Background

On June 5, 2017, the U.S. Supreme Court ruled in Advocate Health Care Network v. Stapleton (Advocate Health Care Network) that an employee benefit plan maintained by a “principal-purpose” organization is a “church plan,” regardless of who established the plan. The Employee Retirement Income Security Act (ERISA) exempts church plans, which means they avoid a wide array of legal obligations. The Supreme Court held that the ERISA exemption for church plans applies to certain organizations that are affiliated with churches, even if they did not establish the plans.

While federal agencies that oversee ERISA have long held the view that church-affiliated plans are not subject to ERISA, numerous lawsuits by employees have challenged that position. The Advocate Health Care Network ruling settles and resolves a recent wave of litigation involving employers with religious affiliations, such as hospitals.

ERISA church plan exemption

ERISA is a federal law that sets minimum standards for employee benefit plans, and it applies to virtually all private-sector employers that maintain benefit plans for their employees, regardless of employer size.

ERISA specifically exempts church plans, which it defines as any employee benefit plan “established and maintained” by a church or group of churches, from its requirements. The definition also includes any plan maintained by a “principal-purpose organization,” which is an organization that:

• is controlled by or associated with a church or a convention or association of churches; and
• has a principal purpose or function of funding or administering benefits to the employees of the church or convention or association of churches.

The federal agencies that administer and enforce ERISA all interpret this definition to include plans maintained by employers that are not churches but that have church affiliations. Since 1983, these agencies have issued numerous written opinions to various church-affiliated employers, including hospitals, orphanages, schools and senior care homes, advising them that their employee benefit plans are exempt from ERISA.

Nevertheless, employee lawsuits challenging the agencies’ opinions have resulted in three recent federal court decisions holding that ERISA does not exempt any plan not originally established by a church.

Advocate Health Care Network v. Stapleton

The Supreme Court’s decision in Advocate Health Care Network overturns the above appellate court decisions and confirms the agencies’ long-standing interpretation of ERISA’s church plan exemption. 

Advocate Health Care Network involved lawsuits filed by employees of church-affiliated organizations that run large nonprofit hospitals and other health care facilities. The plaintiffs argued that the employers’ benefit plans did not fall within ERISA’s church exemption because they were not originally established by a church. The employers countered that the church plan exemption should apply to all plans maintained by a principal-purpose organization, regardless of who established them.

The Supreme Court sided with the employers, holding that ERISA does not require that a church establish a plan in order to enjoy the church plan exemption. Thus, a plan maintained by a principal-purpose organization, like  hospitals, can qualify as a church plan regardless of which entity established the plan.

Considerations for employers

If an employee benefit plan is exempt from ERISA, the plan sponsor does not need to comply with certain requirements that are designed to protect plan participants and ensure plan solvency, such as minimum standards related to plan funding, vesting and accrual; asset administration; and reporting and disclosure requirements (including Forms 5500, summary plan descriptions and ERISA plan documents).

On the other hand, being exempt from ERISA negates certain critical employer protections such as avoiding jury trials, being liable for punitive damages and having to comply with burdensome state law requirements.

Despite the Supreme Court’s recent ruling, employers should be aware that simply being affiliated with a religious organization does not automatically mean that their employee benefit plans are exempt from ERISA. A plan fails to qualify for ERISA’s church plan exemption unless:

• the sponsoring employer is either controlled by or “shares common religious bonds and convictions” with a church or a convention or association of churches; and
• the controlling or associated church or group of churches has tax-exempt status under Section 501 of the Internal Revenue Code.

Action steps

All employers that sponsor employee benefit plans should ensure that their plans either meet the criteria for an ERISA exemption or comply with all applicable ERISA requirements. Employers that are affiliated with a church should understand the specific criteria an employee benefit plan must meet to qualify for ERISA’s church plan exemption. Such employers may also ask the IRS to issue a letter ruling or ask the DOL to issue an advisory opinion that deems their plans to be exempt from ERISA.

EPIC Employee Benefits Compliance Services 

For further information on this or any other topics, please contact your EPIC benefits consulting team.

EPIC offers this material for general information only. EPIC does not intend this material to be, nor may any person receiving this information construe or rely on this material as, tax or legal advice. The matters addressed in this document and any related discussions or correspondence should be reviewed and discussed with legal counsel prior to acting or relying on these materials.