Administration April 4, 2014

Detroit Announces Planned Pension Benefit Reductions

April 4, 2014 (PLANSPONSOR.com) – New bankruptcy paperwork filed by city of Detroit includes benefits reductions for the city’s two public pension funds.
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This week, the city filed an amended plan of adjustment and a related disclosure statement with the U.S. Bankruptcy Court for the Eastern District of Michigan. This paperwork offers clarification for retirees about how much pension benefit reductions would be should the two pension classes involved accept or reject the revised plan of adjustment and the proposed $816 million in outside funding. Detroit’s two public pension funds have opposed the city’s bankruptcy from the beginning (see “Detroit as Bellwether? Maybe Not”).

According to an announcement from the city, for Police and Fire Retirement System participants, voting ‘yes’ for the plan would mean a pension benefit reduction of 6% and elimination of cost of living adjustments (COLA). Voting ‘no’ would mean a 14% benefit reduction and COLA elimination.

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As for General Retirement System participants, voting ‘yes’ would mean a 26% pension benefit reduction and elimination of cost of living adjustments. Voting ‘no’ would mean a 34% pension benefit reduction and COLA elimination.

The amended filing also offers greater detail regarding the plan that the city proposed in February, as well as the city’s restructuring efforts. According to the announcement from the city, Detroit expects to file further amendments to the plan and disclosure statement before the scheduled April 14 hearing for approving the statement. City officials say they expect Detroit to exit the bankruptcy process by late summer.

Copies of the plan and disclosure statement, along with additional information about the bankruptcy can be found here. Bankruptcy Court filings are available here, free of charge.

Compliance April 3, 2014

Sixth Church Plan Challenge Added to List

April 4, 2014 (PLANSPONSOR.com) – Advocate Health Care Network in Illinois is the latest pension plan sponsor facing a challenge to its plan’s status as a “church plan.”
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Four Advocate plan participants allege in a lawsuit filed in the U.S. District Court for the Northern District of Illinois that the organization’s retirement plan is not a church plan as defined in ERISA Section 3(33)(A) because it was not “established and maintained by” a church or by a convention or association of churches and were not maintained for employees of any church or convention or association of churches. In addition, the lawsuit says the Advocate plan does not qualify as a church plan under Section 3(33)(C)(i) because it is not maintained by any entity whose principal purpose or function is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both.

The participants contend that even if the Advocate plan had been “established” by a church and even if the principal purpose or function of Advocate was the administration or funding of the Advocate plan (instead of running a hospital conglomerate), the plan still would not qualify as a church plan under ERISA Section 3(33)(C)(i) because the principal purpose of the plan is not to provide retirement or welfare benefits to employees of a church or convention or association of churches. “[T]he approximately 33,000 participants in the Advocate Plan work for Advocate, a non-profit hospital conglomerate. Advocate is not a church or convention or association of churches and its employees are not employees of a church or convention or association of churches within the meaning of ERISA,” the complaint says.

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The lawsuit notes that under ERISA Section 3(33)(C)(ii) an employee of a tax exempt organization that is controlled by or associated with a church or a convention or association of churches also may be considered an employee of a church. It points out this part of the definition merely explains which employees a church plan may cover once a valid church plan is established, but Advocate is not controlled by or associated with a church or convention or association of churches within the meaning of ERISA. Advocate is not controlled by a church or convention or association of churches, it is not owned or operated by a church and does not receive funding from a church, and it is not “associated with” a church or convention or association of churches within the meaning of ERISA, the complaint says.

According to the lawsuit, the Advocate plan is a cash balance plan because it computes accrued benefits by reference to hypothetical accounts balance or equivalent amounts and is therefore required to comply with the special rules for cash balance plans, including but not limited to ERISA Section 203(f)(2), which requires that any employee who has completed at least three years of service has a non-forfeitable right to 100% of the employee’s accrued benefit derived from employer contributions. Unrelated to the church plan issue, the participants contend currently the plan is being operated in violation of ERISA because it requires participants in the plan to complete five years of service to be vested.

The filing of the lawsuit comes between rulings in two similar suits finding the plans were not church plans (see “Another Court Rejects Pension’s ‘Church Plan’ Status”).

The Advocate suit is the sixth such suit to be filed. Decisions in the cases could reverse 30 years of precedent (see “Church Plan Lawsuits Could Reverse 30 Years of Precedent”). The U.S. government has intervened, saying it will decide when and if to address constitutionality claims depending on further developments in the cases (see “U.S. Intervenes in Church Plan Lawsuits”).

The complaint in Stapleton v. Advocate Health Care Network is here.

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