On March 17, 2016, in Stapleton v. Advocate Health Care Network, the US Court of Appeals for the Seventh Circuit held that a retirement plan established by a church-affiliated organization 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 ( (7th Cir. Mar. 17, 2016)). The Seventh Circuit is the second circuit court to decide the issue, following a recent Third Circuit decision (see Legal Update, Retirement Plan Established by a Church Agency Does Not Qualify as an ERISA Church Plan: Third Circuit).

The facts are similar to those in the Third Circuit decision. Advocate Health Care Network (Advocate), the operator of several hospitals and other health care locations with ties to the Lutheran Church, maintained a non-contributory, defined benefit plan that covered substantially all of its employees. The plan was established by Advocate's predecessor who received an Internal Revenue Service (IRS) private letter ruling exempting the plan from ERISA on the basis that it was a church plan. Advocate did not operate the plan in compliance with the terms of ERISA and believed the plan to be exempt from complying with these provisions under ERISA's church plan exemption.

Participants filed suit against Advocate claiming that it had failed to comply with various ERISA obligations, including underfunding the plan and requiring an impermissibly long vesting period. They also sought an injunction requiring Advocate to reform the plan to comply with ERISA. Advocate moved to dismiss, arguing that the plan fell within ERISA's church plan exemption.

The district court denied Advocate's motion to dismiss, holding that the plan was not a church plan under ERISA's church plan exemption because it was not established by a church. Advocate 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 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)). For more information on the church plan definition, see Legal Update, Retirement Plan Established by a Church Agency Does Not Qualify as an ERISA Church Plan: Third Circuit.

The Seventh Circuit explained that ERISA Section 3(33)(A) requires a church plan to meet both an establishment requirement and a maintenance requirement. It reasoned that the maintenance requirement is expanded by ERISA Section 3(33)(C)(i) to include plans maintained by a church-affiliated organization, if they were first established by a church. According to the court, ERISA Section 3(33)(C)(i) does not expand upon who could establish a plan.

Under this reading, the court explained that a church plan can be either a plan:

The Seventh Circuit rejected Advocate's position that, under ERISA Section 3(33)(C)(i), a plan can qualify as a church plan merely by being maintained by a church-affiliated organization because the reading would make the establishment requirement of ERISA Section 3(33)(A) meaningless. Accordingly, because Advocate's predecessor that created the plan was not a church, its defined benefit plan was not established by a church and could not qualify as a church plan even though it was maintained by a church-affiliated organization.

Like the Third Circuit, the Seventh Circuit held that the statute's language was unambiguous and that its analysis could end there. However, the court went on to consider other additional arguments raised by the parties and determined that, even if they applied, the outcome would remain the same.

The decision marks the continuation in the recent litigation concerning 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)). As this issue seems to be on the rise, sponsors of plans established by church agencies should watch for more decisions in other circuit courts on this topic.