Catholic Hospital Not Covered By ERISA’S Religious Exemption

by Paul L. Croce

The U.S. Court of Appeals for the Third Circuit in Kaplan v. St. Peter’s Healthcare System, has ruled that St. Peter’s Healthcare System’s (“St. Peter’s”) pension plan is not entitled to a religious exemption under the Employee Retirement Income Security Act (“ERISA”).

In May 2013, Laurence Kaplan, a former St. Peter’s employee filed a putative class action suit against St. Peter’s alleging, among other things, that St. Peter’s pension plan was significantly underfunded. St. Peter’s moved to dismiss the Complaint arguing that it qualified under Section 4(b)(2) of ERISA for a church plan exemption and was thus not required to comply with the provisions of ERISA which Kaplan claimed it had violated. The District Court disagreed with St. Peter’s who then sought review from the Third Circuit. 

The Third Circuit acknowledged that in the last few decades various courts “have assumed that entities that are not themselves churches, but have sufficiently strong ties to churches can establish exempt church plans.” However, the Court did not find those cases to be controlling stating that the current case is part of a “new wave of litigation” which argues that the definition of church plan precludes that result. Lower courts which have addressed this current “new wave of litigation” have been split in their decisions. 

ERISA § 3(33)(A) defines a church plan as “a plan established and maintained . . . for its employees (or their beneficiaries) by a church or a convention of churches.” Section 3(33)(c)(i) further clarifies that a “plan established and maintained” by a church “includes a plan maintained by an organization . . . controlled by or associated with a church or a convention of churches.” 

St. Peter’s argued that the clarification in Section 3(33)(c)(i) annulled the requirement that a church establish a plan in order for it to qualify for an exemption. The Court, however, relying on the plain language of the statute as well as various canons of statutory construction, found that the provision merely expanded the definition of church plan to include plans maintained by other tax exempt organizations. It did not, as St. Peter’s contended, eliminate the requirement that the plan be established by a church or convention or association of churches. Accordingly, the Court found St. Peter’s could not rely upon the church plan exemption to avoid the obligations imposed by ERISA. 

This decision will have a serious impact on religious based healthcare organizations as it imposes significant reporting and funding obligations on those organizations. However, this is unlikely to be the last word on the subject. It is anticipated that St. Peter’s will seek certiorari and the same issue is currently being addressed by the Seventh Circuit in Stapleton v. Advocate Health Care Network where the Court heard argument on September 18, 2015. Should the Seventh Circuit rule contrary to the Third, there is a good possibility the matter may ultimately be decided by the United States Supreme Court.