Last week the U.S. Supreme Court agreed to hear three cases involving whether the pension plans of religiously affiliated hospital systems are exempt from federal pension funding requirements.

The Employee Retirement Income Security Act of 1974 (ERISA) was passed to protect employees who depended on pension plans but had lost their money when their employers went out of business, or who learned too late that their employers had not properly funded their pensions. ERISA does not require employers to have pension plans, but it does regulate companies that do have pension benefits to make sure that they are paying enough into pension plans and it provides an insurance system to protect pension beneficiaries.

Churches are exempt, and since 1983 the IRS has opined that employers, like hospitals, that were started by religiously affiliated entities are also exempt. As a result, religiously-based hospitals have worked on more of an honor system when it comes to providing pension benefits to their employees even if it means that their pension plans are underfunded by millions or even billions of dollars.

Employees and plan beneficiaries who are concerned about underfunding have been filing class action suits against religious hospital systems. In the three cases the Supreme Court will hear, involving Advocate Health, Dignity Health, and St. Peter’s Healthcare System, the hospital systems have lost at the Third, Seventh, and Ninth Circuit Courts of Appeals.

In the case involving Dignity Health, the employer reportedly admitted that its administration of the pension plan did not meet ERISA requirements but that it was exempt as a “church plan” under ERISA.

The IRS understanding of the church exemption rule is a “guidance” issue rather than a law, and the circuits opinions are at odds with the way that the IRS has interpreted church plans. If the Supreme Court affirms the lower court decisions, faith-based hospitals will potentially have to pay hundreds of millions of dollars to shore up their employee pension plans to bring them to parity with those of secular employers.

The Supreme Court has consolidated all three cases for one hour of oral argument, and a date is to be set.

Early last month, Adventist Health System was hit with a separate but similar class action lawsuit in Florida federal court (Sheedy v. Adventist Health System Sunbelt Healthcare Corporation et al., number 6:2016cv01893 filed 10/28/16 in Florida Middle District Court)  by plaintiffs who claimed that their plan was short by $134 million, and that the company is a business, not a church and should be required to meet ERISA requirements. The suit seeks declaratory relief and a finding that Adventist Health System is required to bring its plan into compliance with ERISA in terms of recordkeeping and notice obligations in addition to funding to overcome the shortfall. When someone dies during the course of a medical procedure family members may be entitled to compensation.

In response, Adventist Health System has argued that it is church-related and therefore does not have to comply with ERISA because it is religious and that even if it did have to comply, the pensions are adequately funded.

A final decision in the Florida case will likely be deferred pending the result of the Supreme Court cases.




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