Faith in unregulated pensions

For 35 years, faith-based health systems have been exempt from federal regulations governing their pension plans. They need not comply with the Employee Retirement Income Security Act’s disclosure rules, funding requirements and questions about their investments.

But that status quo has come under fire in recent years with a flurry of litigation that systems want the U.S. Supreme Court to take up. If the high court agrees to hear the case, it will determine whether the hospitals are aligned closely enough with their affiliated churches to warrant exemption from ERISA’s requirements.

If the justices choose to revoke those exemptions across the board, pensions at hundreds of religiously affiliated businesses would come under the umbrella of the federal law.

Dignity Health, Advocate Health Care and St. Peter’s Healthcare System have asked the eight justices to review federal appeals court deci- sions that eliminated their church-plan exemptions from ERISA. The three systems maintain that they have close ties with their church backers, their plans are adequately funded and retirees aren’t at risk of lost or cut pension benefits. They are warning the high court that the new regulatory and financial burdens stemming from the litigation could significantly affect their charity-care budgets and overall financial health. “Allowing this gotcha litigation to proceed would come at the expense of destitute citizens of California, Arizona and Nevada who rely on the free care and other free services that Dignity Health provides,” the health system said in its petition to the Supreme Court.

The health systems have been sued by current and former employees with vested claims for benefits under the retirement plans. Although Dignity, Advocate and St. Peter’s all maintain that their plans are adequately funded, the employees have voiced concerns

“The church created new governance structures to ensure that (hospitals) were Catholic and part of the Catholic Church.”

Mark Chopko Chairman Stradley Ronon Stevens & Young

that the health systems are injuring beneficiaries by failing to meet ERISA standards due to long vesting periods, not providing financial reports on the plan’s investments and failing to clarify rights to future benefits.

The lawsuits all contend that faithbased health systems aren’t entitled to church-plan exemptions because they don’t share “common religious bonds and convictions” with their affiliated churches. “A sampling of facts reveals Dignity as a nonprofit healthcare network, not unlike other nonprofit healthcare networks,” the original complaint against Dignity said, and other lawsuits make similar allegations against the other health systems.

Hundreds of millions of dollars are at stake in these lawsuits, according to the health systems. Each putative class action has requested $110 per beneficiary per day in civil monetary penalties for failing to comply with ERISA. Dignity alleges that would make them liable for $7.2 billion in penalties for a single year; the health system’s entire charity care budget for 2014 was $2 billion.

In an era where pensions are an increasingly scarce benefit as employers phase out or terminate their pension plans in favor of 401(k) or other plans, Dignity says eliminating or narrowing the church-plan exemption could have a major impact on those benefits. “The consequences (of eliminating the ERISA exemption) are likely irreversible,” Dignity Health said in its Supreme Court petition. “Some employers may be forced to eliminate their plans altogether and smaller organizations may collapse under the financial burden of retroactive liability, ERISA compliance or both.”

The Supreme Court has yet to decide if it will weigh in on the cases, but legal experts say review is likely, given the growing docket of related faith-based pension suits across the country and the court’s decision to prevent Dignity from coming under ERISA’s jurisdiction until it considers the petitions.

“The Supreme Court sees the landscape, sees how many cases are out there and wants to be able to provide that kind of nationwide guidance on the issue,” said Michael Drew, a partner in Jones Walker’s business and commercial litigation practice group. “Lots of big metropolitan areas are already under a decision that would apply to church-affiliated entities in those jurisdictions.”

Although President-elect Donald Trump’s win could make the Supreme Court more faith-friendly and anti-regulatory in the coming years, faith-based health systems won’t get that relief in this pensions case. The court will decide whether to weigh in on the pension appeals in the next few weeks. If they make it on the docket, arguments will likely happen before the Supreme Court term ends in April, probably before a new justice could reach the bench.

