THE AMERICAN LAW INSTITUTE Continuing Legal Education

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1 49 THE AMERICAN LAW INSTITUTE Continuing Legal Education Employee Benefit Plans of Tax-Exempt and Governmental Employers October 20-21, 2016 Washington, D.C. View From Groom: Latest Developments in the Church Plan Cases Submitted by David W. Powell Groom Law Group, Chartered Washington, D.C. Reproduced with permission from Pension & Benefits Daily, 88 PBD, 5/6/16. Copyright 2016 by The Bureau of National Affairs, Inc. ( )

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3 51 Pension & Benefits Daily Reproduced with permission from Pension & Benefits Daily, 88 PBD, 5/6/16. Copyright 2016 by The Bureau of National Affairs, Inc. ( ) View From Groom: Latest Developments in the Church Plan Cases BY LARS GOLUMBIC, SEAN ABOUCHEDID Lars Golumbic is a principal with Groom, focusing on litigation matters related to ERISA, including lawsuits involving plan sponsors, recordkeepers, actuaries and other service providers. As part of this, Mr. Golumbic defends plan sponsors and plan service providers in governmental investigations, and he counsels clients on fiduciary matters related to ERISA. Sean Abouchedid (sabouchedid@groom.com) is of counsel in Groom Law Group s litigation department and focuses his practice on litigation relating to ERISA. He has represented clients in all stages of civil litigation in federal and state courts across the country and in arbitrations and governmental investigations. Paul Rinefierd (prinefierd@groom.com) is an associate in the Litigation group at Groom Law Group, where his focus has been on issues of pretrial discovery. Recently, he has assisted with a class action challenging the ERISA/Tax Code church plan exemption. AND PAUL RINEFIERD A s of this March, three years have passed since the first lawsuits were filed challenging what had long been an uncontroversial notion: that churchaffiliated non-profits, such as hospitals or schools, are exempt from ERISA s coverage. In this respect, church plans may elect to, but are not required to, comply with ERISA s requirements, such as ERISA s funding standards, notice and disclosure requirements, and insurance premium requirements. During the past three years, some twenty-three church plan lawsuits have been filed challenging that legal proposition. These lawsuits are listed in the table below. The pace of filings has picked up rapidly of late, with a flurry of new cases having been filed in March and April of this year. The key issue in these cases is whether, to qualify for the church plan exemption, a plan must be established by a church, or whether non-profit organizations controlled by or associated with churches may themselves sponsor church plans. And since last December, significant decisions have come down on both sides. On the defense side, the District of Colorado granted the defendants motion for summary judgment in Medina v. Catholic Health Initiatives, et al. (237 PBD, 12/10/15) [Note: Groom Law Group has represented the defendants in Medina and the defendants in Tucker v. Baptist Health System, Inc.] While on the plaintiffs side, the Third and Seventh Circuits affirmed plaintiffs interpretation of the statute in Kaplan v. Saint Peter s Healthcare System (249 PBD, 12/30/15) and Stapleton v. Advocate Health Care Network (53 PBD, 3/18/16). With appeals currently pending in the Ninth and Tenth Circuits, many observers predict that the church plan issue which affects millions of employees of churchaffiliated organizations nationwide could be headed to the U.S. Supreme Court. Background The Church Plan Definition The definition of church plan, which was enacted as part of ERISA in 1974, states in relevant part: The term church plan means a plan established and maintained... for its employees (or their beneficiaries) by a church... which is exempt from tax under section 501 of title U.S.C. 1002(33)(A). In 1980, Congress amended the church plan definition and added the following language: A plan established and maintained for its employees (or their beneficiaries) by a church... 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... if such organization is controlled by or associated with a church U.S.C. 1002(33)(C)(i). While ERISA does not define controlled by, an organization is associated with a church under the statute if it shares common religious bonds and convictions with that church. 29 U.S.C. 1002(33)(C)(iv). The complaints filed in the church plan cases each present versions of the same statutory interpretation argument: under the plain language of the statute, only a church may establish a church plan. ERISA does not define the term church. According to the plaintiffs, section 3(33)(C)(i) does not change this threshold requirement it merely allows plans established by churches to be maintained by certain organizations controlled by or associated with a church and still qualify as church plans. Plaintiffs therefore argue that, because the defendants are not churches, the plans that COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN

