While the church plan exemption from the Employee Retirement Income Security Act of 1974 (ERISA) has been built into ERISA since its adoption, and the specific provision providing that exemption has not been significantly amended since 1983, it has only been in the last decade or so that there have been a proliferation of cases analyzing whether an employee benefit plan, particularly a tax-qualified defined benefit plan, constitutes a church plan.
In 2017, in Advocate Health Care Network v. Stapleton, 137 S. Ct. 1652 (2017) a unanimous Supreme Court in an 8-0 decision (Justice Gorsuch not participating) concluded that a plan maintained by an organization with the principal purpose of administering or funding the plan can qualify as a church plan, regardless of who established the plan. In two separate footnotes, however, the Court made clear it was not addressing the issue of whether an internal benefits committee can qualify as such a “principal purpose” organization.
The recent case of Boden v. St. Elizabeth’s Medical Center, No. 16-49, 2019 WL 3338850 (E.D. Kentucky July 25, 2019), decided by the District Court for the Eastern District of Kentucky, indicated one approach for addressing that issue. A decision by the Court of Appeals for the Seventh Circuit earlier this month, however, in Smith v. OSF Health Care Systems, No. 18-3325 (7th Cir. 2019) suggests that a more nuanced analysis might be appropriate.
In analyzing this issue, it is necessary for Courts to focus on the precise relevant language of ERISA §3(33)(C)(i) – a “plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.”
To determine the applicability of the church plan exemption, several courts have followed Medina v. Catholic Health Initiatives, 877 F. 3d 1213 (10th Cir. 2017), where the Court of Appeals for the Tenth Circuit applied a three-part test to determine whether a plan constituted a church plan under this portion of the definition of church plan in ERISA §3(33)(C)(i). The test states as follows: (i) the entity is a tax-exempt nonprofit organization affiliated with a church; (ii) the entity’s retirement plan is maintained by a principal purpose organization; and (iii) the principal purpose organization is affiliated with a church. The Tenth Circuit test was the test applied in Boden.
With respect to the first element of the test, courts consider a number of factors in determining whether an organization – particularly a health care organization – is associated with a church, including (i) a church’s recognition of the organization; (ii) the inclusion of language in key documents that evidence a relationship between the organization and the plan’s governing committee; (iii) the presence of denominational requirements for board membership; (iv) the denomination affiliation of employees and patients; (v) a clear affiliation with a church through denominational chapels; (vi) evidence that the organization is guided by specific church religious principles; and (vii) requirements that certain decisions must be made by church leadership. In Boden, many of these factors were present, and plaintiffs did not question that defendant satisfied the first prong of the test.
It was the second part of the Medina test – the requirement that the entity’s retirement plan be maintained by a principal purpose organization – that was the area to which Boden devoted most of its substantive attention. First, plaintiff claimed that the committee assigned responsibility for the retirement plan was not an organization because it must be a completely separate organization from the plan. The District Court disagreed. While ERISA does not define the word “organization,” the Court looked to the dictionary definition of organization and concluded that an organization was a group of persons with a specific purpose, and concluded that the plan committee satisfied this low bar to be an “organization.”
The plaintiff next contended that even if the plan committee was an organization, the committee did not maintain the plan. Here, too, ERISA does not define the term “maintain,” and while it had been discussed in other plan contexts, no Court has considered it in the church plan context. In the absence of an ERISA definition, the District Court again looked to dictionaries, both legal and standard oriented, to conclude that maintain means “to keep on an existing state; preserve from failure or inefficiency” or to “care for the plan for purposes of operational productivity.” In making this determination, the Court looked to the documents governing the pension plan for guidance and focused upon the responsibilities delegated to the committee rather than its day to day functions. The internal benefit plan committee, for example, had a variety of powers and responsibilities including the determination of coverage, claims administration, plan interpretation and oversight. The presence of these powers and responsibilities was sufficient to convince the Court that the committee was maintaining the plan, even though it was authorized to, and did, delegate several of its responsibilities, and even though the committee lacked the authority to amend or terminate the plan. Interestingly, it did not matter to the District Court that, as is true of many employee benefit committees, the committee at issue only met a few times a year, and for few hours at each of those meetings.
Further, while the District Court agreed with plaintiffs that “maintenance” means more than administration, the Court distinguished the two terms: “Administration” refers to steps taken to actively run the plan, such as evaluating benefit claims and paying out benefit claims. In contrast, the term “maintenance” is broader, connoting all things necessary to ensure the continuation of the plan. The District Court also distinguished between the principal functions of an organization and the principal purpose. The day-to-day activities of an organization relate to the principal function of an organization, which had been largely delegated, while the principal purpose focuses on the duties and responsibilities set forth in plan documents. Finally, the District Court rejected the argument that only one organization can maintain a plan, and in this case that was St. Elizabeth’s Medical Center. The District Court disagreed, concluding that ERISA §3(33) did not preclude two organizations from maintaining a plan. Consequently, the District Court concluded that the second prong of the three-part test was satisfied.
The third prong of the test, establishing that the principal purpose organization was affiliated with a church – was easily resolved by the District Court because the Court had already concluded that St. Elizabeth’s was associated with a church, and therefore, the plan committee was simply an internal subset of the church. The Court also reasoned that committee members had to believe in and follow the teachings of the Catholic church and administer the plan in accordance with the tenets of the Catholic church, “although such provisions would seem to have greater significance in the welfare plan context rather than the defined benefit plan context.”
The Court’s analysis thus agreed with Defendants that the plan met the terms of the Church plan exemption pursuant to the Supreme Court’s analysis in Stapleton and the tenth circuit’s test set forth in Medina.
In another instructive case on the applicability of the church plan exemption, the Seventh Circuit in Smith v. OSF Health Care Systems set forth guidance as to how it might rule on future disputes. While because of the posture of the case, the Seventh Circuit was limited to providing only dicta on the applicability of the church plan exemption, its reasoning is helpful to understand the future limits and scope of the church plan exemption. In OSF Health Care Systems, over an eight-year period, the plan committee at issue, met for a combined period of 70 minutes.
The Court of Appeals in that case held that the District Court should not have granted summary judgment to the defendants without allowing plaintiffs additional discovery to determine what the plan committee actually did during that 70 minutes. The relevant documents established that the committee was intended to administer the plan, but it was not clear that paper formalities would suffice, or if excessive delegation could amount to a failure to maintain the plan.
Plaintiffs in both of these cases raised an interesting alternative approach to the availability of the church plan exemption . Plaintiffs suggested that in order to meet the definition of an organization “committee” should constitute a wholly independent body with the principal purpose of administering or funding a retirement plan, and endowed with the power to modify or terminate the plan. Commenting upon that structure, the Tenth Circuit in Medina indicated “there may be some organization out there that is structured like that, but it certainly is not the most intuitive way to do it. And it is not clear what the advantage of such a structure would be, or why Congress could have required it.” The Seventh Circuit concurred with this portion of the Medina decision.
It remains to be seen whether other Circuit Courts will apply the same analysis to determine whether an organization is a principal purpose organization as per the Tenth Circuit decision in Medina, or whether other Circuits might tweak the analysis in a manner similar to that suggested by the Seventh Circuit in Smith or whether they may even construct an alternative form of analysis.