On December 12, 2013, the U.S. District Court for the Northern District of California ruled in Rollins v. Dignity Health that a pension plan sponsored by a large tax-exempt health care system does not satisfy ERISAs exemption for church plans.
In denying Dignity Healths motion to dismiss, the court rejected the committee model for church plan sponsorship, which is relied upon by a number of tax-exempt organizations such as hospitals and universities that are affiliated with churches. The court agreed with the plaintiffs contention that while a church-affiliated entity may maintain an ERISA-exempt church plan, only plans established directly by a church or convention of churches qualify as church plans. This case has important implications for sponsors of church pension plans that are not churches and rely instead on the committee model.
BackgroundFive substantially identical lawsuits have been filed against large health care systems, challenging their pension plans status as church plans. These cases attack the committee model, raise constitutional arguments, and allege that the defendants do not satisfy the exemptions requirement of church association because, due to certain aspects of their operations, they do not share common religious bonds and convictions with a church. In Dignity Health, the court held that the committee model is not supported by the language of ERISA and therefore did not address either of the plaintiffs other two arguments.
The courts ruling
The committee model for church plan sponsorship which the court struck down is widely relied upon, and has been upheld by decades of IRS and DOL rulings (as well as previous court holdings). The committee model is based on ERISA §3(33)(C)(i), which provides in relevant part that:
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 the principal purpose or function of which is the administration or funding of a plan 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. (Emphasis added)
The Dignity Health court held that although an organization whose principal purpose is the administration or funding of the plan (i.e., the committee) may maintain a church plan, the plan must still be established by a church or convention of churches. To rule otherwise, the court opined, would violate principles of statutory construction and render meaningless §3(33)(A) of ERISA, which contemplates church establishment. The ruling indicates that since the principal purpose or function of Dignity Health is not the administration or funding of a plan (but rather, its principal purpose is to provide health care services), it would not qualify as the type of organization that §3(33)(C)(i) would allow to maintain a church plan. The court rejected the notion that a committee or subcommittee of Dignity Health could be relied upon as the organization contemplated by the statute.
The courts holding conflicts with the regulatory guidance noted above and the holdings of other courts which permit the establishment and maintenance of a church plan by a tax-exempt entity controlled by or associated with a church, so long as a church plan committee that satisfies the organization requirement is in place (note that the ERISA provision set forth above begins with the language (a) plan established and maintained for its employees by a church or by a convention or association of churches includes ) The court was not persuaded by these contrary authorities. It held that IRS letter rulings are not entitled to judicial deference and that conflicting court rulings utilized flawed approaches.
The practical effect of the ruling on church plan sponsorship will depend on whether the courts reasoning is applied in other jurisdictions and if the 9th Circuit Court of Appeals affirms the holding. In the meantime, the decision is likely to embolden plaintiffs attorneys to file similar cases against sponsors of other plans that have, until now, been treated as ERISA-exempt church plans.
Dignity Health and the other four lawsuits seek as relief that the pension plans be brought into compliance with ERISA and that the plans make whole any losses to participants, as well as the payment of civil penalties and attorneys fees for the plaintiffs. To the extent the Dignity Health ruling is upheld and/or its approach is followed by other courts, the financial implications for sponsoring employers may include funding the plans to meet IRS-mandated levels, payment of PBGC premiums, and paying losses to participants allegedly harmed by plan terms and operations less favorable than those required by ERISA. Employers who may be affected by this issue should continue to monitor these developments closely with the assistance of legal counsel.
Mark E. Furlane is a partner in the labor & employment practice of Drinker Biddle. He can be reached at 312.569.1322 or at firstname.lastname@example.org. Joshua J. Waldbeser is an associate in Drinker Biddles employee benefits & executive compensation practice. He can be reached at 312.569.1317 or at Joshua.email@example.com.
Register or login for access to this item and much more
All Employee Benefit Adviser content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access