class of plan participants.

C. (Re)turning to State Common Law: Hartshorne v. Roman
Catholic Diocese of Albany, NY

The 2018 lawsuit brought by former employees of St. Clare’s in Hartshorne v. Roman Catholic Diocese of Albany, New York is one of the newest and most notable examples of church plan litigation post-Stapleton II. The complaint in this case raised three state-law claims under New York law: breach of contract, promissory estoppel claim, and breach of fiduciary duty. The plaintiffs did not dispute that the plan at issue is a church plan, nor that the Albany Diocese manages St. Clare’s. In fact, the plaintiffs emphasized the involvement of the Albany Diocese in the management of St. Clare’s, as it helped establish that the Albany Diocese is the party responsible for the mismanagement of funds.

The plaintiffs began their complaint by noting that New York law considers retirement plans to be “wage supplements”; therefore, if an employer does not make payment under a retirement plan, a court can find it guilty of a misdemeanor. Consequently, the employees could sue for these benefits in state court.

The plaintiffs first raised a breach of contract claim. According to the plaintiffs, the defendants breached their contract by representing in the plan documents and the SPD that St. Clare’s would fund the plan—not change the plan in a way that would negatively affect benefits—and continue to abide by ERISA even though the plan was exempt from coverage.

The plaintiffs then asserted a related claim for promissory estoppel. To establish a promissory estoppel claim under New York common law, a plaintiff must show that although there was no contract, the plaintiff reasonably relied upon a clear promise made by the defendant to the plaintiff’s detriment. The plaintiffs emphasized that they had made decisions about their employment with the expectation that after five years of service, their right to pension benefits would vest—a fact that St. Clare’s should have reasonably anticipated given its promises.

Finally, the plaintiffs put forth a claim for a breach of fiduciary duty. A fiduciary relationship exists under New York common law when an entity or person is under an obligation to act for the benefit of another within the scope of a special relationship. To establish a breach of fiduciary duty, one must show that this special relationship of trust existed for the benefit of the plaintiff, that an entity or person breached their duty related to that trust, and that the plaintiff suffered an injury as a result. The plaintiffs alleged that St. Clare’s breached its fiduciary duties, specifically its duty of prudence in management of the plan and its duty of disclosure.

Since filing their complaint, the plaintiffs in Hartshorne survived a motion to dismiss brought by the defendants. In their motion, the defendants alleged that the plaintiffs’ complaint did not set forth a case, that the complaint constituted inadmissible documentary evidence, and that the plaintiffs missed the statute of limitations for their breach of contract claims. The N.Y. State Supreme Court, County of Schenectady rejected each of these arguments by the defendants. The court’s decision traced the history of the St. Clare’s plan and emphasized the number of times St. Clare’s promised plan participants that they would receive their pensions. The court’s rejection of a motion to dismiss indicates that, in cases with a high level of reliance by plan participants on promises made by plan administrators, state courts are willing to at least decide on the merits for claims of breach of contract, promissory estoppel, and breach of fiduciary duty.

III. Church Plan Reform: A Call and A Response

Church plan litigation in the wake of the U.S. Supreme Court’s 2017 decision in Advocate Health Care Network v. Stapleton (Stapleton II) demonstrates that the exemption exposes participants and beneficiaries of church plans to tremendous risk, with little recourse in federal or state courts. This Part focuses on a path forward. Section A is a call for reform. It argues that the church plan exemption currently undermines the statutory intent of ERISA, that the exemption’s justification has become irrelevant, and that competing incentives justify change. Section B focuses on potential solutions, emphasizing the efficacy of state statutory law protections for church plan participants.

A. The Call for Action

The church plan exemption undermines the purpose behind ERISA and congressional intent. When enacting ERISA, Congress justified its action by citing its powers under the Commerce Clause of the U.S. Constitution. And, indeed, the welfare of the U.S. pension system is a matter of national concern, affecting the security that Americans feel knowing that they can retire with dignity. Indeed, the church plan exemption itself has an impact on the national retirement system, as retirement plans are used by companies to compete for workers as part of a comprehensive benefits package. Therefore, if one organization complies with ERISA and its obligations, including paying PBGC premiums, hiring additional plan administrators, and meeting ERISA’s vesting and funding obligations, that organization is at a disadvantage compared to those that do not. This creates a disincentive for church plans to opt in to coverage and gives religious plan sponsors an advantage in the marketplace. Consequently, this undermines the congressional intent of regulating interstate commerce.

