by Shalina Ann Schaefer and Tara Schulstad Sciscoe
Ice Miller is an IMA member law firm…
On June 5, 2017, the Supreme Court unanimously held in favor of three religiously-affiliated hospitals, each of which claim the church plan exemption from the Employee Retirement Income Security Act of 1974 (ERISA). In Advocate Health Care Network v. Stapleton, the Supreme Court ruled that ERISA’s definition of “church plan” extends to a plan maintained by a church-related entity—referred to by the Court as a “principal-purpose organization”—regardless of who established the plan. The ruling put to rest the question of whether a church plan must be established by a church in order to be exempt from ERISA and provides welcome relief to many church plan sponsors. Nonetheless, the Supreme Court’s decision did not rule on two significant issues that remain to be decided by the lower courts: first, whether the hospitals are sufficiently “associated with” their respective churches to claim church plan status, and second, whether the hospitals’ internal benefits committees or boards qualify as “principal-purpose organizations” within the meaning of the ERISA church plan exemption.
In light of the Supreme Court’s ruling, hospitals, colleges, and universities, home health care centers, and other sponsors of church plans should review their association with their churches, as well as the structure of their principal-purpose organizations. The Stapleton decision, while significant, is not the end of this discussion, and plan sponsors should work now to ensure their best footing in the face of potential future legal challenges.
SUPREME COURT RULING
The central question before the Supreme Court in Stapleton was whether a church must have originally established the plan for it to qualify as a church plan, or alternatively, whether it is enough that a principal-purpose organization maintains the plan. The lower courts interpreted the statute as requiring a church to have established the plan for it to qualify as a church plan, meaning that a principal-purpose organization could maintain a church plan, but only if that plan was originally established by a church. The Supreme Court unanimously reached a different conclusion: that the language added by Congress in 1980 was intended to expand the definition of church plan to any plan maintained by a principal-purpose organization, regardless of who established it.
The Supreme Court did not address two important additional questions related to the church plan analysis. These questions will almost certainly be litigated by future plaintiffs against church-related organizations that establish and maintain church plans. The Court also did not decide the case on constitutional grounds, leaving open the opportunity for plaintiffs’ counsel to continue to make the argument that the church plan exemption from ERISA is itself unconstitutional under the First Amendment’s Establishment Clause.
What type of organization qualifies as a principal-purpose organization?
The question of whether the hospitals’ internal benefits committees or boards properly qualify as “principal-purpose organizations” was not before the Court, and therefore, the Court declined to express any view on this issue. The IRS position, as reflected in several private letter rulings, is that a retirement committee that has administration of the plan as its principal purpose can be a principal-purpose organization. Following the Stapleton decision, plaintiffs’ counsel are expected to shift their focus to challenging the position that the hospitals’ internal benefits committees or boards are principal-purpose organizations.
Is the organization maintaining the plan controlled by or associated with a church?
A statutory requirement of the principal-purpose organization is that it be either controlled by or associated with the church for which it is administering the plan. Again, this question was not before the Court in Stapleton, so the Court proceeded on the assumption that the hospitals were sufficiently associated with their churches to qualify as principal-purpose organizations that could maintain a church plan. Going forward, we expect challenges by plaintiffs’ counsel related to this requirement as well.
What does it mean to be controlled by a church?
An organization is controlled by a church if a majority of its officers or directors are appointed by the church’s governing board or by officials of a church. When determining whether an organization is controlled by a church, the IRS has considered certain factors including:
- Whether the church has the power to appoint and remove officers or members of the organization’s board
- Whether the organization’s articles of incorporation or by-laws provide that some or all of the officers or board members are limited to members of the church
- Whether the church approves the budget of the organization
What does it mean to be associated with a church?
An organization is associated with a church “if it shares common religious bonds and convictions with that church.” ERISA § 3(33)(C)(iv). The Department of Labor has interpreted this to mean that, under the facts and circumstances, the organization adheres to the tenants and teachings of the church. When determining whether an organization is associated with a church, the IRS has considered certain factors including whether the organization:
- Operates under church principles or under articles of incorporation and by-laws that require the organization to incorporate in its policies and practices the moral teachings of the church
- Carries out the functions of the church, has a mission parallel to the church, or sponsors activities designed to support the religious mission of the church
- Employs a chaplain or maintains a chapel where services and sacraments are conducted
- Requires or offers religious instruction or a religious curriculum
- Requires written verification from employees or students of their agreement to abide by the religious directives of the church
- Receives significant financial support from the church
- Grants preferential admission status to members of the church or practices preferential hiring of church members for faculty positions
- Is organized exclusively for charitable or religious purposes
- Enrolls a significant number of student members of the church, involves a majority of church members in its operations, or has a majority of church members on its board
- Operates under by-laws or articles of incorporation that grant the church an official role in the governance of the organization or an influence over the direction of the organization
- Provides for a reversion of its assets to the church in the event of the dissolution of the organization
This analysis is very fact-sensitive. However, the IRS has given particular weight to the factors regarding board control and financial support. The IRS has also frequently found that the listing of an organization in an official church directory is a significant, but not determinative, factor.
The courts are not bound by past agency interpretations and may review challenges on the status of a principal-purpose organization without deference to the private letter rulings that many entities have received for church plan status. Nonetheless, IRS and Department of Labor interpretations provide plan sponsors with useful guidelines to evaluate whether a church-related entity participating in a church plan is controlled by or associated with that church.
ACTION ITEMS FOR CHURCH PLAN SPONSORS
Regardless of whether or not an organization has a current private letter ruling as to church plan status, a church plan sponsor should review its administrative and governance structure to assess whether the requirements for church plan status are being satisfied and whether any steps should be taken to strengthen its reliance on the church plan exemption.
- Review the organization’s relationship with a church. Some organizations were originally controlled by or strongly associated with a church, but over time those bonds may have relaxed. In some circumstances, organizations may have splintered from a denomination, and although faith-based, no longer have an association with a church within the meaning of the Internal Revenue Code. Organizations should review their relationship with a church to determine the strength of those bonds, and, if necessary, consider taking action to solidify those bonds or reconsider reliance on church plan status.
- Review plan administration. Church plans must be maintained by either a church or a principal-purpose organization. While the precise parameters of the definition of “principal-purpose organization” will undoubtedly be subject to ongoing litigation, it most certainly requires a formal structure for administering the plan. Organizations that administer their church plan through their human resources departments should take steps now to adopt and implement a benefits committee or board that has the primary purpose of maintaining the church plan and that reflects the committee’s or board’s control by or association with a church. Organizations that have existing benefit committees or boards that serve as the principal-purpose organization should review those committees or boards to ensure that the governing documents and structure best support the committee’s or board’s control by or association with a church.
- Review plan documents. Church plan sponsors should review their plans and plan-related documents, such as trusts and vendor agreements, to ensure that they support church plan status and the organization’s relationship with the church. In particular, church plan sponsors should ensure that vendor-provided plan documents do not contain standard ERISA language or adopt standards that do not apply to church plan sponsors. Additionally, plan and trust documents should reflect the organization’s association with the church so there is clear and consistent documentation of this association.
Note that although the litigation to date has focused on hospitals and their defined benefit plans, the implications apply to all organizations that rely on church plan status, including colleges and universities, day care centers, home health care centers, and other religiously-affiliated organizations. Moreover, although the litigation has focused on defined benefit pension plans, all types of employee benefit plansare impacted by church plan status, including 401(k) and 403(b) defined contribution plans, 457 deferred compensation plans, and health and welfare plans. In other words, regardless of the nature of the organization or the plan type, organizations that rely on church plan status should consider taking the above action steps.
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