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ERISA Church Plan Exemption Under Attack: Implications for Church-Affiliated Employers Administering Pension Plans

Structuring, Operating, and Funding Church-Affiliated Employer Pension Plans Amid Conflicting Court and IRS Guidance

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, OCTOBER 11, 2016

• G. Daniel Miller, Partner, Conner & Winters, Washington, D.C.

Jeffrey D. Smith, Partner, Fisher & Phillips, Cleveland

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ERISA CHURCH PLAN EXEMPTION UNDER ATTACK

• G. Daniel Miller, Esq.

Conner & Winters, LLP dmiller@cwlaw.com Jeffrey D. Smith, Esq. Fisher & Phillips, LLP jdsmith@fisherphillips.com

CHURCH PLAN DEFINITION

(33) (A) The term “church plan” means a plan established and maintained (to the extent required in clause (ii) of subparagraph (B)) for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under section 501 of title 26

6

CHURCH PLAN DEFINITION

(33) (C) For purposes of this paragraph— (i) A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function

• f 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.

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CHURCH PLAN DEFINITION

(33) (C) (i) The term employee of a church or a convention or association of churches includes— (I) a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry, regardless of the source of his compensation; (II) an employee of an organization, whether a civil law corporation or otherwise, which is exempt from tax under section 501 of title 26 and which is controlled by or associated with a church or a convention or association of churches; and (III) an individual described in clause (v).

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AUGSBURG PUBLISHING

• Plan frozen 2005, terminated 2010 providing

reduced lump sums, participants sued claiming plan was not a church plan.

• Decision issued January 27, 2011 (D. Minn.):

Augsburg plan is a church plan exempt from ERISA – court did not accept plaintiffs’ theory of the church plan definition.

• Court dismissed all ERISA-related and Minnesota

Consumer Fraud claims, but allowed plaintiffs to pursue claims against ELCA under state law “alter ego” theory.

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CHURCH PLAN LITIGATION

• Over 30 lawsuits have been filed against non-profit

health care systems alleging that a defined benefit plan maintained by each health care system is not entitled to church plan status.

• Allegations in each lawsuit are substantially the same:

− Defendants violated minimum funding, notice, written plan document, trust and fiduciary rules of ERISA; engaged in prohibited transactions. − Defendants purposefully ignored ERISA requirements that are meant to protect plan participants by “improperly” claiming to be church plans and exempt from ERISA. − Plaintiffs claim underfunding, plus other unspecified damages. − Failure to pay PBGC premiums.

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PLAINTIFFS’ ALLEGATIONS

• Most of the lawsuits also introduce claim that the

ERISA church plan exemption violates the Establishment Clause of the First Amendment.

• Cases do not mention Internal Revenue Code

disqualification consequences of church plan status failure.

• Cases do not mention the defined contribution

plans or welfare plans of the defendant health care systems, though same arguments apply.

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ROLLINS V. DIGNITY HEALTH

Decision in Rollins v. Dignity Health:

• Trial court ruled the plan was not a church plan on July

24, 2014.

• 9th Circuit Court of Appeals ruled in favor of plaintiffs on

July 26, 2016, affirming the district court’s decision that the plan was not a church plan; motion to stay mandate was not granted.

• Dignity Health has filed a petition for writ of certiorari

with the U.S. Supreme Court, asking the Court to determine whether its pension plan is considered a “church plan” under ERISA. Also requested the Supreme Court to stay the Ninth Circuit’s mandate; this request was granted.

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KAPLAN V. ST. PETER’S HEALTHCARE SYSTEM

Decision in Kaplan v. Saint Peter’s Healthcare System:

• Trial court ruled the plan was not a church plan on

March 31, 2014.

• The 3rd Circuit Court of Appeals ruled in favor of

plaintiffs on December 24, 2015, affirming the district court’s decision that the plan was not a church plan; stay of mandate pending cert. petition to Supreme Court was not granted.

• St. Peter’s Healthcare System has filed a petition for

writ of certiorari with the U.S. Supreme Court, asking the Court to determine whether its pension plan is considered a “church plan” under ERISA.

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OVERALL V. ASCENSION HEALTH

Decision in Overall v. Ascension Health:

• Trial court granted employer’s motion to dismiss

and held the plan was a church plan on May 9, 2014.

• The parties settled on September 22, 2015, after

the plaintiffs had appealed to the 6th Circuit and briefs were filed, but before oral arguments were heard.

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MEDINA V. CATHOLIC HEALTH INITIATIVES

Decision in Medina v. Catholic Health Initiatives:

• Trial court ruled in favor of employer on August 29,

2014—determined that the plan in question is a church plan and therefore is exempt from ERISA.

• The case is now on appeal to 10th Circuit; initial

briefs have been filed.

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MEDINA

• Magistrate Mix
• Plan must be established

by a church

• Judge Blackburn
• Does not need to be established

by a church

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STAPLETON V. ADVOCATE HEALTH CARE NETWORK

Decision in Stapleton v. Advocate Health Care Network:

• Trial court held the plan was not a church plan on

December 31, 2014.

• On March 17, 2016, the 7th Circuit affirmed the trial

court’s decision.

• Employer petitioned for a stay of mandate on March

31, 2016 pending filing and disposition for writ of certiorari; stay of mandate was granted.

• Advocate Health Care Network has filed a petition for

writ of certiorari with the U.S. Supreme Court, asking the Court to determine whether its pension plan is considered a “church plan” under ERISA.

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LANN V. TRINITY HEALTH

Decision in Lann v. Trinity Health:

• Trial court granted a partial motion to dismiss on

February 24, 2015.

• Case was administratively closed on December

11, 2015 following settlement.

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KEMP-DELISSER V. ST FRANCIS HOSPITAL

Decision in Kemp-DeLisser v. St. Francis Hospital and Medical Center:

• Parties filed proposed settlement order on May

20, 2016; case has now settled.

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THE COURTS OF APPEAL OPINIONS

• All three circuits found the statute’s meaning

plain, but all three went on to consider the legislative history and agency guidance interpreting the church plan definition.

• All three circuits adopted the “gatekeeper”

view of the church plan definition’s general rule in ERISA section 3(33)(A).

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THE COURTS OF APPEAL OPINIONS

• It appears that none of the circuits understood that their

decisions favor hierarchically-governed denominations

• ver congregationally-governed denominations—which

means they opted for what is at best a constitutionally questionable interpretation of the church plan definition

• ver one that is not constitutionally suspect.
• While the Third and Seventh Circuits gave short shrift to

the IRS’s GCM 39007, the Ninth Circuit gave it Skidmore deference—but then said that the GCM was “unpersuasive” and “based on an obvious misreading of the statutory text.”

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WHAT DOES THIS MEAN IF A PLAN IS NOT A CHURCH PLAN?

• Defined Benefit
• Funding & PBGC
• Annuities
• QDRO
• Defined Contribution
• Welfare Plan

22

WHAT TO DO

• Wait and See
• Correction
• Church Plan Definition (D)
• EPCRS?

23

SUPREME COURT

• What if Supreme Court

decides circuit courts are right?

• Legislation

“grace period”

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