4 52 2 Church Plan Lawsuits, as of May 1, 2016 they sponsor cannot qualify as church plans and must comply with ERISA, including ERISA s funding standards, notice and disclosure requirements, and insurance requirements. Some of the lawsuits allege that the plans at issue are underfunded by hundreds of millions of dollars on an ERISA basis and that the defendants owe significant civil penalties for failing to follow ERISA s reporting and notice requirements. Defendants in these cases, all of which are religiously-affiliated hospitals or healthcare systems, interpret section 3(33)(C)(i) differently. Under the defendants reading, a non-church such as a churchaffiliated hospital or school may establish a church plan so long as the plan is maintained by an organization qualifying under section 3(33)(C)(i) that is controlled by or associated with a church. In many cases, the defendants plans are maintained by the plan sponsor s retirement plan committee. The defendants statutory interpretation is consistent with how the U.S. Department of Labor and the Internal Revenue Service have applied the church plan exemption for over three decades. Until recently, the few courts to have considered the issue also had adopted the defendants interpretation of the statute. 1. Chavies v. Catholic Health East, No. 2:13-cv (E.D. Pa.) (filed Mar. 28, 2013) 2. Overall v. Ascension, No. 2:13-cv (E.D. Mich.) (filed Mar. 28, 2013) 3. Rollins v. Dignity Health, No. 3:13-cv (N.D. Cal.) (filed Apr. 1, 2013) 4. Kaplan v. Saint Peter s Healthcare System, No. 3:13-cv (D.N.J.) (filed May 7, 2013) 5. Medina v. Catholic Health Initiatives, No. 1:13-cv (D. Colo.) (filed May 10, 2013) 6. Stapleton v. Advocate Health Care Network, No. 1:14-cv (N.D. Ill.) (filed Mar. 17, 2014) 7. Owens v. Saint Anthony Medical Center, No. 1:14-cv (N.D. Ill.) (filed June 2, 2014) 8. Lann v. Trinity Health Corporation, No. 8:14-cv (D. Md.) (filed July 11, 2014) 9. Morris v. Daughters of Charity Health System, No. 3:14-cv-4681 (N.D. Cal.) (filed Oct. 21, 2014) 10. Griffıth v. Providence Health & Services, No. 2:14-cv (W.D. Wash.) (filed Nov. 7, 2014) 11. Tucker v. Baptist Health System, Inc., No. 2:15-cv (N.D. Ala.) (filed Mar. 3, 2015) 12. Carver v. Presence Health Network, No. 1:15-cv (N.D. Ill.) (filed Apr. 2, 2015) 13. Kemp-Delisser v. Saint Francis Hospital and Medical Center, No. 3:15-cv (D. Conn.) (filed July 21, 2015) 14. Boden v. St. Elizabeth Medical Center, Inc., No. 2:16-cv (E.D. Ky.) (filed Mar. 17, 2016) 15. Lupp v. Mercy Health, No (S.D. Oh.) (filed Mar. 30, 2016) 16. Beiermann v. SSM Health Care Corp., No. 4:16-cv (E.D. Mo.) (filed Apr. 4, 2016) 17. Feather v. SSM Health, No. 3:16-cv (S.D. Ill.) (filed April 8, 2016) 18. Curtis v. Wheaton Franciscan, No. 1:16-cv (N.D. Ill.) (filed April 11, 2016) 19. Hodges v. Bon Secours Health System, Inc., No. 1:16-cv (D. Md.) (filed April 11, 2016) 20. Miller v. Bon Secours Health System, Inc., No. 1:16-cv (D. Md.) (filed April 18, 2016) 21. Nicholson v. Franciscan Missionaries of Our Lady Health System, No. 3:16-cv (M.D. La.) (filed April 21, 2016) 22. Jewett v. Franciscan Alliance, Inc., No. 1:16-cv (N.D. Ill.) (filed April 22, 2016) 23. Allen v. Iowa Health Systems D/B/A Unitypoint Health, No. 1:16-cv (C.D. Ill.) (filed April 29, 2016) COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN

5 53 3 Latest Developments Before December 2015, the six federal district courts that considered the threshold legal issue of whether a church plan must be established by a church were evenly split: the Northern District of California (in Rollins), the District of New Jersey (in Kaplan), and the Northern District of Illinois (in Stapleton) sided with the plaintiffs statutory interpretation, while the Eastern District of Michigan (in Overall), the District of Colorado (in Medina), and the District of Maryland (in Lann) sided with the defendants. In December, two notable decisions came down. In Medina, District Judge Robert Blackburn granted the defendants motion for summary judgment and dismissed the plaintiff s lawsuit in full. In so doing, Medina became the first of the recent church plan cases to reach on a full evidentiary record the issue of whether a church-affiliated health care system was associated with a church. Medina was also the first court to consider on the merits the argument made by some of church plan plaintiffs that permitting a church-affiliated health care system to claim the church plan exemption would violate the First Amendment s Establishment Clause. Several weeks later, a panel of the Third Circuit became the first court of appeals to weigh in and affirmed District Judge Michael Shipp s pro-plaintiff statutory interpretation in Kaplan. And just last month, a second appellate decision was issued by a Seventh Circuit panel in Stapleton, also siding with the plaintiffs. Each of these decisions is discussed in more detail below. Summary Judgment for the Defendants in Medina In his opinion granting the defendants summary judgment motion and denying the plaintiff s cross motion, District Judge Blackburn held that the defined benefit plan sponsored by Catholic Health Initiatives (the CHI Plan ) qualified as a church plan under 29 U.S.C. 1002(33)(C) and was therefore exempt from ERISA. In reaching this conclusion, the court began by examining the scope of the church plan exemption. Reiterating