Analysis Law and Policy

Will the Roberts Court Allow Catholic Hospitals to Keep Underfunding Pension Plans?

Jessica Mason Pieklo

For more than 30 years, federal agencies have treated the pension plans of giant religiously affiliated businesses as church plans, thus making them exempt from funding requirements under the law.

The U.S. Supreme Court on Monday heard arguments in a series of cases with the potential to allow businesses like Catholic hospitals to avoid complying with employee benefits law by exploiting a “church plan” exemption.

If the Roberts Court sides with the businesses, that could mean approximately 95,000 employees would have less savings and fewer comprehensive benefits than the law would normally require. It could also potentially open up further challenges by religiously affiliated institutions to so-called burdensome government regulations.

Advocate Health Care Network v. Stapleton, and two cases consolidated with it, address the scope of the “church plan” exemption under the Employee Retirement Income Security Act of 1974 (ERISA), which governs employee pension plans.

ERISA law contains some key employee protections. Among them is a “fiduciary duty” standard that says plan managers and employers must act in the best interest of the employees. Another protection says pension funds, when existent, must meet certain minimum-funding requirements. Another provision forbids those plans from discriminating in the administration of those benefits, such as by matching a higher percentage of a male employee’s retirement contributions than a female employee’s, for example.

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ERISA was passed, and these provisions specifically enacted, in part because after the Studebaker-Packard Corporation went bankrupt in 1933, creditors took what was owed them under bankruptcy law. This, in turn, left many employees with pension buyouts that were less than 20 percent of their original value, and others with absolutely nothing when the company finally closed decades later. Studebaker-Packard wasn’t the only pension scandal, but it was a big enough one to help draw the attention of Congress, which answered by enacting ERISA.

But like most employment-related laws, churches have an ERISA exemption allowing them to avoid its regulatory requirements: Any plan that is “established and maintained for its employees by a church” is designated as exempt from ERISA regulation.

That exemption for “church plans” was broadened in 1980 through congressional amendments to the law. It now also “includes a plan maintained by an organization … controlled by or associated with a church.”

The explanation for the church plan exemption is like the rationale behind most religious or ministerial exemptions to other nondiscrimination laws: Churches and other religious orders have, as part of their business, spiritual outreach and ministry. So, the logic goes, it would be unfair to expect them to meet the same funding requirements as, say, a police union.

Then, religious groups aggressively entered the marketplace and began gobbling up secular hospitals and other social-service related businesses. For more than 30 years, the Internal Revenue Service, the Department of Labor, and the Pension Benefit Guaranty Corporation—the three federal agencies that administer ERISA—have still often treated the pension plans of those religiously affiliated businesses as church plans, and thus exempt from the funding requirements.

But these religiously affiliated employers began to grow well beyond church missions or homeless shelters into for-profit enterprises that compete with secular businesses. Treating an employer like Dignity Health, which is one of the largest health-care providers in California and one of the hospitals being sued in Advocate Health Care Network, the same as the local church-run soup kitchen when it comes to these issues does not make sense. That’s the argument advanced by employees in arguments Monday.

The hospitals, backed here by the Trump administration, argue that because the amended definition of “church plan” in the ERISA statute quotes the exemption directly and states that it includes “a plan maintained by an organization [affiliated] with a church,” affiliate plans like those run by Dignity and other employers are exempted without regard to whether they were established by a church or became part of a religious organization as a result of a corporate merger.

Monday’s arguments tried to sort that statutory language out and determine if Congress intended to exempt organizations like Catholic hospitals from ERISA—and if so, why did federal agencies allow those exemptions anyway?

Lisa Blatt, counsel for the Catholic hospitals, opened arguments by essentially explaining that should the justices rule against her clients then they would be forcing nuns like the Little Sisters of the Poor—whom you may remember for their crusade against the Affordable Care Act’s birth control benefit—to cough up potentially billions in penalties and employee contributions to plans they believed, thanks to federal agencies, they were not a part of. It’s a good argument to make on optics alone. It’s also one Blatt is particularly adept at putting forth, given that she has spent almost her entire career helping multibillion dollar corporations avoid court judgments and regulatory fines.

Not surprisingly Justice Samuel Alito found Blatt’s argument compelling, so when it was attorney James Feldman’s turn to argue on behalf of the rights of employees, the justice spent nearly half of the lawyer’s allowed 30 minutes badgering him about that financial burden on the corporations. Feldman pushed back, reminding the justices that while multibillion dollar corporations like Dignity Health may face a financial penalty, so too do their employees in the form of devalued retirement benefits.

Meanwhile, Chief Justice John Roberts and Justice Anthony Kennedy appeared the most concerned over how much, if any, deference, to give the letters federal agencies send to organizations in response to requests for church plan exemptions. Those letters, the hospitals argue, should control the church plan determination, even if they conflict with the ERISA statute. Kennedy noted he found the legislative history of ERISA “useless” to determine whether Congress intended to include large corporations within the church plan exemption, yet expressed reluctance that agency letters telling some religiously affiliated organizations to ignore ERISA requirements carry any authority on their own. Later, Kennedy contradicted those sentiments by insisting that it was reasonable for those same businesses to rely on those agency letters when deciding to underfund employee pensions; to rule against them now, he said, would be unfair.

But it was Justice Sonia Sotomayor who offered the most cutting critique of the hospitals’ case, pressing them for justification within the statutory language of ERISA that would grant multibillion dollar companies a pass from employee benefits regulations. Blatt offered no good response and instead pivoted to an anecdote about federal agencies telling an order of nuns they did not qualify for the church plan exemption because they were not engaging in priestly duties. Thus, Blatt’s logic suggested, to rule against her clients now would be akin to ruling against nuns.

That sounds like a religious patriarchy problem to me, not one of statutory construction. Unfortunately, none of the justices raised that point and instead moved back into the specific language of the statute: Did it or did it not allow employers like Dignity Health to claim the church plan exemption under ERISA?

By the end of arguments there was, as is usually the case, no clear consensus from the justices on how they would rule. So far three courts of appeals have agreed with the employees, holding employers like Dignity should not qualify for the church plan exemption in ERISA. But that may mean little to the pro-business conservative wing of the Roberts Court. The real question though is whether one of the more liberal justices agrees.

A decision in the case is not expected until later this summer.

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