Who's the Employer?

Answer:

Advocate Health Care Network v. Stapleton, No. 16-74 (U.S. June 3, 2017) clarifies that certain plans can qualify as church plans, even though they were not established by a church itself. The decision allows these plans to retain their exemption from ERISA. In the process of interpreting the ERISA question, the ruling clarifies tax qualification and 403(b) issues for church plans. However, an important question was not before the high court, and this leaves open a litigation route.

When ERISA section 3(33) was passed, a "church plan" had to be "established and maintained" by a church. In 1980, Congress amended the law to provide that a plan could be a church plan if it was maintained by what the court called a "principal purpose organization." This is an organization whose principal purpose is administering or funding benefit plans for church employees. The organization must be controlled by or associated with the church. A pension board that a church establishes would be a good example of a principal purpose organization.

The case involved several large tax-exempt organizations that operate hospitals. The organizations each are associated with a church. The hospitals sponsor defined benefit plans that are underfunded by the standards that apply to ERISA plans. The hospitals claimed the plans are exempt from ERISA because they are church plans. Employees filed suit claiming ERISA applied. Three courts of appeal agreed with the employees. The Supreme Court did not.

The employees argued that, after the 1980 amendment, a church plan could be maintained by a church or by a principal purpose organization, but a church had to establish the plan. The hospitals argued that if a plan is maintained by a principal purpose organization, it does not matter who set up the plan. Applying frequently used standards of interpreting statutes, the Supreme Court unanimously agreed with the hospitals.

Although I do address ERISA issues, most of my practice focuses on tax issues facing qualified and 403(b) plans. The case is significant on the tax side because the same definition of church plan appears in Code section 414(e). Thus, the hospitals should be able to claim exemption from the coverage requirements of Code section 410(b), for example. See Chapter 23 of Who's the Employer for a further discussion of church plans.

Interestingly, the case is not the end of the story. The opinion notes that the decision did not address the question of whether the hospital plans were maintained by a principal purpose organization. But that’s a fight for another day.

This has been a quick summary of the effect of the decision. In my next column, we will look more closely at the requirements for church plans and how the decision addresses the statutory requirements.

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