In a ruling that could have cost nonprofit religious-affiliated employers millions of dollars in compliance and other costs had it gone the other way, on June 5, 2017, the U.S. Supreme Court held, in a unanimous opinion authored by Justice Kagan in Advocate Health Care Network v. Stapleton, Nos. 16-74, 16-86, 16-258, 2017 U.S. LEXIS 3554, (June 5, 2017), that employee benefit plans established or maintained by church-affiliated entities are exempt from regulation under the Employee Retirement Income Security Act of 1974 (“ERISA”), even when they are not originally established by a church and in so doing, reversed the judgments of the Third, Seventh and Ninth Circuits.
The cases arose out of three class action lawsuits filed by employees of church-affiliated nonprofits that run hospitals and other healthcare facilities and the dispute hinged on the combined meaning of two separate ERISA provisions under 29 U.S.C. § 1002(33), which Justice Kagan boiled down to:
“Under paragraph (A), a “‘church plan’ means a plan established and maintained . . . by a church” and [u]nder subparagraph (C)(i), “[a] plan established and maintained . . . by a church . . . includes a plan maintained by [a principal-purpose] organization.'”
The employees claimed that their employers’ pension plans did not fall within ERISA’s church-plan exemption because, although subparagraph (C)(i), a 1980 amendment to ERISA, allowed so-called “principal-purpose organizations,” such as the defendant nonprofits, to “maintain” exempt benefit plans, ERISA still required that such plans must have been originally “established” by a church. In contrast, the hospitals claimed that subparagraph (C)(i) was added “to bring within the church-plan definition all pension plans maintained by a principal-purpose organization, regardless of who first established them,” a position long taken by the IRS, the Labor Department and the Pension Benefit Guaranty Corporation. The Third, Seventh and Ninth Circuits all agreed with the employees and determined that the plain language of the statute required that to be exempted, the plan must have originally been “established” by a church.
The Supreme Court granted certiorari based on its determination that the issues in the cases raised important matters and began its analysis by examining the statutory language. In determining that Congress was really creating a new exemption when it added subparagraph (C)(i), the Court phrased the issue as a simple logic problem with paragraphs (A) and (C)(i) as its first two steps, stating:
“Premise 1: A plan established and maintained by a church is an exempt church plan and Premise 2: A plan established and maintained by a church includes a plan maintained by a principal-purpose organization. Deduction: A plan maintained by a principal-purpose organization is an exempt church plan.”
As such, it stated that since Congress deemed that the category of plans “established and maintained” by a church “to include” plans maintained by principal-purpose organizations, then all those plans are exempted from ERISA. The Court further noted that had Congress wanted to accomplish what the employees claimed it intended by adding (C)(i), it could have simply omitted the words “established and” and allowed principal-purpose organizations to maintain previously established plans while still requiring that they be established by a church. The Court also restated its long-standing practice “to give effect, if possible, to every clause and word of a statute” and noted that following the employees’ claims would require it to treat “established and” as “stray marks on a page – notations that Congress regrettably made but did not really intend.”
By ruling this way, the Court essentially maintained the status quo, as the three previously mentioned federal agencies had been consistently interpreting the statute this way for more than 30 years. However, it will probably end, or at least severely curtail, the recent trend of class action lawsuits stemming from so-called “church-plan conversions” filed by employees of principal-purpose organizations.