Church-Affiliated Benefit Plans Exempt from ERISA: What the Supreme Court’s Ruling Means for Healthcare Providers

In Advocate Health Care Network v. Stapleton, 581 U. S. ____ (2017), issued June 5, 2017, the Court held that ERISA’s “church plan” exemption applies to plans sponsored by hospitals that are affiliated with churches, regardless of whether or not those plans were actually established by a church. This decision reverses contrary rulings by the Third, Seventh, and Ninth Circuits.  While this case arose out of pension plans sponsored by church-affiliated entities, the decision will apply equally with respect to health and welfare plans.

Summary of the Case

Petitioners in the case were three church-affiliated nonprofits that ran hospitals and offered defined-benefit pension plans to their employees. The plans were established by the hospitals rather than by a church and were managed by internal employee-benefits committees. Respondents, current and former employees of the hospitals, had filed class actions alleging that their employers’ pension plans did not fall within ERISA’s “church plan” exemption because the plans had not been established by churches. The District Courts had agreed with employees’ position, and the Third, Seventh, and Ninth Circuits affirmed those decisions. 
 
The Supreme Court unanimously rejected Respondents’ argument. The Court, led by Justice Kagan, held that while Congress had initially only included plans “established and maintained” by a church in its definition of “church plan,” Congress’s 1980 amendments to the statute had included all plans “maintained by” principal-purpose organizations in that definition. The Court concluded that “a plan maintained by a principal-purpose organization therefore qualifies as a ‘church plan,’ regardless of who established it.” In so holding, the Court also noted that the three federal agencies responsible for administering ERISA (the Internal Revenue Service, Department of Labor, and Pension Benefit Guaranty Corporation) had long read the 1980 provisions as exempting plans like the hospitals’ from ERISA’s mandates. 
 
Justice Sotomayor wrote a separate concurrence. While she was “persuaded that [the Court’s Opinion] correctly interpret[ed] the relevant statutory text,” she was “troubled by the outcome of these cases.” She observed that “the available legislative history [did] not clearly endorse this result” and said “this silence gives me pause.” “The decision to exempt plans neither established nor maintained by a church could have the kind of broad effect that is usually thoroughly debated during the legislative process and thus recorded in the legislative record.” 
 
Justice Sotomayor also noted that organizations such as those of petitioners bore “little resemblance to those Congress considered when enacting the 1980 amendment to the church plan definition.” They “earn billions of dollars in revenue, and compete in the secular market with companies that must bear the cost of complying with ERISA.” Given this reality, Sotomayor suggested that Congress might be prompted “to take a different path.”
 
IMPACT ON HEALTHCARE PROVIDERS: This ruling may affect healthcare providers in two separate ways – (1) as employers themselves sponsoring benefit plans for their employees, and (2) as medical providers seeking reimbursement from the health benefit plans that cover their patients.  First, with respect to healthcare providers who are themselves affiliated with church organizations (like the hospitals in this case), when they sponsor benefit plans for their employees, it is clear that the mere religious affiliation will warrant the plans being classified as “church plans,” and thus they will be exempt from ERISA.  As ERISA’s requirements on employers can often be burdensome, costly, and rigorous, this will allow those sponsoring employers more latitude in designing and administering their plans. Second, for healthcare providers who are treating patients covered by health plans claiming to have “church plan” status, there will also be an impact. While there has been much scrutiny of church plans in recent years, the Supreme Court has now definitively laid most of the controversy to rest. This means there will be little ability to challenge a health plans’ claimed church plan status. It also means that ERISA’s claims and appeals requirements will not apply.  When reimbursement disputes arise with church-affiliated health plans, the provider will have only state law means of relief.

Looking at the decision more broadly, it has stunned many in the industry who believed the Circuit Courts were getting it right, and that church plan status should be curtailed.  It certainly draws into question the wisdom of hundreds of millions of dollars that have been paid in settlements of earlier church plan litigation, when the legal landscape looked much different—for example, in October 2016, Providence Health & Services agreed to pay nearly $352 million to settle class action claims that it had underfunded its pension plan by wrongly treating its plan as a “church plan” exempt from ERISA’s funding and vesting requirements.
 
The major downside of this ruling, of course, is the potential impact on the millions of participants and beneficiaries of plans across the country maintained by church-affiliated organizations. Pursuant to the Court’s decision, they are not protected by ERISA. ERISA provides federal consistent standards under which benefit plans must be operated – all designed to protect participants and beneficiaries. If ERISA does not apply to these plans, protections relating to fiduciary duties, vesting of benefits, funding, insurance, termination procedures, and claims and appeal rights may not exist. On the other hand, without ERISA preemption, state laws will govern these plans. We may well be on the verge of a proliferation of state laws that will be created to regulate these plans in ERISA’s absence (assuming Congress itself does not act).  Even without additional state legislation though, state laws can already provide more avenues of relief than the limited remedies that ERISA affords.  With ERISA out of the way, claimants are free to pursue state law claims, such as breach of contract, negligence, and statutory claims, and may even be able to recover punitive damages under state law, where they would not be available under ERISA.