Faith-based hos­pi­tals could lose decades-old ERISA ex­emp­tions

Modern Healthcare - - NEWS - By Erica Te­ichert

For 35 years, faith-based hos­pi­tals have been ex­empt from fed­eral pen­sion reg­u­la­tions im­posed on their sec­u­lar com­peti­tors that in­clude hefty in­sur­ance pre­mi­ums to safe­guard em­ploy­ees’ re­tire­ment ben­e­fits. But the U.S. Supreme Court will soon weigh in on whether they’ll keep that com­pet­i­tive ad­van­tage.

The high court last week con­sid­ered three cases that ques­tion whether faith­based health sys­tems—rang­ing from large providers like Dig­nity Health and Ad­vo­cate Health Care to one-hospital sys­tems like St. Peter’s Health­care Sys­tem of New Jersey—should be ex­empt from the Em­ployee Re­tire­ment In­come Se­cu­rity Act. The court’s de­ci­sion, which will be re­leased by late June, could cost faith-based or­ga­ni­za­tions bil­lions of dol­lars and af­fect the re­tire­ment ben­e­fits of more than a mil­lion work­ers across the coun­try.

“Just from plan as­set size, sev­eral of my clients be­tween them have over $10 bil­lion in plan as­sets,” said Howard Shapiro, a part­ner at the law firm Proskauer Rose and an ERISA ex­pert. “This is a ma­jor is­sue for th­ese re­li­giously af­fil­i­ated hos­pi­tals.”

Un­der ERISA, all pri­vate em­ploy­ers ex­cept faith-based or­ga­ni­za­tions must fully fund their pen­sions, pay pre­mi­ums to the Pen­sion Ben­e­fit Guar­anty Corp. and com­ply with the law’s dis­clo­sure re­quire­ments. In the 1980s, Congress ex­panded the church plan ex­emp­tion to in­clude the pen­sion plans of church-af­fil­i­ated or­ga­ni­za­tions af­ter the In­ter­nal Rev­enue Ser­vice de­nied an ex­emp­tion to Lit­tle Sis­ters of the Poor in the 1970s.

But are the hos­pi­tals re­ally arms of their found­ing churches? Three fed­eral ap­peals courts have said they’re not, nix­ing long-stand­ing IRS, PBGC and La­bor Depart­ment poli­cies for go­ing be­yond what Congress in­tended with the church plan ex­emp­tion and provid- ing com­pa­nies a reg­u­la­tory loop­hole if they have seem­ingly tan­gen­tial con­nec­tions to churches.

“I don’t think any­one would say there’s no con­nec­tion be­tween a church agency and a church,” said Tess Gee, an ERISA at­tor­ney at Miller & Che­va­lier. “But is a church agency a church? I think for a lot of le­gal rea­sons it’s not.”

While churches re­ceive spe­cial treat­ment un­der the law to pro­tect their re­li­gious rights, Gee noted that church agen­cies are treated dif­fer­ently un­der tax law and other reg­u­la­tions.

Some of the eight jus­tices on the Supreme Court bench ex­pressed sim­i­lar skep­ti­cism dur­ing oral ar­gu­ments, even though the fed­eral gov­ern­ment has asked the court to keep the ERISA ex­emp­tion in place.

Jus­tice So­nia So­tomayor noted that Dig­nity Health, one of the na­tion’s largest health sys­tems, isn’t even for­mally af­fil­i­ated with the Catholic Church, al­though por­tions of the com­pany were es­tab­lished by nuns.

“Do you be­lieve that Congress’ vi­sion was to let, what is es­sen­tially a cor­po­rate en­tity, opt out of pro­tect­ing all of those em­ploy­ees?” she asked.

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 that the 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. More than 30 sim­i­lar cases are pend­ing against other faith­based health sys­tems in fed­eral courts across the coun­try.

Still, the jus­tices rec­og­nized that the IRS, La­bor Depart­ment and PBGC re­as­sured faith-based or­ga­ni­za­tions hundreds of times over 35 years that they were not sub­ject to ERISA. Al­though the em­ploy­ees su­ing Dig­nity, Ad­vo­cate and St. Peter’s have asked for tens of bil­lions of dol­lars in civil penal­ties for ERISA vi­o­la­tions, that type of award is un­likely and the re­quest con­cerned Jus­tice Sa­muel Al­ito.

But com­ing into com­pli­ance with ERISA could take six months to a year for faith-based or­ga­ni­za­tions, even if their pen­sion plans are funded up to the law’s stan­dards, Gee said. All of the or­ga­ni­za­tions would need to eval­u­ate their plan fund­ing lev­els and make any nec­es­sary catch-up con­tri­bu­tions, cre­ate new dis­clo­sure mech­a­nisms, iden­tify plan fidu­cia­ries and con­duct a full plan au­dit. It’s un­clear whether some faith-based health sys­tems, es­pe­cially smaller providers like St. Peter’s, might freeze or elim­i­nate their plans en­tirely due to the reg­u­la­tory bur­den.

“The ad­min­is­tra­tive part of deal­ing with the plan and the re­port­ing and dis­clo­sure regime is very ro­bust,” Gee said. “That will be very dif­fi­cult.”

The trou­ble may be worth it, both for the providers and their em­ploy­ees.

“If they are fully funded and they man­aged to main­tain that over the years, they may scream and yell about hav­ing to com­ply with ERISA, but for the sake of their em­ploy­ees it’s a very valu­able ben­e­fit they of­fer,” Gee said. “They may bite the bul­let and keep go­ing with the plan.”

“I don’t think any­one would say there’s no con­nec­tion be­tween a church agency and a church. But is a church agency a church? I think for a lot of rea­sons it’s not.” —Tess Gee ERISA at­tor­ney, Miller & Che­va­lier

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