an opinion from earlier in the case, the court found that a plan need not be established by a church under subsection (A) of the statute to qualify as a church plan. Instead, a plan also can qualify as a church plan by satisfying subsection (C), i.e., if the plan is maintained by a tax-exempt organization controlled by or associated with a church whose principal purpose or function is the administration or funding of a benefits plan. The court then interpreted subsection (C) to apply to plans sponsored by church-affiliated non-profit organizations and administered by such an organization s plan committee if the principal purpose or function of the committee is administering the plan and the committee is controlled by or associated with a church. This interpretation of subsection (C) is consistent with Judge Cohn s opinion in Overall v. Ascension and with the long-standing interpretations of the IRS and DOL. In analyzing whether the CHI Plan qualified as a church plan under 29 U.S.C. 1002(33)(C), the court began by examining the history and structure of CHI. The court pointed out that CHI is the civil law identity of Catholic Health Care Federation ( CHCF ), a public juridic person of the Roman Catholic Church established under canon law by decree of the Holy See in the Vatican and accountable to the Holy See. As the civil law identity of CHCF, CHI s mission and purpose is to carry out the healing ministry of the Catholic Church. The court pointed out that CHI is required to comply with the Ethical and Religious Directives for Catholic Health Care Services ( ERDs ), which contain rules for Catholic health care providers promulgated by the United States Conference of Catholic Bishops. The local Catholic bishops in the dioceses in which CHI operates enforce CHI s compliance with the ERDs. The court also noted that the Roman Catholic Church publicly declared that CHI is a Catholic institution by listing CHI in the Official Catholic Directory. Turning to the administration of the CHI Plan, the court pointed out that the plan is managed and administered by a retirement plan committee of CHI. The members of the committee are appointed by CHI s board, and the committee is required to be mindful of Catholic teachings and tenets in administering the CHI Plan. Applying the church plan exemption to these facts, the court concluded that CHI s ties to the Catholic Church extend downward to the plan committee and that it was evident that both CHI and the [committee] plainly share common religious bonds and convictions with the Catholic Church. Indeed, the court explained, the entire reason for CHI s existence is to allow the [Catholic] Church to pursue its faith-based healing ministry in the secular world, and the [plan committee] must keep that mission at the forefront in its administration of the [CHI] Plan. Because there was no serious dispute that the principal purpose of the [plan committee] is to administer the [CHI] Plan, and the committee was associated with the Catholic Church, the court held that the CHI Plan qualified as a church plan under 29 U.S.C. 1002(33)(C). Although the court ultimately did not need to reach the question of whether CHI was a church, such that the CHI Plan qualified as a church plan under 29 U.S.C. 1002(33)(A), the court ha[d] little trouble in concluding that CHI is, at the very least, a constituent part of the Catholic Church. Likewise, while the court did not reach the question of whether the plan committee was controlled by a church under 29 U.S.C. 1002(33)(C)(i), the court stated that it was likely that the committee would meet that legal standard. Having concluded that the CHI Plan qualified as a church plan, the court addressed the plaintiff s claim that applying the church plan exemption to the CHI Plan would violate the Establishment Clause. The court rejected this claim, finding the plaintiff s arguments singularly unpersuasive. In reaching this conclusion, the court applied the Supreme Court s test for Establishment Clause violations first announced in Lemon v. Kurtzman, 403 U.S. 602 (1971). Under Lemon, a government action does not violate the Establishment Clause as long as it (1) has a secular purpose, (2) does not have the principal or primary effect of advancing or inhibiting religion, and (3) does not foster excessive government entanglement with religion. The court held that the church plan exemption satisfied each of the three Lemon factors and, [a]ccordingly, affording CHI the benefit of the church plan exemption works no violation of the First Amendment. The Medina opinion included several firsts with regard to the recent wave of church plan lawsuits. It was the first court to hold at the summary judgment stage that the plan of a Catholic health system was a church ISSN BNA

