A federal court judge has dismissed a lawsuit alleging a health care system in North Carolina falsely claims to be a governmental entity, allowing it to dodge Employee Retirement Income Security Act (ERISA) requirements and protections for its retirement and health plans.

The complaint—naming defendants The Charlotte-Mecklenburg Hospital Authority, Atrium Health Retirement Committee and its individual members, and MedCost Benefits Services LLC—said Atrium has never satisfied the Federal law definition of a government of a state, a government of a political subdivision, or an agency or instrumentality of such and, therefore, the plans do not qualify as ERISA-exempt governmental plans. The plaintiffs claim Atrium’s plans were not established by a governmental entity, and the plans are not maintained by any governmental entity.

U.S. District Judge Thomas D. Schroeder of the U.S. District Court for the Middle District of North Carolina noted in his opinion that the Authority is a non-profit health care conglomerate headquartered in Mecklenburg County, North Carolina. The City of Charlotte created the Authority in 1943 pursuant to the Hospital Authority Act (HAA) of North Carolina’s General Statutes. The HAA authorizes cities and counties to create hospital authorities “whenever a city council or a county board of commissioners finds and adopts a resolution finding that it is in the interest of the public health and welfare to create a hospital authority.” The Charlotte-Mecklenburg Hospital Authority is registered as a “municipal” body.

According to the court document, the Authority is governed by the Board of Atrium Commissioners. The Mayor of Charlotte appointed the Authority’s original commissioners, who took an oath to support the state and federal constitutions. To appoint new Board members, the Board submits a list of nominees to the Chairman of the County Commissioners, and the chairman appoints commissioners from that list. The chairman can remove the commissioners for inefficiency, neglect of duty, or misconduct in office, after notice and a hearing, and is required to remove any commissioner who, after notice and a hearing, is found to have acquiesced in any willful violation by the Authority of state law or of any contract to which the Authority is a party.

The Authority is granted “all powers necessary or convenient to carry out the purposes of [the Act].” The Authority has the power of eminent domain, may issue tax-exempt bonds, is not subject to tax on real property, personal property, or motor fuel, and is not subject to federal or state income tax or state franchise tax. The commissioners of the Authority’s board may not be compensated for their services. The Authority is also subject to open meetings laws and public records laws.

The defendants asked the court to take judicial notice of the Authority’s governing statute and articles of incorporation, the Authority’s registration in the Secretary of State’s website, as well as several statutes, administrative rulings, and an IRS private letter ruling.

Schroeder noted that, according to ERISA, a governmental plan is a “plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of the foregoing.” The parties in the suit agreed that if the Authority’s plans are governmental plans, then the plans are not subject to ERISA coverage and the plaintiffs’ claims fail as a matter of law.

According to Schroeder, while the 4th U.S. Circuit Court of Appeals has not established a test for determining whether an entity is a governmental plan, to determine whether an entity is a “political subdivision” under federal law, courts routinely apply the test from NLRB v. Natural Gas Utility District of Hawkins County. This test provides that “political subdivisions” are “entities that are either created directly by the state, so as to constitute departments or administrative arms of the government, or administered by individuals who are responsible to public officials or to the general electorate.”

Schroeder said the Authority satisfies the first prong of the Hawkins test because it was created by the state of North Carolina through a delegation of its authority pursuant to the HAA. The plaintiffs argue that the Supreme Court in Hawkins cited the 4th Circuit’s decision in NLRB v. Randolph Electric Membership Corporation for the principle that a court looks to “the actual operations and characteristics of [entities] in deciding whether [they are] political subdivisions.” However, Schroeder pointed out that both the Supreme Court in Hawkins and the 4th Circuit in Randolph Electric considered the state statutes under which the entities were organized to ascertain the entities’ characteristics.

“Because Defendants have provided ample persuasive case law holding that creation by a local entity pursuant to a state enabling statute is sufficient to satisfy the first prong of the Hawkins test, and Plaintiffs have neither distinguished these cases from the present case nor provided persuasive contrary authority, the court finds that the first prong of the test is satisfied,” Schroeder wrote in his opinion.

Schroeder said that because the Hawkins test is disjunctive, satisfying either prong is sufficient for an entity to attain “political subdivision” status and thereby categorize its retirement benefits plans as “governmental plans” exempt from ERISA coverage. However, he explained why he was also persuaded that the Authority meets the second prong of the test.

“Courts have held that the second Hawkins prong—that the entity is administered by individuals who are responsible to public officials or to the general electorate—is met when public officials appoint and may remove the entity’s governing members. The complaint alleges that the Authority’s commissioners do not include state officials and that the commissioners are not appointed or removed by state officials. But there is no requirement that the entity consist of state officials or individuals who are appointed by state officials, so long as local government officials have appointment and removal power,” Schroeder stated.