Our newsletter has provided a comprehensive review and analysis of the district and circuit court cases regarding ERISA Church Plan Litigation over the last year. The Supreme Court granted certiorari in the consolidated Supreme Court cases of: Advocate Health Care Network v. Stapleton (7th Cir.), St. Peters Healthcare System. v. Kaplan (3d Cir.), and Dignity Health. v. Rollins (9th Cir.). This consolidated action could set precedent and impact the outcome for no less than 25 class actions held in abeyance pending the outcome in Stapleton. Suffice it to say that the outcome of the SCOTUS decision will create additional issues for how both parties move forward.
In our Fall 2016
Brief Background
In 1974, when ERISA was enacted, many provisions were set out in principle with the intention that further clarification would be needed. The ERISA church plan exemption, 29 U.S.C. 1002(33)(A), was just such a provision. This exemption applies to a plan that is "established . . . by a church." In revisiting and explaining the rationale for the only exemption from ERISA for employee pension plans sponsored by private employers, many pundits claim that Congress wanted to avoid intrusion into a church's confidential books, donor records, and sometimes sensitive relationships between clergy and others. In the 1980s, Congress made permanent a temporary provision expanding the exemption to include employees of church-affiliated organizations while also correcting some technical issues. In 1983, the IRS issued a General Counsel Memorandum (1983 WL 197946, July 1, 1983) in which the Service took the position that the "church plan" exemption could cover plans sponsored by non-profit organizations (including hospitals) that are "controlled or associated with a church." In the 1990s and 2000s, the idea of an exemption from the ERISA funding, reporting, and disclosure obligations became a movement among a large number of church and church-related ERISA plan sponsors. The plan sponsors applied for (and in many cases were granted) Private Letter Rulings from the IRS and, with Private Letter Rulings in hand, applied for reimbursement of PBGC premiums.
The core of the textual argument comes from ERISA Section 3(33)(C)(i) and (ii) and focuses on whether or not the literal reading of the phrase "[a] church plan includes a plan established and maintained" by a church or church-affiliated organization really means that in order for a plan to qualify for the church plan exemption the plan must be both established and maintained by such an organization.
The current Circuit split involves five cases: three decided in the Third, Seventh, and Ninth Circuits; and two cases in the Fourth and Eighth Circuits.2
In the Supreme Court, the question presented is: "Whether a pension plan for employees of a giant health-care provider is exempt from—and therefore its participants are unprotected by—ERISA, even though there is no genuine dispute that the plan was not 'established' by a church."
Different Kinds of Defendants and Participants
Even though application of the church plan exemption is common in these cases, the range of plan sponsor entities involved means that the outcomes could vary widely. Church plans that were established and maintained by a church and have continued to operate continuously are not the kind of defendants involved in these cases. In general, the types of defendants in these cases include church organizations, religious associations, healthcare organizations, and hospitals. In cases involving large healthcare organizations or hospitals that have been profitable for many years, an outcome where the plans are found non-exempt creates the prospect of requiring additional funding of the plans. In any case where a defendant has fewer resources or may be tied to a declining donor base, realizing any recovery is less certain.
There are many forces that will combine to make the impact of the SCOTUS and other decisions that follow very impactful. In these cases there are "double-whammies" that create the possibility for a litany of negative results. For example, the gradual decline in church attendance and, consequently, donations, occurred concurrently with increased church plan exemption applications. The dedicated nature and loyalty of long-term church employees means the population of participants that will be impacted has not shifted in the same way as employees in other industries. The participant population is also disproportionately represented by the baby-boomer generation who grew up in a time when church membership and support was higher in the general population. The combination of these factors creates a large population of near-term retirees who may suffer an additional setback in their retirement assets. Reports of Americans who are ill-prepared for retirement are commonplace. A result favoring the plans could be an additional hurdle to retirement for these plan participants.
If the SOTUS Decision Favors the Plans
If the decision favors the plans, the resulting impact will be a permanent exemption from the ERISA fundng, reporting and disclosure requirements for these church and church-affiliated plans. A failure to fund these plans will likely result in millions of plan participants with reduced or eliminated pensions. In the event the plans prevail, participants and beneficiaries could nonetheless seek to enforce in state court the contracts or promises made by the employers to them. Where state laws are generally preempted as applied to ERISA plans, these church plans are not covered by ERISA and arguments exist that no ERISA preemption would apply to these state law claims. The number of plan participants involved probably means that many of these enforcement actions will set precedent and any litigation has a good chance of involving collective or class action status.
