For the past few months, various online articles and ERISA blogs have been discussing the Internal Revenue Service’s (“IRS”) revocation of Cathedral Healthcare System Inc.’s (“Cathedral”) church plan status. Cathedral was a hospital located in Orange, NJ that shutdown its operations in 2004. Cathedral sponsored a defined benefit plan that was previously insured by the Pension Benefit Guaranty Corporation (“PBGC”) under Title IV of ERISA. In 1998, Cathedral became affiliated with a church and sought a ruling from the IRS that the hospital’s pension plan had become a church plan as a result of the affiliation. The IRS determined that Cathedral’s pension plan was a church plan.
Because section 3(33) of ERISA exempts plans established and maintained by a church or convention or association of churches from ERISA’s requirements, this meant that Cathedral’s pension plan was no longer subject to ERISA and no longer covered by the PBGC. Shortly after the IRS’s determination, Cathedral began experiencing financial problems and eventually ceased all operations. When participants learned that their pension plan had become a church plan, and their benefits were no longer protected by PBGC’s insurance program, the participants, with the help of a pension advocate group and PBGC, persuaded the IRS to reconsider the pension plan’s status as a church plan. The participants argued that under federal rules, once a plan is an ERISA plan, it cannot later become a church plan, and that the IRS should have never granted church plan status to Cathedral’s pension plan. IRS agreed and ultimately reversed its earlier ruling. PBGC then took over the plan.
The Cathedral case is pushing a number of church-affiliated plan sponsors to seek a church plan ruling from the IRS and appears to be causing a wave of participant suits against church plan sponsors. In these suits, participants are asking the courts for a determination of their plan’s status by arguing that the sponsoring employers are erroneously claiming to be churches or church-affiliated organizations, and therefore, violating ERISA by failing to maintain their plans in accordance with ERISA. Multiple class action complaints challenging the church plan status of some church-affiliated hospitals with underfunded pension plans are currently pending before federal district courts. Some of the arguments in the complaints are that the plans are not church plans because the hospital sponsors were not “established” by a church or convention or association of churches, and even if the plans could qualify as church plans, they would be specifically excluded because substantially all of the employees in the plans are not employed by an organization that is controlled by or associated with a church. Another argument is that the sponsors are not “associated with” the church because the hospitals deliberately choose to distance themselves from the church’s religious bonds and convictions when it serves the hospitals’ economic interest to do so.
Although it is unclear what the outcome of these complaints will be for the hospitals involved, what is clear is that plan sponsors claiming church plan status should re-examine their organizations to determine whether their
plans continue to qualify for the church plan exemption under ERISA. IRS is currently accepting requests for favorable determination letters from church plan sponsors and IRS considers such requests to be mandatory assignment cases.
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