Further, when church plan participants cannot avail themselves of ERISA’s protections, they are placed in a similar position to Studebaker-Packard employees prior to the enactment of ERISA. First, by allowing the church plan exemption to continue, Congress is placing countless workers in a position where they must seek state common-law protections when employers fail to fulfill pension obligations. Before the enactment of ERISA, pensioners, such as Studebaker-Packard former employees, had to rely on the meager protection afforded by state-law claims. Church plan litigants now face a similar lack of predictability and recourse related to their pensions, further highlighting how the church plan exemption cuts against the congressional intent of ERISA. ERISA was also a direct congressional response to the real human effects of the Studebaker-Packard plant’s closing. In that case, employees faced the same issues church plan pensioners do now: lack of accountability from their employer, as well as a lack of recourse if something goes awry. The real human effects are not only retirees left without their expected post-retirement income, but also retirees who remained at a job offering a defined-benefit plan specifically because of its financial reassurance.

Recent church plan litigation demonstrates that the reality of modern church organizations undermines the intent behind the church plan exemption itself. Most modern church plan litigation centers around Catholic-affiliated hospital networks. The Catholic Church is currently suffering worldwide financial difficulties because of priest sexual abuse allegations. With church organizations in a precarious financial state, protecting retirees relying upon pension plans managed by these organizations becomes even more important.

Additionally, when Congress enacted the church plan exemption, one justification given was that churches would handle these funds in a more ethical manner than other organizations. Not only is confidence in the ethical behavior of churches eroding, but church organizations have demonstrated through their (mis)management of employee pension funds and failure to opt in to ERISA compliance that they can fail to reliably fund and insure promised pension plans.

Finally, the reality is that many modern church organizations are healthcare organizations that are only loosely connected to a religious mission. Therefore, the Establishment Clause’s concern of maintaining separation of church and state becomes less important for these organizations.

B. The Response

This Note joins with others to ultimately advocate for Congress to narrow the church plan exemption to plan sponsors who have pension plans for employees carrying out essential religious work. Such a response, however, may be too far off and not politically feasible. Therefore, in the meantime, there is another approach: states should step in and create legislation around church plans.

Of course, church plan litigants can sue under traditional state laws, using causes of action such as breach of contract or breach of fiduciary duty. These remedies, however, only provide recourse after an employer falls short of its obligations by, for example, failing to fund a plan, creating a prohibitively high vesting requirement, or failing to report and disclose the financial status of the plan. In contrast, ERISA places affirmative duties upon the sponsors of traditional defined-benefit pension plans, which protect pensioners before anything goes awry, and if the plan participants have no other recourse against their plan sponsor under state laws. Pensioners under such plans can work and retire with more confidence in their plan funds. These employees have confidence their employer is being forthcoming about the status of the pension fund and that they will be covered by pension insurance if the plans terminate. This is a stark contrast to church plan litigants, who are forced to file class action lawsuits after suddenly learning that their employers will no longer pay their pensions.

A promising and innovative option to protect church plan litigants is the enactment of narrowly tailored state-law legislation that places affirmative duties on church plan sponsors. Rhode Island is the trailblazer on this type of legislation, passing a law in 2019 that brought church plans under ERISA’s annual reporting requirement. Rhode Island officials explain the benefits of such legislation are numerous. First, state laws can be narrowly tailored to address the specific needs of church plan beneficiaries in a particular region. For example, legislation could bring plans under the funding or vesting requirements of ERISA instead of annual reporting, if that better fit the needs of a given jurisdiction. Second, state-law legislation such as Rhode Island’s avoids Congress’s Establishment Clause concerns about looking into church finances. If plan sponsors only give annual reports to plan participants, and not to the government, then participants are equipped with the knowledge they need, without any mingling of church and state. Finally, statutes such as these give a clear cause of action to church plan litigants; these litigants no longer need to try to fit their claims into existing state-law causes of action such as a breach of contract claim.

One could argue that this legislation does not go far enough. A reporting and disclosure requirement may not be helpful if church plans are still not subject to vesting and funding standards, or are not covered by PBGC insurance. If plan participants can catch problems with funding early on, however, this could protect workers while putting pressure on employers. Workers could have the option to make different employment decisions earlier if they knew that the employer was underfunding its pension plan. State-law regulation of church plans is a step in the right direction, and sends the message to employers that if they avoid ERISA coverage, then they expose themselves to state regulation.

Conclusion

When Congress enacted ERISA in 1974, lawmakers intended to protect the rights of workers who receive employee benefits, particularly pensions. Congress barely discussed or justified the church plan exemption, but it has led to extensive administrative and judicial debate, as well as the loss of anticipated benefits for countless pensioners. Litigation following the Supreme Court’s 2017 decision in Advocate Health Care Network v. Stapleton demonstrates that litigants now have a slim chance of succeeding in federal court, and must rely on state-law claims and settlement agreements to hold their employers accountable to their pension obligations. To protect vulnerable retirees, Congress could act to amend the church plan exemption, or states can and should act on their own to regulate church plans. Absent such protective measures, countless current and future retirees are left exposed to financial instability.