Religiously-affiliated hospitals and other organizations could owe billions of dollars if the high court upholds appellate court rulings that pensions aren’t exempt from ERISA.

Dec. 13—A recent U.S. Supreme Court decision to hear the pension law appeals of three religiously affiliated hospital systems could spark financially damaging consequences in the hospital industry and beyond, say pension law experts.

The court agreed Dec. 2 to hear cases involving hospital pension plans, consolidating class action lawsuits filed against Advocate Health Care, St. Peter’s Healthcare, and Dignity Health. The lawsuits, which were upheld by three federal appeals courts, turn on an interpretation of the 1974 Employee Retirement Income Security Act (ERISA) law. That law applies to employers that offer pensions and other health benefit plans to employees. However, the law provides an exemption for “church plans.” 

The legal challenge centers around which plans qualify as “church plans.”  While the federal appeals courts upheld the employee lawsuits, district courts around the country have split in their decisions. Further complicating the matter, since the early 1980s the IRS has ruled that pension plans established by employers of religiously affiliated organizations, such as hospitals, schools, nursing homes, and social services organizations, also may qualify as church plans.

More than two-dozen similar lawsuits against hospitals and health systems are pending the Supreme Court decision. At broader issue are the pensions of hundreds of thousands of employees and retirees of religiously affiliated hospitals, nursing homes, schools and social services organizations that have relied on IRS guidance to opt out of federal pension regulations and obligations under ERISA.

Since 1983, the IRS has interpreted an exemption as allowing “church agencies” in plans established by churches to include pension and other employee benefit plans that were created by schools, hospitals and other tax exempt, organizations affiliated with churches. Employees filing a recent lawsuit characterized the IRS decision as a misinterpretation.

Beginning in 2013, groups of hospital employees and retirees filed a series of high profile class-action lawsuits claiming their employer health systems underfunded their pension plans. Some of country’s biggest health systems have since settled the lawsuits, which resulted in settlements, including some that ranged from $100 million to $300 million.

Thought Settled

Mark Chopko, an attorney at Stradley Ronon Stevens & Young and outside counsel for the Catholic Health Association, said that organization has filed a friend of the court brief supporting the health systems.

“There is a lot of head-scratching gone on here,” Chopko said in an interview.  “Most people thought this issue was settled by legislation in the 1980s. From the institutions’ perspective, this is what the law always was.”

Chopko said the cost to those organizations is potentially billions of dollars if the court rules against the hospitals.

Since the 1980 legislation was enacted, the IRS has issued more than 500 determinations that pension plans operated by a religious charity are “church plans” exempt under ERISA.

“If you can’t rely on the government, who can you rely on? The exemption is engrained in the practical day-to-day operations of religious organizations around the country,” Chopko said.

Karen Ferguson, director of the consumer organization, the Pension Rights Center, said the case affects the retirement security of hundreds of thousands of current and former employees at hospitals, social services agencies, educational institutions, and other religiously-affiliated nonprofit organizations whose pension plans were not established by a church.

“The reality is that there are no religious reasons for stand-alone religiously-affiliated hospitals, schools, or social services agencies to seek an exemption from ERISA for their pension plans,” the Pension Rights Center wrote in an amicus brief supporting the hospital employees. “The only reasons employers have to request church plan rulings are to save large sums of money at the expense of the retirement security of their hard-working, loyal current and former employees.”

Ferguson said some hospital employees are fearful that amid hospital consolidations, pensions not backed by ERISA may not protect employees.

If the Supreme Court sides with the employees, the hospitals will be required to follow ERISA law, pay insurance to a federal pension agency, the Pension Benefit Guaranty Corp., and fully fund their plans according to federal regulations. Ferguson said the hospitals and health systems with cases before the court followed ERISA law for years, even decades, before seeking the “church plan” exemption from ERISA.

“Many not-for-profit hospitals competing with religious affiliated rivals may feel at an unfair competitive advantage, because they have to comply with ERISA and fully fund their plans,” Ferguson said in an interview. “What’s really unfair is that hospitals took advantage of a misinterpretation of law by the IRS.”

G. Daniel Miller, an attorney with Conner & Winters, who was an architect of the 1980 amendment to ERISA and a church benefits specialist, speculated that if the court didn’t step in to resolve the “church plans” exemption, there would be more lawsuits and uncertainty.

“The justices need to weigh in,” Miller said in an interview. “If the 3rd, 7th and 9th Courts of Appeal are right and church-affiliated organizations cannot establish church plans, it will open up a giant can of worms. There’s a lot at stake here--potentially billions of dollars.”

Miller said if the court sides with employees against the hospitals, it would require congressional legislation to provide a transition period for these plans.

“It would create such a giant compliance problem,” Miller said.

Miller said the pension plans of the hospital plaintiffs are fully funded, though not to ERISA standards.  

“Most of these hospitals and health systems have tax exempt bonds and to qualify, they must have all their bills paid up,” Miller said. “So there is a strong incentive to fund plans to make sure those bond covenants are met.”

Possible Middle Ground?

At least one attorney predicted the court’s decision to intervene will favor the hospitals.

David Godofsky, an attorney at Alston Bird, said that at least four of the current justices believe that the lower courts may have erred in their rulings.

“Typically, the judges don’t take on cases when they think the lower courts got it right,” Godofsky said in an interview. “The questions is will they come in with a broad or narrow ruling? I would guess they’d overturn in favor of the plaintiff hospitals and what the Supreme Court decides will be settled law around the country.”

Godofsky said there is a middle ground.

“They could agree with plaintiffs that the hospitals don’t qualify as church plans, but acknowledge that under the clear policies of the IRS and its rulings, they were considered church plans and starting today, would need to comply with ERISA,” Godofsky said, “But not retroactively. Courts balance risks and harms all the time.”

The cases will be argued in March or April of 2017. 

Mark Taylor is a freelance writer based in Chicago.  

Publication Date: Tuesday, December 13, 2016