6 54 4 plan based on a full discovery record; the first court to suggest that a Catholic health system could qualify as a church under 29 U.S.C. 1002(33)(A); and the first court to reject a plaintiff s Establishment Clause challenge to the church plan exemption on the merits. The Third Circuit s Decision in Kaplan In an opinion on behalf of a Third Circuit panel that included Chief Judge Theodore McKee and Circuit Judge Thomas Hardiman, Circuit Judge Thomas Ambro affirmed the District of New Jersey s decision denying the defendant s motion to dismiss in Kaplan. In so doing, the panel agreed with District Judge Shipp that a church-affiliated non-profit like a hospital cannot establish a church plan. Beginning with the plain meaning of 29 U.S.C. 1002(33), the panel agreed with the district court that subsection (A) serves as a gatekeeper, meaning that every church plan must be established by a church. The panel reasoned that subsection (C)(i) only expands the universe of entities that can maintain a church plan not the entities that can establish a church plan in the first instance. Judge Ambro drew on several canons of statutory construction to support his conclusion. Primarily, he found that the interpretation advanced by Saint Peter s (and defendants in the other church plan cases) would render subsection (A) superfluous because establishment by a church would no longer be required. Although he noted that further analysis was unnecessary given the lack of ambiguity in the statute, Judge Ambro proceeded to reject Saint Peter s arguments as to legislative history, agency interpretation, congressional ratification, and constitutionality. First, he rejected Saint Peter s appeals to legislative history, finding that Saint Peter s has not pointed to a single statement showing that Congress, in addition to being concerned about the sunset provision and plans maintained by pension boards... was also focused on plans established by [church] agencies. Second, he rejected federal agency interpretations agreeing with Saint Peter s interpretation of the statute, reasoning that the agency interpretations were not promulgated through noticeand-comment rulemaking and lacked the power to persuade. Third, Judge Ambro was unpersuaded by Congress s having incorporated the church plan definition into later acts following the IRS s interpretation of the church plan exemption, observing that St. Peter s has not shown any evidence that Congress had such a detailed knowledge of the IRS interpretation. Finally, he rejected Saint Peter s argument that the district court s interpretation would cause unconstitutional distinctions between churches and church agencies (such as church-affiliated hospitals, schools, and charities), reasoning that Congress regularly applies provisions to churches without reference to church agencies. After the panel s opinion was issued, Saint Peter s filed a petition for rehearing and rehearing en banc, which was denied. The Seventh Circuit s Decision in Stapleton On March 17, 2016, Seventh Circuit Judge Ilana Rovner issued an opinion affirming District Judge Edmond Chang s decision for a panel including herself, Circuit Judge William J. Bauer, and Circuit Judge Michael S. Kanne. Judge Rovner agreed with Judge Chang and the Third Circuit that only a church may establish a church plan. According to Judge Rovner, under the defendants statutory interpretation, the established by a church requirement of subsection (33)(A) would become meaningless. Instead, she found that subsection (33)(C)(i) merely expands the types of organizations that can maintain a church plan, while preserving the requirement that a church plan be established by a church in the first instance. Judge Rovner also disagreed with the defendants argument about the manner in which the word includes in subsection (33)(C)(i) expands on the subsection (33)(A) requirement, concluding that the maintained element is expanded while the established element is unaffected. The opinion then analyzed the relevant legislative history and agency interpretations of the statute. Judge Rovner observed, first, that the 1980 amendments to the church plan definition were intended to address the socalled affiliated entity and pension board problems not to permit church agencies themselves to sponsor church plans. Second, she concluded, like the Third Circuit, that IRS interpretations of the church plan exemption were not entitled to deference because they did not result from formal notice and comment rulemaking. Finally, Judge Rovner rejected the defendants concerns with the constitutional implications of the district court s statutory interpretation. She noted precedent allowing Congress to distinguish churches from church-affiliated organizations, and providing that the burdens or benefits of a law need not be equalized across religious denominations. Future Developments: What to Expect As the recent decisions discussed above illustrate, the church plan landscape is changing rapidly, and the courts are split on the key statutory interpretation issue. More decisions are expected to come down soon, including by the Ninth Circuit in Rollins, to join the opinions by the District of Colorado and the Third and Seventh Circuits. In addition, a flurry of new lawsuits have been filed in the wake of the Kaplan and Stapleton opinions, with at least ten arising since March. If the courts continue to differ on the meaning of the church plan exemption, consensus may only arise through Supreme Court review or Congressional clarification whichever comes first COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN

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