High Court Hears Oral Arguments in Church Plan Cases

The U.S. Supreme Court heard oral arguments this week in the cases of Advocate Health Care Network v. Stapleton, St. Peter’s Healthcare System v. Kaplan, and Dignity Health v. Rollins.

Of the many cases challenging whether an entity’s pension plan is a “church plan” under the Employee Retirement Security Act (ERISA), federal appellate courts ruled that the plans in these cases did not fit ERISA’s definition of “church plan.”

The bulk of the oral arguments focused on the definition of a church plan set forth in Section 3(33) of ERISA and whether deference should be given to Internal Revenue Service (IRS) letters granting church plan status to entities’ plans.

Lisa S. Blatt, counsel on behalf of the petitioners, argued that the holdings in the three district court cases should be reversed for three reasons. She said the text of the statute does not require a church to establish benefit plans for someone else’s employees; the government’s consistent view, over three decades, has generated enormous reliance interest and warrants deference; and affirmance would resurrect the precise problems that everyone understood the 1980 amendment would fix.

Blatt noted that the main text at issue is subparagraph C(i) of section 3(33) which she said expands the original church plan definition in subparagraph A. “Now, the only plausible reason that C(i) repeats the entire phrase “a plan established and maintained by a church” is Congress intended that C(i) redefine and modify that entire phrase,” she argued.

But, Justice Sonia Sotomayor pointed out there was a provision that was proposed that would have done very clearly what Blatt thinks this provision does now, and Congress didn’t pass it.  Blatt responded that the clear thing in terms of this unpassed piece of legislation is it came out in the last couple of days of this several-year process, and it is implausible that that change went unnoticed when it would have excluded all the plans that the religious community was up in arms about, and all the plans that prompted the amendment in the first place.

Justice Elena Kagan pointed out there would be a simple way of accomplishing what Blatt thinks this provision accomplishes.  “You know, something along the lines of just saying any plan maintained by a church-affiliated organization is a church plan or something like that,” she suggested. “It’s very odd language, this statutory language, and I’m wondering why you think that Congress chose to do what you think it chose to do in this perplexing way rather than in a straightforward way?”

Justice Ruth Ginsberg said she thought Blatt would like the provision to say includes a plan maintained by an organization controlled by or associated with a church, but the provision seems to be giving authority to principal-purpose organizations and not to entities controlled by or associated with a church.

Sotomayor asked Blatt, “Do you think Congress had in mind corporations that are essentially like every other corporation except they’re not for profit?”  She pointed out that the Catholic Church has disavowed any formal affiliation with Dignity. She noted that the nuns may have established Dignity, but they’re no longer are affiliated with the church. “They’re not doing anything different than any other hospital. They are competing. They’re the fifth largest health care provider in the nation. They have 60,000 employees.  Do you believe that Congress’s vision was to let, what is essentially, a corporate entity opt out of protecting all of those employees?”

James A. Feldman, counsel on behalf of the respondents, argued that Congress actually defined church plans carefully. They wanted a close tie between the church and the plan because their purpose was they didn't want to get involved in church affairs, so they said church plan has to be established and maintained by a church. “It needs to fit both criteria because we want, if there's church involvement here, we want hands off. If there's no church involvement, though, there's no reason why these hospitals, like any other hospital in the country, and like every other firm in the country shouldn't have to provide the employees with the pension insurance to protect them against the possibility that when the plan goes bust, they end up with nothing,” he stated.

He further argued that the petitioners’ view is Congress wanted to allow fishing—they wanted these agencies to split up—these plans to split apart, and the agency to have its own plan and the church to have its own plan.  But, he said, it's exactly the opposite. Congress wanted to allow churches to continue, as they had been, to have a plan that would cover both the churches' employees and the agencies' employees.

“I think that the literal meaning of [the statute], as all three courts of appeals unanimously agreed, this is not a standalone statute,” Feldman continues. He gives the example that there are statutes in the U.S. code that don't define a term, and then they say, but a term includes something or other. And then courts are supposed to figure out what else the term includes. “But this statute doesn't do that.  And in fact, the language at the beginning of (C)(i), a plan established and maintained by a church…can't be read as a standalone statute, because it wouldn't make any sense,” he says.

