Church Plan Litigation is Headed for a Standoff in the Circuit Courts (or Beyond)

This article originally ran on June 17, 2014.

By Thomas E. Clark Jr.

In the spring of 2013, a nationwide wave of class action lawsuits were filed against five large hospital systems claiming affiliation with the Catholic Church. The claims were all the same: The defined-benefit pension plans sponsored by the hospitals were not eligible for the church plan exemption under ERISA. As a result, the hospitals were violating nearly every provision of ERISA because the plans were being operated as non-ERISA plans. In total, the cases alleged that the plans were underfunded on a combined basis of more than $3 billion that resulted from the plans not following ERISA’s minimum funding rules. Since then, two additional cases have been filed — including one very recently, on June 2, 2014.

During the last year, we have had substantive decisions in three of the cases on what the scope of the church plan exemption should be. Two decisions have been decided in favor of the plaintiffs and one in favor of a hospital. The decision friendly to the hospital agreed with longstanding IRS interpretations that a church or an organization controlled by or associated with a church can establish and maintain a church plan. The decisions that favor the plaintiffs disagree and find that only a church can establish a church plan, while organizations controlled or associated with a church cannot establish church plans but can maintain them as long as the plans were first established by churches.

Following is a summary of the cases and their current status.

Rollins v. Dignity Health  

  • Filed April 1, 2013 in the Northern District of California 
  • Alleged $1.2 billion underfunded
This was the first case to have a substantive decision. The court ruled that the hospital plan cannot be a church plan as a matter of law and thus is fully subject to ERISA. The court rejected longstanding IRS interpretations of the church plan exemption, finding that only a church can establish a church plan, although an associated organization can maintain a plan if it was first established by a church.

The hospital then sought permission to immediately appeal the decision to the 9th Circuit U.S. Court of Appeals, but this was rejected by the district court. The parties have filed cross motions for summary judgment, which remain pending.

Kaplan v. Saint Peter’s Healthcare System 

  • Filed May 7, 2013 in the District of New Jersey
  • Alleged $77 million underfunded
This was the second case to have a substantive decision. Largely in agreement with the favorable decision to the plaintiff in Rollins v. Dignity Health, the court found that church plans can only be established by churches, that the hospital was not a church, and that as both a matter of fact and of law, the plan was subject to ERISA. Notable here is that the plan had complied with ERISA since its inception in 1974 and only sought an exemption letter from the IRS in recent years. While the case was pending, the IRS issued a letter granting the exemption on the papers without a hearing being held. Also unique to the cases, there is a very vocal group of participants in the plan, including former executives of the hospital and fiduciaries to the plan, who are fighting in favor of the plaintiffs and against the hospital and its church plan status. The hospital currently has a motion pending requesting an immediate appeal to the 3rd Circuit U.S. Court of Appeals. The parties also have cross motions for summary judgment pending.

Overall v. Ascension Health 

  • Filed March 28, 2013 in the Eastern District of Michigan
  • Alleged $444 million underfunded
In the first major win for the hospitals, the court disagreed with the decisions in the cases against Dignity Health and Saint Peter’s. The court, while failing to address and rectify the “establish” vs. “maintain” distinction from the earlier decisions, found that the only proper way to read the statutory language is to agree with the longstanding IRS interpretation — that is, while a church plan can be established and maintained by a church, a church plan can also be established and maintained by an organization that is either (1) controlled by or (2) associated with a church or convention of churches. The case was dismissed and the plaintiffs have already filed their notice of appeal to the 6th Circuit U.S. Court of Appeals.

Chavies v. Catholic Health East 

  • Filed March 28, 2013 in the Eastern District of Pennsylvania
  • Alleged $438 million underfunded
Shortly after oral arguments were held on the hospital’s motion to dismiss, the court denied the motion without prejudice and allowed 120 days of discovery on the issue of whether the hospital itself is a church as defined by ERISA and the Internal Revenue Code. The court did not provide any further justification in its order. After discovery has concluded, the defendants will be free to file another motion to dismiss or a motion for summary judgment.

Medina v. Catholic Health Initiatives 

  • Filed May 10, 2013 in the District of Colorado
  • Alleged $892 million underfunded 
Just six days after the hospital filed a motion to dismiss, the court entered a sua sponte order (meaning “of his, her, its or their own accord”) converting the motion to a motion for summary judgment based upon the court’s jurisdictional issues being intertwined with the merits of the case. The effective outcome is that before any issues of law or fact can be decided by the court, the plaintiffs are entitled to take discovery (i.e., request documents and take depositions). As of this writing in mid-June, the discovery and motions practice is ongoing.

Stapleton v. Advocate Health Care Network 

  • Filed March 17, 2014 in the Northern District of Illinois
  • No underfunding allegation included in the complaint
The hospital has filed a motion to dismiss, which is currently pending. It is worth noting that this case differs from the previous five in that it does not involve a hospital alleged to be affiliated with the Catholic Church, but instead the United Church of Christ and the Evangelical Lutheran Church in America. Additionally, the plan at issue here is different than the previous five in that it is a cash balance plan rather than a traditional defined benefit pension plan.

Owens v. St. Anthony Medical Center, Inc. 

  • Filed June 2, 2014 in the Northern District of Illinois
No motion has yet been filed at this early stage of the case. In a departure from the previous cases, the defined benefit pension plan at issue here is no longer active, but was terminated in 2012. At that time, participants’ promised benefits were reduced by 40 percent because of underfunding. Notably, like the plan at issue in the case against Saint Peter’s, the plan at one time complied with ERISA prior to seeking a church plan exemption from the IRS. In 1989, the IRS found that plan qualified as a church plan because it was managed by a retirement committee that was controlled by the two defendants, which were themselves controlled by the Catholic Church.

Conclusion

The issue of how expansive the church plan exemption to ERISA should be is now headed to the circuit courts, with the plaintiffs filing their notice of appeal to the 6th Circuit U.S. Court of Appeals in the case against Ascension Health. Before the end of the year, there is a strong possibility we will have additional appeals to the 9th and/or 2nd Circuits from the cases against Dignity Health and Saint Peter's respectively. Given the mutually exclusive policies at issue in these lawsuits of protecting participants under ERISA and not intrusively regulating religious organizations, it seems these cases may eventually head to the Supreme Court for resolution unless congressional action happens first.

Thomas E. Clark Jr., is a partner in the Employee Benefits and Executive Compensation Group of The Lowenbaum Partnership LLC. Previously he served as chief compliance officer, director of fiduciary oversight and general counsel at FRA PlanTools. He continues to serve as editor-in-chief of the popular FiduciaryMatters blog, a collaborative effort of The Lowenbaum Partnership and FRA PlanTools. 

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