A retirement plan that qualifies as a church plan under ERISA and the Internal Revenue Code is exempt from a variety of important provisions of these statutes. A church plan is not covered by ERISA’s minimum funding rules, reporting and disclosure requirements, spousal rights requirements, and, for defined benefit plans, the payment of premiums to the Pension Benefit Guarantee Corporation.
However, whether a plan is a church plan or not is not always so clear. Over the last three years, a series of lawsuits have questioned whether the retirement plans of church affiliatedorganizations (such as hospitals and health care providers) were correctly being treated as church plans exempt from ERISA. In Kaplan v. St. Peter’s Healthcare System, issued on December 29, 2015, the U.S. Court of Appeals for the Third Circuit considered this question, and it concluded that the definition of “church plan” under ERISA is to be read narrowly.
The issue stems from the language in ERISA that creates the exemption. Under ERISA Section 3(33)(A), a “church plan means a plan established and maintained...for its employees (or its beneficiaries) by a church or a convention of churches which is exempt from tax” under IRC section 501 (emphasis added). That part is relatively straightforward. But the statute also provides that a church plan includes a plan maintained by a certain church affiliated organizations that are controlled by or associated with a church or a convention or association of churches. This part of the definition omits the term “established”. The question before the court was whether the ERISA exemption covers retirement plans that are established by the church affiliated organization, as opposed to established by the church itself.
The Third Circuit found that the plain meaning of ERISA provides that only retirement plans established by a church can meet the definition of church plan. While a plan that covers employees in a church affiliated organization can be maintained by that organization, it could not be established by it. To qualify for the exemption, the church must have established the plan of the affiliated organization.
The Third Circuit’s decision did not only rely on an interpretation of the statutory language. Although St. Peter’s Healthcare System argued that the legislative history of the church plan exemption supported its view for a broader definition of church plan, the court read the legislative history as demonstrating Congress’ desire for a narrow exemption. And the court found the fact that the IRS has for many years issued “at least several hundred” church plan exemptions based on the broader reading of the statute to be completely unpersuasive. It is interesting to note that St. Peter’s Healthcare System itself had received a ruling from the IRS stating that it was a church plan.
This is potentially a very significant ruling for tax-exempt entities that are affiliated with churches and believe that they are maintaining church plans, such as hospitals and schools. If the Third Circuit view prevails, all such entities will need to review whether they are in fact subject to the church plan exemption from ERISA, even if they have a favorable ruling from the IRS. However, there are six other district courts that have issued opinions on this question, split three-to-three on how the statute should be read. It is very likely that other Courts of Appeals will be asked to decide the issue, and if another circuit disagrees it is possible that the Supreme Court will need to answer the question. In the meantime, church plans should keep a close watch on the developments in this area.
© Boutwell Fay LLP 2016, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of February 29, 2016.
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