On December 29, 2015, in Kaplan v. Saint Peter's Healthcare Sys., the US Court of Appeals for the Third Circuit held that a retirement plan established by a church agency was not a church plan qualifying for an exemption under the Employee Retirement Income Security Act of 1974 (ERISA) because it was not established by a church (No. 15-1172, (Dec. 29, 2015)). The Third Circuit is the first circuit court to decide the question in a holding.

Saint Peter's Healthcare System (St. Peter's), a nonprofit healthcare entity with ties to the Roman Catholic Church, established and maintained a non-contributory defined benefit plan that covered substantially all of its employees. For decades, St. Peter's operated the plan subject to ERISA and represented to its employees that it was complying with ERISA. In 2006, St. Peter's filed an application with the Internal Revenue Service (IRS) seeking an exemption from ERISA's requirements under the church plan exemption (29 U.S.C. § 1003(b)(2)). During this time, it continued to pay ERISA-mandated insurance premiums.

In 2013, the employee participants filed suit against St. Peter's claiming that it failed to comply with various ERISA obligations, including that the plan was underfunded by more than $70 million. 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.

St. Peter's moved to dismiss the suit, claiming that its plan qualified for ERISA's church plan exemption and was not required to comply with the ERISA provisions the employees claimed it violated. The district court denied St. Peter's motion to dismiss, holding that St. Peter’s could not establish an exempt church plan because it was not a church. St. Peter's appealed.

ERISA provides an exemption from its requirements for church plans that have not made an election to be covered by certain provisions of the Internal Revenue Code (Code) (29 U.S.C. § 1003(b)(2)). These plans are exempt from many ERISA provisions, including fiduciary obligations and minimum funding rules (see Practice Notes, Title I of the Employee Retirement Income Security Act (ERISA): Overview and Requirements for Qualified Retirement Plans: Minimum Funding Requirements). The general definition in ERISA provides that a church plan is an employee benefit plan that is established and maintained for its employees by a church or convention or association of churches (29 U.S.C. § 1002(33)(A)).

After the original definition of "church plan" was passed as part of ERISA, Congress enacted the Multiemployer Pension Plan Amendments Act of 1980, which expanded the definition.

Specifically, Section 3(33)(C)(i) of ERISA provided that:

"A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, 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 convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches."

The effect of the new definition was to include plans maintained by church agencies, such as church pension boards, and allowed churches to establish plans that covered church agency employees after a certain sunset provision kicked in (29 U.S.C. § 1002(33)(C)).

The Third Circuit explained that the new definition did not remove the requirement that a church plan must be established by a church. Focusing its analysis on the plain meaning of the statute, it reasoned that ERISA Section 3(33) requires a church plan to meet both an establishment requirement and a maintenance requirement. Specifically, it explained that a church plan can either be a plan:

(29 U.S.C. § 1002(33).)

The court rejected St. Peter's reading that the amended definition of church plan also includes a plan established by a church agency because that reading failed to follow the plain meaning of the statute. Accordingly, because St. Peter’s itself is not a church, its plan was not established by a church and could not qualify as a church plan even though it was maintained by a church agency.

In its analysis, the court also noted that various canons of statutory construction supported its holding, reasoning that:

Although the court held that the statute was unambiguous and its analysis complete, it went on to consider other additional arguments raised by St. Peter's and concluded that, even if these arguments applied, the result would remain the same. Specifically, the court addressed:

The court also noted that the IRS private letter rulings exempting plans established by church agencies, based on a general counsel memorandum (Gen. Couns. Mem. 39,007 (July 1, 1983)), only act as persuasive authority because they are not part of formal adjudication or notice and comment rulemaking.

Coming after a split at the district court level on whether plans established and maintained by church agencies can qualify for an exemption from ERISA under Section 4(b)(2) (29 U.S.C. § 1003(b)(2)), the Third Circuit is the first circuit court to consider this issue. As this issue seems to be on the rise, sponsors of plans established by church agencies should watch for possible decisions in other circuit courts on this topic.