Supreme Court rules on tax-exempt hospitals and church plans

July 8, 2017

By Mark Luscombe and George G. Jones, Accounting Today, July 03 2017:
In a somewhat surprising decision, a unanimous Supreme Court (with new Justice Neil Gorsuch not participating) overturned the consistent views of three circuit courts, the Third, Seventh and Ninth, and sided instead with the interpretation of three federal agencies, the Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corp., to hold that pension plans established and maintained by tax-exempt hospitals affiliated with churches qualify for the “church plan” exemption from certain ERISA [Employee Retirement Income Security Act of 1974] requirements, even though those plans were not established by a church. 

ERISA Language

At issue for the court was the interpretation of a 1980 amendment to ERISA. Under ERISA, “church plans” do not have to comply with the various reporting, participation, vesting and funding requirements of ERISA.

Prior to 1980, a “church plan” was defined in ERISA Section 1002(33)(A) as “a plan established and maintained … for its employees … by a church or any convention or association of churches.” In 1980 this definition was changed. The change added reference to church-affiliated organizations in ERISA Section 1002(33)(C)(i):

A plan established and maintained for its employees … by a church or by a convention or association of churches includes a plan maintained by an organization … 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 or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.

The IRS and other federal agencies interpreted the language to mean that the internal benefits committee of a church-affiliated nonprofit meets this definition.

Employees of church-affiliated hospitals sued, contending that the pension plans of church-affiliated hospitals were not exempt from ERISA requirements since, for the pension plan to be exempt, the plan must still be established by the church even though it is maintained by a church-affiliated organization.

The new ruling

The unanimous Supreme Court in Advocate Health Care Network v. Stapleton, SCt. 2017-1 USTC ¶50,237, ruled that the statutory language permits the exemption of a pension plan from the ERISA requirements even if it was established by the church-affiliated organization and not by the church itself.


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