Supreme Court Rules ERISA-Exempt “Church Plan” Includes Plan Maintained by Church-Affilaited Organizations (like hospitals and schools)

The United States Supreme Court has held, in Advocate Health Care Network v Stapleton that a benefit plan maintained by a church-affiliated organization, whose principal purpose is to fund or administer a benefits plan for the employees of either a church or a church-affiliated nonprofit (a “principal purpose organization”) is a church plan under ERISA Section 3(33), regardless of who established the Plan. This is in accordance with the long-standing regulatory position adopted by the IRS, Department of Labor and PBGC.

Background on ERISA’s Church Plan Exception

ERISA generally obligates private employers offering pension plans to adhere to an array of rules designed to ensure plan solvency and protect plan participants. “Church plans” however, are exempt from those regulations.

From the beginning, ERISA  defined a “church plan” as “a plan established and maintained . . . for its employees . . . by a church.”  Congress then amended the statute to expand that definition in two ways:

  • “A plan established and maintained for its employees . . . by a church . . . includes a plan maintained by an organization . . . the principal purpose . . . of which is the administration or funding of [such] plan . . . for the employees of a church . . . , if such organization is controlled by or associated with a church.” (The opinion refers to these organizations  as “principal-purpose organizations.”)
  • An “employee of a church” includes an employee of a church-affiliated organization.

The Case

The Petitioners in Advocate Health Care Network v Stapleton were three church-affiliated nonprofits that run hospitals and other healthcare facilities, and offer their employees defined-benefit pension plans. Those plans were established by the hospitals themselves, and are managed by internal employee-benefits committees. Respondents, current and former hospital employees, filed class actions alleging that the hospitals’ pension plans do not fall within ERISA’s church plan exemption because they were not established by a church. The Supreme Court held for the hospitals, ruling that a plan maintained by a principal-purpose organization qualifies as a “church plan,” regardless of who established it. 

The Court reasoned that the term “church plan” initially “mean[t]” only “a plan established and maintained . . . by a church.” But the amendment provides that the original definitional phrase will now “include” another—“a plan maintained by [a principal-purpose] organization.” That use of the word “include” is not literal, but tells readers that a different type of plan should receive the same treatment (i.e., an exemption) as the type described in the old definition. In other words, because Congress deemed the category of plans “established and maintained by a church” to “include” plans “maintained by” principal purpose organizations, those plans—and all those plans—are exempt from ERISA’s requirements.

What Comes Next?

Advocate Health Care Network v Stapleton does not rule on what is or is not a “principle purpose organization”, and that is where we can expect future litigation to focus. The key question will be whether such organization is “controlled by or associated with a church.” Therefore, church-affiliated organizations, such as hospitals, schools, and social welfare agencies, that are relying on ERISA’s church plan exception ought to review their documentation and evidence of either control by or affiliation with a church.

Fiduciaries Ultimately Prevail in Tibble v. Edison

On remand from the United States Supreme Court, which held in May 2015 that ERISA imposes on retirement plan fiduciaries an ongoing duty to monitor investments, even absent a change in circumstances, the 9th Circuit Court of Appeals recently affirmed the district court’s original judgment in favor of the employer and its benefits plan administrator on claims of breach of fiduciary duty in the selection and retention of certain mutual funds for a benefit plan governed by ERISA.

The court of appeals had previously affirmed the district court’s holding that the plan beneficiaries’ claims regarding the selection of mutual funds in 1999 were time-barred. The Supreme Court vacated the court of appeals’ decision, observing that federal law imposes on fiduciaries an ongoing duty to monitor investments even absent a change in circumstances.

On remand, the panel held that the beneficiaries forfeited such ongoing-duty-to-monitor argument by failing to raise it either before the district court or in their initial appeal. While the fiduciaries ultimately prevailed in this case, the lesson for fiduciaries remains clear: You have an ongoing duty to monitor the investment options in your retirement plans.

Tibble v. Edison International (9th Cir., 2016)

Full Text of the Supreme Court Decision in Tibble v. Edison International (2015)

Supreme Court Rules ERISA Equitable Relief Can’t Reach Nontraceable Settlement Proceeds

Employee benefits plans regulated by the Employee Retirement Income Security Act of 1974 (ERISA or Act) often contain subrogation clauses requiring a plan participant to reimburse the plan for medical expenses if the participant later recovers money from a third party for his injuries.

On January 20, 2016, the US Supreme Court held, in MONTANILE v. BOARD OF TRUSTEES OF THE NATIONAL ELEVATOR INDUSTRY HEALTH BENEFIT PLAN that if an ERISA-plan participant wholly dissipates a third-party settlement on nontraceable items, the plan fiduciary may not rely on a subrogation provision in their health plan to bring suit under ERSA §502(a)(3) to attach the participant’s separate assets.  Plan fiduciaries are limited by §502(a)(3) to filing suits “to obtain . . . equitable relief.” The Court previously held that whether the relief requested “is legal or equitable depends on [1] the basis for [the plaintiff’s] claim and [2] the nature of the underlying remedies sought.” Sereboff v. Mid Atlantic Medical Services, Inc., 547 U. S. 356, 363.  In Montanile, the Court held that the Plan was not seeking equitable relief because it sought to recover against the defendant’s general assets, not specifically traceable assets. The lesson for Plan fiduciaries wishing to assert subrogation claims is to (1) put participants on specific notice of the subrogation claim as soon as the Plan learns of a significant incident of a type that might give rise to a subrogation claim (such as an accident); and (2) pursue the claim diligently before the participant receives settlement proceeds.  We routinely include in our welfare wrap plan documents a vigorous subrogation reservation to protect Plans’ subrogation rights to the fullest extent practical.

