Faith-based hos­pi­tals win ERISA case in high court, but de­bate isn’t over yet

Modern Healthcare - - NEWS - By Alex Kacik

With one ma­jor win in hand, faith­based hos­pi­tals are brac­ing for the next le­gal chal­lenge to their pen­sion pro­grams.

The U.S. Supreme Court last week unan­i­mously af­firmed that faith­based hos­pi­tals are ex­empt from pen­sion guide­lines set by the Em­ployee Re­tire­ment In­come Se­cu­rity Act, pre­serv­ing ex­cep­tions those or­ga­ni­za­tions have re­lied on to es­tab­lish and main­tain their pen­sion plans for more than 35 years.

Al­though the rul­ing is a sig­nif­i­cant mile­stone, faith-based health sys­tems aren’t in the clear yet. Lawyers rep­re­sent­ing the plain­tiffs in cases against Ad­vo­cate Health Care Net­work, Dig­nity Health and St. Peter’s Health­care Sys­tem said they will con­tinue to chal­lenge the ERISA ex­emp­tions by fo­cus­ing on whether the health sys­tems are “prin­ci­pal pur­pose” or­ga­ni­za­tions. Ac­cord­ing to ERISA, a prin­ci­pal pur­pose or­ga­ni­za­tion is a church-as­so­ci­ated or­ga­ni­za­tion whose “chief pur­pose or func­tion is to fund or ad­min­is­ter a ben­e­fits plan for the em­ploy­ees of a church or church-af­fil­i­ated non­profit.”

Em­ploy­ees ar­gued in fed­eral District Courts that the hos­pi­tals’ pen­sion plans are not “church plans” be­cause their in­ter­nal ben­e­fits com­mit­tees do not count as prin­ci­pal pur­pose or­ga­ni­za­tions.

Courts will have to de­ter­mine what the struc­ture of the in­ter­nal plan com­mit­tee is and how it op­er­ates, who its mem­bers are, what func­tions the plan per­forms and the sys­tems’ re­la­tion­ship to their af­fil­i­ated churches, said Tess Gee, an ERISA at­tor­ney at Miller & Che­va­lier.

“That ques­tion may breed a new wave of lit­i­ga­tion to fur­ther com- pli­cate this al­ready com­pli­cated area of ERISA,” added Michael Gra­ham, chair­man of Michael Best & Friedrich’s ERISA lit­i­ga­tion prac­tice group in Chicago.

Congress ex­panded the church plan ex­emp­tion in the 1980s to in­clude the pen­sion plans of church-af­fil­i­ated or­ga­ni­za­tions af­ter the In­ter­nal Rev­enue Ser­vice de­nied an ex­emp­tion to the Lit­tle Sis­ters of the Poor.

In last week’s rul­ing, the high court dis­missed three ap­pel­late court rul­ings that the “church plan” ex­emp­tion did not ap­ply to faith-based or­ga­ni­za­tions based on the fact that those plans were not es­tab­lished by a church. The eight jus­tices de­ter­mined that Congress in­tended for a broader in­ter­pre­ta­tion of the rule when it amended ERISA. Jus­tice Neil Gor­such did not par­tic­i­pate in the de­ci­sion be­cause he wasn’t yet on the bench when the court heard the case ear­lier this year.

ERISA—which has been de­scribed as “bub­ble wrap for ben­e­fits”—re­quires com­pa­nies to fully fund their pen­sions, pay pre­mi­ums to the Pen­sion Ben­e­fit Guar­anty Corp. and com­ply with the law’s dis­clo­sure agree­ments.

Es­sen­tially, em­ploy­ees at faith­based or­ga­ni­za­tions are at risk of los­ing their pen­sion ben­e­fits if their em­ployer be­comes in­sol­vent, al­though the sys­tems in­volved in the case have as­sured the courts that their plans are sta­ble and well-funded.

If the ERISA ex­emp­tions were over­turned, sys­tems col­lec­tively could have been li­able for bil­lions of dol­lars in ad­di­tional fund­ing li­a­bil­ity and penal­ties for not com­ply­ing with ERISA. Health sys­tems ar­gue that com­ply­ing with ERISA would mean they would have to sig­nif­i­cantly cut back their char­ity care or drop their pen­sion ben­e­fits al­to­gether. “Health sys­tems would’ve been in for a world of hurt,” said Joseph Ur­witz, a part­ner at McDer­mott Will & Emery. “This is un­equiv­o­cally pos­i­tive for health sys­tems.”

The de­bate is part of a broader dis­cus­sion sur­round­ing tax ex­emp­tions that ap­ply to not-for-profit health sys­tems. Crit­ics ar­gue that ERISA and tax ex­emp­tions cre­ate an un­fair com­pet­i­tive ad­van­tage, while not-for-profit sys­tem ex­ec­u­tives con­tend that they use the tax breaks to pro­vide char­ity care and other com­mu­nity ben­e­fits.

The wave of re­cent law­suits against faith-based or­ga­ni­za­tions may open the door to fu­ture lit­i­ga­tion against church plan ex­emp­tions, par­tic­u­larly through state law, Ur­witz said.

Since church plans are ex­empt from ERISA, they’re also ex­empt from ERISA’s pre-emp­tive pro­vi­sions, so plan spon­sors may be ex­posed to claims made un­der state law, he said. Some states may eval­u­ate their statutes to de­ter­mine if ac­tion is war­ranted, Ur­witz said.

“There is too much money on the line for lit­i­ga­tion to cease,” said Brian Net­ter, an ERISA at­tor­ney for Mayer Brown.


The eight jus­tices de­ter­mined that Congress in­tended for a broader in­ter­pre­ta­tion of the rule when it amended ERISA in the 1980s.

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