There is also the potential for plan participants to seek control group liability extending to viable entities connected with the hospitals or plan sponsor organizations, but which may not be entitled to the church plan exemption. Because many of these exempt plans applied for a refund of PBGC
If the SCOTUS Decision Favors the Plan Participants
The plans have already begun revising their benefit structures in the event a decision favors plan participants and requires funding the plans.3 But there are multiple types of employers who are the plan sponsors of these plans. The question presented in Stapleton, for example, is limited in such a way that the decision should be addressed only toward "Large Plans" of healthcare organizations, many of which were the organizations that sought Private Letter Rulings in the 1990s and 2000s. It appears many large, profitable health care organizations and hospitals can find a budget mechanism to fund these obligations. Particpants in these plans should benefit from the court's decision.
Participants in plans associated with healthcare organizations affiliated with less well-funded churches or smaller organizations could face a different story. At a time when attendance at churches is trending downward, the idea of churches becoming immediately liable for substantial funding obligations could be daunting. Many such plans have spent time and effort attempting to remove themselves from these obligations, arguing that they relied upon the Private Letter Rulings and other similar decisions and therefore cannot now be required to comply with a federal law where a government agency has for many years exempted them..
Oral Argument
On March 27, oral argument was heard by the then-current eight Supreme Court Justices. Lisa Blatt delivered the oral argument for the plans and her defense of the Petitioner plans focused on her reading of the text of the church plan exemption, the long period over which the plans have relied on the Private Letter Rulings and guidance, and the idea that a decision for the Respondent-plaintiffs would resurrect the problems that the 1980 amendment was designed to fix. She also highlighted that if a decision were issued for the plaintiffs in two of these cases, the plans could be liable for up to $66 billion. When Justice Sotomayor focused on the original language of the statute that required that a church plan be both established and maintained by a church, Ms. Blatt highlighted that the 1980 Amendment was in response to concerns from hundreds of churches that established plans maintained by a "church-affiliated" organizations.
Malcolm Stewart delivered the oral argument for the United States as amicus curiae. His comments highlighted the fact that while the statutory language is a bit ambiguous he believes the intent behind the 1980 Amendment was clearly to allow broadening of the church plan exemption. Justice Breyer asked a series of questions involving hypotheticals where a strict reading of the statute could result in no relief for the very plans that requested the 1980 Amendment.
James Feldman delivered the oral argument for the Respondent-plaintiffs. He argued that while the 1980 Amendment attempted to address concerns raised by churches and church-affiliated organizations, limits were always intended and any inclusion of hundreds of hospitals years into the future would represent an unintended consequence. He pointed out that the 1983 IRS General Counsel Memorandum specifically states that it is not precedent and cannot be relied upon or cited as precedent. In response to Justice Ginsburg, he agreed that the lower courts could tailor a remedy that may weigh the equities and not impose the penalties and immediate billion dollars financial burden complained of by the Petitioners. When Justice Alito asked if Mr. Feldman was willing to waive any request for penalties, Mr. Feldman declined to waive any claim for penalties.
Conclusion
Several justices seemed concerned that the IRS issued "hundreds" of Private Letter Rulings and seemed convinced that the Petitioners reliance argument was convincing, which may indicate a potential to reverse the lower court decisions. While an ideological split of the Justices could result in a 4-4 decision (upholding the lower court decisions), if even one of the more liberal justices becomes convinced of the reliance argument, a decision could be issued for the Petitioners.
In Stapleton, the SCOTUS decision will focus on the limited issues of how large plans should be treated with regard to the church plan exemption. Aside from the direct impact of interpretation of the church plan exemption, the decision in Stapleton is likely to have wide-ranging impacts for ERISA litigation. Attempts to unwind the impacts of the decision could drive class-action litigation for several more years.
1See "Religious Hospital Employees Closing in on Retirement Security: An Update on Victories in Church Plan Litigation," by Darin Ranahan (Feinberg, Jackson, Worthman & Wasow LLP); and "The Church Plan Litigation, Revisited," by G. Daniel Miller (Conner & Winters, LLP).
2For the Participants: Stapleton v. Advocate Health Care Network, 817 F. 3d 517 (7th Cir. 2016), Kaplan v. St. Peters Healthcare Sys., 810 F. 3d 175 (3d Cir. 2015), and for the Plans: Rollins v. Dignity Health, 830 F.3d 900 (9th Cir. 2016); Lown v. Continental Cas. Co., 238 F. 3d 543 (4th Cir. 2001); and Chronister v. Baptist Health, 442 F. 3d 648 (8th Cir. 2006).
3See, e.g., "The Supreme Court Case That Could Bankrupt Religious Schools and Hospitals," by Emma Green, The Atlantic, December 12, 2016.