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Want an ERISA-Exempt Church Plan for Retirement? Become a Church

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By Casey C. Sullivan, Esq. on January 08, 2016 11:59 AM

If you want to officiate your cousins wedding, you can spend a few bucks and get ordained online in under 15 minutes. But if you want to establish a church plan, an ERISA-exempt defined benefit retirement plan, you better be a church. That's the gist of a recent ruling by the Third Circuit that concluded, "per the plain text of ERISA, only a church can establish" such plans.

Though the Third Circuit's ruling seems straightforward, it contrasts with years of IRS practice found that "nonchurch status is not fatal" when establishing church plans and decades of court opinions assuming that church plans could be established by entities that simply have strong ties to churches.

Out With the Old, in With the New?

The Employee Retirement Income Security Act exempts church defined benefit plans from many of its requirements, including fiduciary obligations and minimum-funding rules. Under ERISA, such church plans must be established by a tax-exempt church, though they may be maintained by a church agency, such as church pension boards.

But, can those agencies establish their own church plans? The Third Circuit says no, but for decades common wisdom held the opposite. As the Third notes, after the current definition of church plans was adopted in 1980, many courts assumed, but did not decisively rule, that entities strongly associated with churches, such as religious charities and hospitals, could establish church retirement plans.

In 1983, the IRS issued a memorandum stating that nonchurch status does not prevent some church agencies from establishing church plans. Even in 2013, the IRS issued an opinion saying that the plan in question -- St. Peter's Healthcare System's retirement plan -- was eligible for the church plan exemption, even though it was not established by a church.

A recent wave of litigation has upended those assumptions. District courts in Illinois, Colorado, and California have ruled that only churches can establish plans. Courts in Maryland, Michigan, and (again) Colorado, have disagreed, keeping with older practice.

Employees at St. Peter's argue that the healthcare nonprofit is in violation of ERISA's requirements that would not apply to church plans, including that St. Peter's retirement fund is underfunded by $70 million. They argue that St. Peter's, a hospital, could not establish a church plan as it is simply not a church.

A Sign of Rulings to Come?

The Third Circuit agreed, applying a simple plain meaning reading of the law. On its face, ERISA provides that church plans must be established by a church. Amendments adopted in 1980 allowed church agencies to maintain those plans, but they did not extend to them the right to establish church plans themselves.

Those decades when court's assumed agencies could create plans? Simply dicta. The IRS policy that nonchurch status was not fatal? Not an officially adopted rule. Alternative cannons of construction? Unnecessary!

The Third Circuit is the first to rule on the issue and could presage future rulings from sister circuits. The Seventh, for example, heard oral arguments on the same issue last September, but has yet to issue an opinion.

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