The Third Circuit Court of Appeals recently held that St. Peter’s Healthcare System could not rely the Employee Retirement Income Security Act (ERISA) exemption for church plans. The decision in Kaplan v. St. Peter’s Healthcare System is precedential and affirms the ruling of a New Jersey district court judge.
Employees of the hospital filed suit under ERISA alleging that the St. Peter’s Healthcare System (St. Peter’s) violated the federal law by under-funding its employee retirement plan by over $70 million. St. Peter’s is a non-profit healthcare entity that operates several facilities. Although it is not a church, it has substantial ties to the Roman Catholic Diocese of Metuchen, New Jersey.
For more than three decades, St. Peter’s operated the retirement plan in compliance with ERISA. In 2006, it filed an application with the Internal Revenue Service (IRS) seeking a church plan exemption. Although the application signaled the belief of St. Peter’s Healthcare System that it qualified for an ERISA exemption, it continued to pay ERISA-mandated insurance premiums for the retirement plan while the application was pending.
In May 2013, Laurence Kaplan, a former St. Peter’s Healthcare System employee, filed a putative class action alleging that the hospital failed to comply with various ERISA obligations, including that the plan was significantly underfunded. In August 2013, while the lawsuit was pending, the IRS issued a private letter ruling affirming the plan’s status as an exempt church plan for tax purposes. St. Peter’s moved to dismiss the suit, claiming that it qualified for ERISA’s church plan exemption and therefore was not required to comply with the provisions Kaplan claimed it had violated. The District Court denied the motion after concluding that St. Peter’s could not establish an exempt church plan because it is not a church.
The Legal Background of Kaplan v. St. Peter’s Healthcare System
Subsection 4(b)(2) of ERISA establishes an exemption for church plans
under which plans need not comply with several of the law’s provisions, including fiduciary obligations and minimum-funding rules. ERISA defines a church plan as one that is “established and maintained
[emphasis supplied] . . . for its employees (or their beneficiaries)” by a tax-exempt church. Subsection 3(33)(C)(i) clarifies that a “plan established and maintained” by a church includes a plan maintained by a qualifying agency of a church. The question before the Third Circuit is whether a church agency, in addition to maintaining an exempt church plan, must also establish such a plan?
The Third Circuit’s Decision on Kaplan v. St. Peter’s Healthcare System
The Third Circuit held that a church must establish
a plan in order for it to qualify for a religious exemption under ERISA. “The plain terms of ERISA only make these exemptions available to plans established in the first instance by churches. Because St. Peter’s is not a church, the exemption is not available, and it is not entitled to dismissal of Kaplan’s complaint on that basis,” Judge Thomas Ambro wrote on behalf of the appeals court.
In reaching its decision, the Third Circuit acknowledged that, under ERISA amendments enacted in 1980, plans maintained by church agencies may benefit from the religious exemption. However, it rejected the argument that the amendments removed the requirement that the plans must be initially created by a church. The Court, while acknowledging the IRS ruling, rejected it despite the normal deference accorded the agencies charged with ERISA enforcement:
“But the IRS changed course in 1983 based on its interpretation of the 1980 amendments and began issuing exemptions to plans that were not established by churches. A 1983 IRS memorandum stated that because “religious orders can now have their employees covered by a church plan without a determination that such orders are churches, [an order’s] nonchurch status is not fatal.” I.R.S. Gen. Couns. Mem. 39,007 (July 1, 1983). According to St. Peter’s, the IRS has issued at least several hundred exemptions based on that reasoning. And, as discussed, St. Peter’s itself received an exemption from the IRS in 2013, after this lawsuit was filed. St. Peter’s also notes that the Department of Labor has issued several exemptions of its own based on the IRS’ position.
However, because the IRS’ position came in a general counsel memorandum and not as a result of “formal adjudication or notice-and-comment rulemaking,” its interpretation is owed deference “only to the extent that [it has] the power to persuade.” Christensen v. Harris Cnty., 529 U.S. 576, 587 (2000) (internal quotation marks omitted). The IRS’ 1983 memorandum lacks the power to persuade because it does not even consider the church establishment requirement of § 3(33)(A). Rather, it skips directly (and inexplicably) to § 3(33)(C). Because the IRS’ position is at odds with the statutory text, we owe it no deference.”
The Third Circuit also rejected St. Peter’s Free Exercise claims, which maintained that if church agencies cannot establish their own plans, the IRS will be forced, in considering requests for exemptions, to determine on an individualized basis whether particular agencies are performing sufficiently religious functions such that they can themselves qualify as churches. “Churches and agencies can avoid this inquiry altogether by having a church establish the plan in the first instance,” the court noted.
The Third Circuit is the first to address whether only churches can establish exempt church plans. However, the Seventh Circuit considered the issue in September and is expected to release an opinion shortly.
It will be interesting to see whether this case ultimately goes up to the Supreme Court. In this instance, the Third Circuit literally threw the opinion of the IRS “out the window” even though its position has been in existence since 1983 and relied upon by many others, including the U.S. Labor Department. It cannot be doubted that the plight of the many plan participants with unfunded pensions and the protective and remedial purposes of ERISA swayed the Court in its determination. The question remains whether this apparent balancing of the equities will be further tested and sustained?