More on the Montanile case…

Montanile was seriously injured by a drunk driver, and his ERISA plan paid more than $120,000 for his medical expenses. Montanile later sued the drunk driver, obtaining a 500,000 settlement. Pursuant to the plan’s subrogation clause, the plan administrator (the Board of Trustees of the National Elevator Industry Health Benefit Plan, or Board), sought reimbursement from the settlement. Montanile’s attorney refused that request and subsequently informed the Board that the fund would be transferred from a client trust account to Montanile unless the Board objected. The Board did not respond, and Montanile received the settlement.

Six months later, the Board sued Montanile in Federal District Court under §502(a)(3) of ERISA, which authorizes plan fiduciaries to file suit “to obtain . . . appropriate equitable relief . . . to enforce . . . the terms of the plan.” 29 U. S. C. §1132(a)(3). The Board sought an equitable lien on any settlement funds or property in Montanile’s possession and an order enjoining Montanile from dissipating any such funds. Montanile argued that because he had already spent almost all of the settlement, no identifiable fund existed against which to enforce the lien. The District Court rejected Montanile’s argument, and the Eleventh Circuit affirmed, holding that even if Montanile had completely dissipated the fund, the plan was entitled to reimbursement from Montanile’s general assets. The Supreme Cour reversed for the reasons explained above.

icon Supreme Court Decision in Montanile

icon Supreme Court Decision in Sereboff

Supreme Court Obergefell Decision Impacts Employer Welfare Benefit Plans

Today’s Supreme Court decision in Obergefell v. Hodges, requiring all 50 States to license same sex marriages, has two immediate implications for employer-sponsored welfare benefit plans:

1. Do your welfare benefit plan documents define “Spouse”, and if so, how?

If all of your operations are in a state that recognized same sex marriage before today’s ruling, then your welfare benefit plans probably already either do not contain a definition of “Spouse”, or they define “Spouse” by reference to state law.  If that is true for you, then you probably do not need to amend your plan documents.  You will automatically extend benefits to legally married same sex spouses, just as you have already done, since you operate in a state that recognized same sex marriage before today’s ruling.

However, if you operate in a state that did not recognize same sex marriage before today’s ruling, then your welfare benefit plans might define “Spouse” by reference to one man and one woman.  If that is how your plan defines “Spouse”, you ought to discuss with ERISA counsel whether to change that definition.

In addition, even if you maintained an opposite sex definition of “Spouse” for your welfare benefit plans in states that previously recognized same sex marriage, you should revisit this issue in light of today’s ruling.

While welfare benefit plans are not required to offer spousal coverage, and therefore in concept could extend coverage only to a subset of Spouses (opposite sex spouses), this practice is more risky today than it was yesterday.  Given the Obergefell holding – that same sex marriage is a fundamental right protected by the 14th Amendment, there are now significant risks associated with offering spousal coverage that is limited to opposite sex people.

Public sector employers cannot maintain such policies because they would be subject to a direct claim of employment discrimination based on the 14th amendment fundamental rights holding in Obergefell.  A direct claim such as this in the private employment market would have significant weaknesses, at least in jurisdictions that do not prohibit discrimination on the basis of sexual orientation or preference.  The reason? The 14th Amendment does not apply to private actors.  However, additional circumstances, such as a disparate impact of such a provision on one sex or the other, could make such a claim viable.

Moreover, employers that maintain the opposite sex definition of “Spouse” will increasingly be out of the mainstream.  This may be a good or a bad thing, depending on your market.

The point is, check your plan documents and talk to counsel about the implications of leaving them unchanged vs. changing them.

2. Do you offer Domestic Partner Coverage?  If so is it limited to same sex domestic partners?  Is it limited to domestic partners in states that did not recognize same sex marriage before today’s ruling?

In recent years many employers offered welfare benefits to same sex domestic partners, but may not have done so for opposite sex domestic partners, on the theory that same sex domestic partners could not get married.  Other employers may have limited domestic partner coverage to states that did not recognize same sex marriage, again on the theory that this was only an issue on those states.  This rationale has been breaking down as more states recognized same sex marriage, and it is now gone entirely.

You should revisit your decisions regarding domestic partner coverage in light of today’s ruling. Employers that limit domestic partner coverage in one of these ways need to decide whether to :

(a) continue offering coverage only to same sex domestic partners,

(b) extend coverage to all domestic partners (both same sex and opposite sex), or

(c) eliminate domestic partner coverage.

There are serious risks associated with option (a) (continue offering coverage only to same sex domestic partners), for many of the same reasons discussed above, except that now, opposite sex unmarried domestic partners who do not get a benefit offered to same sex domestic partners might challenge those provisions.

Option (b) (extend coverage to all domestic partners) is a legally safer course, though it may have significant financial implications for employers. Extending benefits to same sex unmarried domestic partners was not very costly because not many people took up the offer.  Extending those benefits to opposite sex unmarried domestic partners could be attractive to a much larger pool of your employees.

Option (c) (eliminate domestic partner coverage) might make logical sense, and may be the best alternative to (b).  Bloomberg reports that this may in fact be a significant result of the ruling:

“A survey of large corporations released earlier this month showed that far fewer of them offer health coverage to unmarried heterosexual couples — 62 percent — than to same-sex domestic partners, at 93 percent.

That gap suggests less of a willingness to cover unmarried couples when legal marriage is an option. More powerfully, 22 percent of the companies said they plan to drop coverage of domestic partners as a response to a ruling that makes gay marriage a viable option nationwide.”

But there are both legal and practical risks associated with taking a benefit away from a group of employees.

Again, think about these issues, discuss them with counsel and make deliberate and informed decisions about how to deal with them, given your unique situation.