December 31, 2015

(Washington, D.C.) A federal appeals court has ruled that a pension plan established by St. Peter's Healthcare system does not qualify as a "church plan" exempt from the Employment Retirement Income Security Act (ERISA), the federal pension law that requires such plans to be fully funded and provides employees with certain rights related to benefit entitlements.

The unanimous decision, written by Judge Thomas Ambro, of the U.S. Court of Appeals for the Third Circuit on Dec. 29, 2015, upheld a U.S. District Court decision that St. Peter’s Healthcare System, which is headquartered in New Brunswick, N.J., and employs more than 2,800 people, was ineligible for the church-plan exemption because it was not established by a church.

“We are pleased with the Court’s decision, which upholds the rights of St. Peter’s pension fund participants to a fully funded pension plan and to other federal  protections  designed to insure that the money is there when workers need it for their retirement,” said co-lead plaintiff’s counsel Karen L. Handorf, of Cohen Milstein Sellers & Toll PLLC.

St. Peter’s established its retirement plan in 1974 and for more than three decades operated the plan subject to ERISA, representing to its employees in plan documents and other materials that it was complying with ERISA.  In 2006, St. Peter’s filed an application with the Internal Revenue Service seeking a determination that it was exempt for tax purposes.

In May 2013, Laurence Kaplan, who worked for St. Peter’s from 1985 to 1999, filed a putative class action lawsuit on behalf of himself and other pension participants alleging that St. Peter’s failed to comply with various ERISA obligations in the years after the healthcare system applied for church-plan exemption. The most serious allegation was that, as of the end of 2011, the plan was underfunded by more than $70 million. 

In August 2013, while the lawsuit was pending, St. Peter’s received a private letter ruling from the IRS affirming the plan’s status as an exempt church plan for tax purposes. The system moved to dismiss the lawsuit claiming that it qualified for ERISA church plan exemption and therefore was not required to comply with the provisions the lawsuit claimed it had violated. The District Court denied the motion after concluding that St. Peter’s could not establish an exempt church plan because it is not a church.  St. Peter’s subsequently appealed that decision to the Third Circuit.

In addition to rejecting the IRS’ interpretation of the church-plan exemption, the Third Circuit further noted that as of 2012, religiously affiliated hospitals accounted for seven of the nation’s 10 largest nonprofit healthcare systems and that to construe the church plan exemption to apply to such hospitals would defeat the purpose of ERISA.  The Court also rejected St. Peter’s argument that the IRS interpretation was necessary to avoid entanglement in religion, noting that Congress regularly distinguishes between churches and church agencies.

As the decision noted, Kaplan v. St. Peter’s Healthcare System is part of a “new wave of litigation” throughout the nation challenging the exempt status of pension plans established by religiously affiliated hospitals.  It is likely to set the tone for litigation pending against Advocate Health in the Seventh Circuit and Dignity Health in the Ninth Circuit, both of which are on appeal from decisions also holding that religiously affiliated hospitals cannot avoid federal pension regulations by claiming that their pension plans are ”church plans.”

Because the Court has determined that the St. Peter’s plan is not an exempt church plan, it must now comply with all of ERISA’s protections which require, among other things, that the Plan be fully funded. 
 
The plaintiffs in Kaplan v. St. Peter’s Healthcare System are represented by Karen L. Handorf and Michelle C. Yau of Cohen Milstein Sellers & Toll PLLC, and Lynn Sarko, Ron Kilgard, and Havila C. Unrein of Keller Rohrback L.L.P.

For more information, or a copy of the decision, visit:/case-study/saint-peters-healthcare-system-church-plan-litigation.