Religious exception for church-related pensions takes a hit

By BenefitsPro

By Dan Cook

When is a religious entity permitted to dodge the letter of the law with respect to pensions? Most of the time, according to traditional interpretations of those laws.

That status has long frustrated plaintiffs’ attorneys, because it has provided cover to religiously affiliated hospitals and other “businesses” whose plans don’t meet ERISA standards.

Pension shortfalls at some religiously affiliated hospitals, businesses and social service agencies are raising new alarms and spotlighting a largely overlooked gap in the law protecting Americans' retirement benefits. Congress set up the exemption in benefits law to protect churches from government interference in their finances.

Now, however, the plaintiffs’ lawyers may have found a federal judge willing to crack open those protections.

As detailed on the website of the Groom Law Group of Washington, D.C., the fight stemmed from efforts to limit the definition of the term “church plan” to actual churches and not their related hospitals, schools, thrift shops and other entities “maintained” by the church. The result of such protection: underfunded pension plans maintained by church-related organizations.

Of course, the underfunded plans give these entities a competitive advantage compared to non-religious schools and hospitals that have to follow the ERISA law. (The question of whether an underfunded plan is also a competitive disadvantage in attracting quality employees is not addressed in the discussion.) More to the point for the plaintiffs’ lawyers, hundreds of thousands of employees of these entities could be owed back pension contributions if the definition were narrowed.

With visions of multibillion-dollar class action awards swimming before them, five plaintiffs’ attorneys sued in different venues last year, hoping to come up with a favorable ruling.

They got it in Rollins v. Dignity Health, with Judge Thelton Henderson in the Northern District of California issuing the ruling in mid-December.

Thelton essentially gave the plaintiffs’ bar what it wanted. While acknowledging that pretty much every previous decision had gone the other way, he said that, from a “plain reading” of the religious ERISA exception, the earlier opinions missed the point.

They had assumed that if a church established and maintained a protected plan, that plan could be extended to any related entities. Thelton said no way — once the plan leaves the sanctity of the church, it has to meet full ERISA standards.

Groom Law Group opines that this is but one isolated opinion, flying in the face of hundreds supporting the exception. Certainly, it will be appealed. In addition, Groom hints at a legislative solution to tighten up the protections so that the related entities will be fully covered once and for all. “There may be an opportunity to mobilize supporting in Congress to clear up any ambiguity resulting from Rollins by amending the definition of church plan,” the firm wrote.

But, it added, many dire consequences lie in store for these entities should Rollins prevail on appeal. We’re talking Department of Labor fines, massive IRS penalties, and even determining where a protected plan begins and ends.

“The income tax consequences in particular may present a problem” because “many church plans will not have met the Internal Revenue Code qualification requirement applicable to non-church plans,” Groom says.

It advises those possibly affected by the decision to carefully monitor the situation.

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