By Mark Casciari and Jennifer Neilsson

The Court of Appeals for the Third Circuit now is the first federal appellate court to decide whether a defined benefit plan sponsored by church-affiliated organization is a church plan under ERISA. The Court held that a hospital affiliated with a church could not establish a church plan exempt from ERISA. Kaplan v. Saint Peter’s Healthcare System, No. 15-1172, 2016 WL 9487719 (3d Cir. Dec. 29, 2015).

Under ERISA Section 3(33)(A), “church plan” means a plan “established and maintained. . . for its employees (or their beneficiaries) by a church or by a convention or association of churches which exempt from tax” (emphasis added). The Court reasoned that church plan status requires that the plan be established by a church, and the Saint Peter’s plan was not established by a church.

The Court found Saint Peter’s arguments regarding legislative history unpersuasive, and actually said that the legislative history more clearly indicated Congress’ intent to that church plan status be narrowly construed. The Court said that the fact that Saint Peter’s had received a private letter ruling from the Internal Revenue Service granting church plan status was not controlling.

Status of Church Plan Litigation. In the past three years, three other district courts have found that only churches can establish exempt church plans– Northern District of Illinois, District of Colorado, and Northern District of California. During a similar time period, three district courts have found that plans established and maintained by church agencies can qualify as exempt church plans– District of Maryland, District of Colorado, and Eastern District of Michigan. The Court of Appeals for the Seventh Circuit has heard arguments regarding the Northern District of Illinois case, but has not yet issued its opinion.

Importance of Cases. Many of the defined benefit plans at issue in the church plan litigation are severely underfunded. If the plans now must suddenly comply with ERISA, because they are not found to be church plans, the plan sponsors would face daunting funding requirements. Saint Peter’s plan was approximately $70 million underfunded at the time the lawsuit was filed, for example. Closing that gap under ERISA will not be easy. Plans newly subject to ERISA also would subject plan sponsors to PBGC scrutiny and impose PBGC insurance premium obligations. These financial strains may lead to corporate restructurings, layoffs, mergers or bankruptcies. The stakes are high, especially at a time when health care costs are rising, and of great concern. Imposing new ERISA costs on plans previously considered church plans will increase financial tensions.

The church plan litigation thus has consequences beyond the narrow issue of ERISA interpretation. Expect the litigation to continue in Courts of Appeals other than the Third Circuit, and expect as well the possibility of consideration by the Supreme Court if a circuit split develops. The Supreme Court might be tempted to resolve this issue not only because of the financial impact of finding church plan status, but also because of First Amendment religious freedom issues that are lurking in these cases.