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Jun 2017

U.S. Supreme Court Exempts Church-Affiliated Hospitals from Pension Law


The United States Supreme Court recently held that church-affiliated hospitals do not have to comply with the federal Employee Retirement Income Security Act of 1974 (ERISA), which governs employee pensions. The eight justices ruled in Advocate Health Care Network v. Stapleton that faith-based hospitals’ pension plans qualify for the so-called “church plan” exemption from the ERISA. The main goal of ERISA was to provide uniform, federal regulation of pensions and employee benefit plans (including health care). The Stapleton ruling means that religious-affiliated hospitals and health systems will not have to pay premiums to the Pension Benefit Guaranty Corporation or fully fund their pensions to meet ERISA requirements.

ERISA requires private employers offer pension plans that adhere to rules to ensure plan solvency and protects the employees. Church plans have long been exempt from these federal regulations.

Saint Peter’s HealthCare System (New Brunswick, NJ), Dignity Health (San Francisco, CA), Advocate Health Care (Downers Grove, IL) and approximately three dozen other faith-based health systems have faced lawsuits from current and former employees alleging they are not entitled to the church-plan exemption. Three federal appeals courts ruled against Dignity, Advocate and St. Peter’s, leading to the high court showdown.

If the Supreme Court had narrowed the church plan exemption, it may have spelled the end for Advocate, Dignity and St. Peter’s as they faced funding contributions of possibly billions of dollars a year plus civil penalties for failing to comply with ERISA’s reporting and disclosure requirements. Legal and economic experts said the hospitals could have faced a $4 billion shortfall in their pension funding if the Supreme Court upheld the lower court rulings. In the 11th Circuit case, workers alleged that Dignity Health – the fifth-largest provider of health care in the country – had underfunded its pension plan by $1.2 billion.

In December, the Supreme Court agreed to take up appeals filed by religious-affiliated hospital systems that were accused of underfunding their employee pension plans. Three similar lawsuits were consolidated into one case to go before the Supreme Court. The high court justices were asked to decide if the health systems should be allowed to rely on their church affiliations to avoid complying with ERISA, which requires pension plans to have adequate funding to pay their promised benefits.

The lower courts said each of the three hospital systems — Saint Peter’s HealthCare System, Dignity Health and Advocate Health Care misclassified their pensions as “church plans” exempt from ERISA.

But in an 8-0 ruling issued on June 5, the Supreme Court overturned the lower court decisions that could have cost these health systems billions of dollars combined. Supreme Court Justice Neil Gorsuch did not participate in Monday’s decision, since he joined the court’s bench after arguments were presented in the case.

Supreme Court Justice Elena Kagan, writing for the court, said ERISA’s religious exemption applies to pension plans established by churches themselves and those established by organizations affiliated with churches.

“Because Congress deemed the category of plans ‘established and maintained by a church’ to ‘include’ plans ‘maintained by’ principal-purpose organizations, those plans — and all those plans — are exempt from ERISA’s requirements,” wrote Justice Kagan.

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