Religious exemption at heart of employee pension disputes

A trio of cases pending before the Supreme Court of the United States, which could require more than $1 billion in new funding for certain employee pension plans, revolves around a central question: What is a church?

The disputes all take aim at a section of the Employment Retirement Income Security Act of 1974 that exempts churches from its reporting and funding requirements. As such, these pension plans are not protected by the Pension Benefit Guaranty Corp., so employees are at risk of losing their retirement savings.

Four current and former employees of Advocate Health Care Network were concerned enough about their future financial stability that they filed a class-action lawsuit alleging their employer has, among other things, underfunded the company pension, in violation of ERISA.

Advocate countered it does not have to meet ERISA mandates because it qualified for the exemption under the church-affiliated language in the statute.

The U.S. District Court for the Northern District of Illinois disagreed, denying Advocate’s motion to dismiss. On appeal, the 7th Circuit Court of Appeals affirmed in Maria Stapleton, et al. v. Advocate Health Care Network, An Illinois Non-Profit Corporation, et al., 15-1368. Now the case, plus cases from the 3rd and 9th Circuits, will appear before the eight justices March 27.

While district courts have struggled with the exemption issue, the rulings from the three circuits are the first time the appellate courts have addressed the matter. All three circuit panels considered very similar cases and reached the same conclusion — the defendant-employers should not be excused from the ERISA requirements because their pension plans had not been established by a church.

“The Supreme Court review of this case is very puzzling to me because all three appellate decisions were consistent with one another,” said Mark DeBofsky of DeBofsky Sherman & Casciari P.C. in Chicago, who represents employees in benefits and disability insurance cases. “These are the only rulings on point on this issue.”

If the Supreme Court sides with the circuits, DeBofsky contends that will give employees more protection for their retirement savings. Going against the circuits would give employers who can claim the exemption carte blanche to breach their promises.

However, Sam Schwartz-Fenwick, partner in the labor and employment practice group of Seyfarth Shaw LLP in Chicago, sees the need for the justices to weigh in to settle the constitutional question of how far the government can step into church matters.

“I think it’s a really important issue, so I’m glad the Supreme Court granted cert to provide clarity,” he said. “I think there’s a real need for uniformity and one voice in what the plans need to be ERISA-compliant.”

Key question

The 7th Circuit said the sole question of Stapleton was “whether Advocate’s plan is a church plan as defined by ERISA.”

When Congress enacted the Employee Retirement Income Security Act, it set requirements on pension plans so workers would have their retirement savings available when they reached 65 years of age. Among the safeguards in ERISA is the insurance provided by the Pension Benefits Guaranty Corp., which covers the employees if a pension is underfunded or defaults.

Congress carved out a narrow exemption for church plans that alleviated religious groups from the costs of ERISA compliance and allowed these pensions to operate without much government oversight. In exchange, the plans did not have the protections provided by the Act.

Still, some churches were worried their plans would not qualify for the exemption because even though they had established it, the pension was maintained by a third party. In 1980, Capitol Hill revisited ERISA and broadened the language to extend the exemption to cover church plans that were overseen by another entity.

Parties’ arguments

Stapleton and her colleagues claim Advocate does not meet the standard for the ERISA exemption. They assert the hospital is not controlled by or associated with a church so it has to, among other things, fund the plan at sufficient levels, file reports related to benefits, and put the plan’s assets in a trust that meets statutory requirements.

Advocate maintains it meets the exemption requirements because it is affiliated with the United Church of Christ and the Evangelical Lutheran Church in America.

The hospital was formed in 1995 by the merger of Lutheran General Health System and Evangelical Health Systems. Today, it generates annual revenue of $4.6 billion and employs 33,000 people among 12 hospitals and more than 250 inpatient and outpatient health care locations.

7th Circuit ruling

The Chicago panel did an exhaustive analysis of the exemption in the ERISA statute. It found the amendment added a section that defines the church plan exemption as, “A plan established and maintained for its employees by a church or by a convention or association of churches includes a plan maintained by an organization” outside of the religious body.

Advocate interpreted the language broadly. It argued the amendment allowed that since a church-affiliated organization maintains the plan, it meets the exemption requirement even if the organization did not establish the pension.

Writing for the court, Judge Ilana Rovner said Advocate’s position has a fatal flaw.

“If a plan could qualify solely on the basis of being maintained by a church-affiliated organization, the ‘established by a church’ requirement … would become meaningless,” she wrote. “… Advocate’s reading, therefore, violates the cardinal rule of statutory interpretation that every word and clause must be given meaning.”

At the Supreme Court

In its petition for writ of certiorari, Advocate asserted the three circuit courts upended 30 years of settled law. Moreover, the Internal Revenue Service, along with the Department of Labor and the Pension Benefit Guaranty Corp., all interpreted the exemption as covering church-affiliated businesses such as hospitals, schools and retirement homes.

Plaintiffs and defendants also argue violations of the Establishment Clause of the First Amendment. The plaintiffs contend that by enabling religious organizations to be exempt from ERISA, the state is establishing a religion. The defendants make the opposite assertion; by limiting the scope of the amendment, civil authorities would have to unconstitutionally peer into a religious institution’s internal business to determine if the entity meets the exemption requirements.

Schwartz-Fenwick said the defendant’s constitutional argument was the most persuasive. It is not proper for “the courts to make value judgments about what is a church and what is not a church,” he said.

DeBofsky pointed to the marketplace and noted the exemption is giving some businesses a competitive advantage. Advocate serves the same patient population as other non-religious hospitals and receives insurance reimbursements for care. However, they do not have the same financial obligations for their employees’ pension.

“We have a pension crisis in this country,” he said. “The more security people have in their retirement savings, the better off we all are.”•