Feldman continued, “If the Court has said one thing more often than anything else in the context of statutory interpretation, it's that you have to read things in context and you have to read statutes as a whole. And this (C)(i) has language that ties it directly back to A, which Congress said in 1980, we are retaining A the way it is. And I think you have to read them both together. The basic form of this is if you have a statute that says here's a rule that applies to A and B, and then it says A and B includes a particular kind of B—this says established and maintained includes a particular kind of maintenance—then that is naturally taken to mean a plan must be established by a church.”

Tess Gee, member in the ERISA & Employee Benefits Litigation practice at Miller & Chevalier, comments, “Regardless of how the Court rules, this will not be the end of the litigation. The issue of whether the hospitals are a “principal purpose organization” has yet to be briefed. Even if the Court decides in their favor, the hospitals will have to establish that they are a PPO, as their counsel conceded at the argument, to qualify for the church plan exemption. If the respondents/participants prevail, the lower courts will have to determine what it means to bring those plans into ERISA compliance and how to quantify losses. Another significant issue is constitutional standing. If the respondents prevail in arguing that these hospital plans are covered by ERISA, the hospitals are certain to raise the standing issue immediately upon remand.”

Justice Anthony Kennedy asked why the court should give so much deference to Internal Revenue Service (IRS) letters giving plans church plan status when there was no notice and comment regulation.

Blatt responded that “Countless plans have been structured around the IRS, the Department of Labor, and the PBGC's view, and if you affirm, just for all the existing plans that were not established, you're unleashing a torrent of undesirable and unintended consequences, not just for the hospital[s].”

When Chief Justice John Roberts asked Feldman why the IRS, the Department of Labor (DOL), and the Pension Benefit Guaranty Corporation (PBGC) for 30 years took the opposite view of what Feldman presented, Feldman said, “they took this view in the early 1980s at a time when they were facing one or two… I'm not sure they knew at the time when they started down this road what it was going to lead to in terms of the hundreds of hospitals and other businesses that were going to be able to just deprive their employees of ERISA benefits.”

Feldman also noted that the first letter, which was the general counsel memorandum from 1982 and 1983, said “this may not be relied upon or cited as precedent.” He said the government had that "this may not be relied upon" language because it didn't want to be bound to this.

Of the hundreds of letters the IRS issued, Feldman agreed the agency did believe the interpretation was different, but there is no reasoning in the letters for this. “And insofar as there is any, it's wrong,” he stated.

“These were ex parte letters. Every one of them, up until the last couple of years, was done on an ex parte basis. The competitors had no chance to say this is what we think. The employees had no chance to say this is what we think. They didn't analyze the importance of ERISA provisions. They didn't analyze what would, [and] inevitably did happen, which is there are six or seven church plans already that have failed and left the employees with nothing; but had they been covered by ERISA, they would have had PBGC insurance,” Feldman concluded. “The IRS didn't take any of that into account at all. They didn't consider the practical consequences of this, they didn't consider the history of it, they didn't consider the relationships between the A and the C(i) provision. They just didn't consider what any of the particular words of the statute meant. They really didn't do any of that.”

At least one justice said the meaning of the statute is something the Supreme Court should decide.

“From the oral argument, it’s very difficult to say which way or how the Court will decide the case. The Court’s reaction to the argument is still something of a small victory for the petitioners because some practitioners believed they would have confronted a much more skeptical Court,” Gee says. “Their decision will probably be based on pure statutory interpretation since the Justices found the legislative history either ‘uninformative’ or ‘murky,’ and the IRS’s role in the 1980 amendment process did not seem persuasive.”

She adds that the stakes are high for all sides, including the government. “For the hospitals, they face required funding contributions of possibly billions of dollars a year plus civil penalties for failing to comply with ERISA’s reporting and disclosure requirements. For the participants, if they lose, they could face uncertainty in the security of their pension benefits. For the government, specifically PBGC, it could be confronted with having to insure an additional 1 million individuals, or more, who are participants in these plans,” she concludes.

Text of the oral arguments is here.