So far, three dozen lawsuits by current and former employees have been filed against faith-based health systems in federal courts. All allege the not-for-profit healthcare organizations aren’t entitled to skirt ERISA require- ments. Three federal appeals courts covering California, Illinois, New Jersey and Pennsylvania have already batted down the church-plan exemptions.

The Internal Revenue Service and U.S. Labor Department have issued more than 500 rulings granting church-plan status to health systems, universities, day-care centers and other church-affiliated businesses over the past 35 years. According to Dignity, Advocate and St. Peter’s, all of those letters won’t be worth the paper they’re written on if the Supreme Court doesn’t step in and back the church-plan exemption.

To qualify for a church-plan exemption, the pension plan must be established and maintained by a church or association of churches. In 1980, Congress amended the exemption to include pension plans maintained by associated organizations, and it has provided church-plan status to hundreds of organizations based on those amendments. But the plaintiffs suing the health systems claim the exemption still requires the church itself to establish the pension plan, and they allege that criteria wasn’t met.

Those arguments are hard to swallow for many health systems, according to Mark Chopko, chairman of Stradley Ronon Stevens & Young’s not-for-profit and religious practice and counsel for the Catholic Health Association. While he acknowledges that the faithbased health industry has changed significantly over time, Catholic hospitals and even large health systems still maintain close ties to their church sponsors.

“The church created new governance structures to ensure that they were Catholic and part of the Catholic Church,” he said.

But establishing those links can be tricky, as churches tend to be organized in a series of ecclesiastically related entities including dioceses, parishes, hospitals and universities.

“That’s just a feature of modern American life,” Chopko said. “By making these decisions as prudent administrators of the church, why does that take us out of the protection of the law? That can’t be what Congress intended.”

Under ERISA, pension plans must be insured and fully funded, which protects those benefits for retirees and beneficiaries. Although Dignity, Advocate and St. Peter’s all maintain that their plans are fully funded, some other faith-based health systems may not be in that same situation; some 1,900 beneficiaries of St. Anthony’s Medical Center in

“There are some advantages of church-plan status. It gives you more flexibility to ensure that your plan is appropriately tailored to your organization and to your ministry.” Sarah Bassler Millar Drinker Biddle

Homewood, Ill., allege in their own pending lawsuit that as much as 40% of their pension benefits were cut after the plan was terminated in 2012.

But a St. Anthony’s-esque situation couldn’t happen at St. Peter’s, according to the health system’s attorney Jeffrey Greenbaum. The head of Sills Cummis & Gross’ classaction practice group said St. Peter’s pension plan isn’t considered at risk and is at least 80% funded.

“The point is the church-plan exemption was to protect agencies of the church, which are vital to the mission of the church,” Greenbaum said. “These cases will impact every sized school or hospital affiliated with the church.”

If the Supreme Court does eliminate or narrow the church-plan exemption, faith-based health systems will have to bring their pension plans up to the federal law’s substantial funding, vesting and regulatory requirements. The financial implications alone could cause many systems to freeze or eliminate their pension plans entirely.

The federal law also requires businesses to pay premiums to the Pension Benefit Guaranty Corp. to insure their plan’s benefits. While that can provide beneficiaries with some protection, it can also siphon funds away from pension investments or other uses.

“There are some advantages of church-plan status,” said Sarah Bassler Millar of Drinker Biddle. “It gives you more flexibility to ensure that your plan is appropriately tailored to your organization and to your ministry.”

But the Pension Benefit Guaranty Corp., or PBGC, is in rough shape itself, according to Tess Gee of Miller & Chevalier. As a “chronically underfunded” agency that consistently claims it’s on the verge of insolvency, the PBGC may face significant challenges if it has to insure a wide range of faith-based pension systems with varying funding levels. “It escalates the problem,” she says.

Eliminating the church-plan exemption could also trigger a new wave of First Amendment litigation from faithbased entities as they potentially have to provide benefits for same-sex partnerships or other issues that could infringe on their religious beliefs, Gee said. “We’re just dealing with the very tip of the iceberg.”