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Religious Health Care Systems Push Back Against Pension Suits in Supreme Court.

Byline: Marcia Coyle

Three religious-affiliated, nonprofit health care systems are asking the U.S. Supreme Court to step into a multimillion-dollar battle with two plaintiffs firms that claim the pension plans of the medical networks are not exempt from federal law.

Lisa Blatt, head of Arnold & Porter's Supreme Court and appellate practice, filed petitions in the high court for three nonprofits that are targets of class actions brought by the Washington firm Cohen Milstein Sellers & Toll and Seattle's Keller Rohrback.

Plaintiffs lawyers began suing nonprofit religious employers in 2013, arguing that their pension plans did not qualify as "church plans" that are exempt from the insurance premiums, requirements and protections of the federal Employee Retirement Income Security Act. Those lawsuits, Blatt argued, defy 30 years of federal administrative rulings that church plans do not have to be established by churches.

"As the firms themselves recently observed, these lawyers 'have for years together developed and litigated the innovative theory of liability at issue here,' " Blatt wrote. She said the firms seek " billions of dollars in retroactive liability and a wholesale upheaval in the administration of pension plans affecting religious employers and employees across the country."

In the last three years, plaintiffs firms have filed 36 class actions against hospital systems, claiming their pension plans were not church plans, according to the petitions. The pending cases in the Supreme Court are Advocate Health Care Network v. Stapleton, Dignity Health v. Rollins and Saint Peter's Healthcare System v. Kaplan.

Cohen Milstein and Keller Rohrback have urged the justices not to review lower court decisions. The three federal appeals courts--the Third, Seventh and Ninth circuits--agreed with the plaintiffs' interpretation that only pension plans "established by a church" are entitled to the church-plan exemption under the Employee Retirement Income Security Act, or ERISA. Advocate Health Care is based in Illinois, Dignity Health in California and Saint Peter's in New Jersey.

The plaintiffs firms contend that "hundreds of church-associated hospital conglomerates, often at the urging of 'gotcha' benefit consultants, have in recent decades exploited a misreading of ERISA to lower their costs by claiming church-plan status for plans that had been operated--correctly--as ERISA plans."

Those plans, Cohen Milstein's Karen Handorf said in a brief, now are often substandard, underfunded--and no church stands behind them.

The 33,000 putative plaintiffs in the case against Advocate, Blatt said, seek $110 a day for every day Advocate Health Care did not provide benefit statements of funding notices. "Stated differently, for just one year, respondents seek over $3.9 billion in penalties," Blatt wrote.

In May, In May, Saint Francis Hospital and Medical Center in Connecticut reportedly agreed to settle a church plan lawsuit for $107 million.

"Just from a dollars and cents perspective, it's a big issue," said Eric Rassbach of the Becket Fund for Religious Liberty, which filed a brief in support of the health care systems. "You're dealing with a whole lot of pension plans affected by this."

'Established and maintained by a church'

Church plans have been exempt from the Employee Retirement Income Security Act since that law was enacted in 1974. With the exemption, Congress sought to avoid government scrutiny of confidential church books and activities. In 1974, the employee retirement act defined a church plan as one "established and maintained for its employees by a church or by a convention or association of churches" that is tax-exempt.

In 1980, Congress amended the church-plan exemption to include "a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches."

The high court battle is over whether the "established and maintained by a church" requirement still applies.

Lisa Blatt. (Photo: Diego M. Radzinschi)

Blatt said in her petition for Advocate Health Care that the IRS in 1983 concluded a pension plan may qualify as a church plan in two ways: "established and maintained by a church," or maintained by a church-controlled or associated organization.

Since then, Blatt told the justices, the Internal Revenue Service has issued more than 500 private letter rulings confirming that the plans of qualifying, church-affiliated organizations--including her clients--are exempt regardless of whether they were established by churches. The U.S. Labor Department has issued 70 advisory opinions to that effect, Blatt said.

Keller Rohrback's Lynn Sarko urged the justices to give weight to the three appellate court decisions and not to "ex parte, non-binding private letter rulings."

Although Congress allowed churches to extend pension benefits to employees of church-associated schools and hospitals, Sarko said, it did not allow "giant businesses" like Advocate Health Care to create exempt benefits plans simply by claiming a religious affiliation.

"Such a pure preference for religiously connected institutions, without any need to accommodate religious faith or practice, would have violated the Establishment Clause," Sarko told the justices.

Finding lawyers

The church-plan lawsuits stemmed from concerns raised by the Pension Rights Center in Washington, Karen Ferguson, the center's director, said. "Several groups of employees of nonprofits affiliated with religious organizations came to us," she said. "Exhibit A" was the Hospital Center at Orange, in New Jersey.

The Hospital Center paid insurance premiums for its pension plan under ERISA for more than two decades, Ferguson said. But in 1998, when the center was taken over by Cathedral Health Service, the pension plan was switched to a "church plan."

Employees were not informed of the change until a nurse raised a question at a meeting about the center's deteriorating financial condition. The nurse and other co-workers sued; a settlement gave the Internal Revenue Service time to reconsider its "church plan" exemption, which it did just before the pension money was due to disappear.

The Pension Benefit Guaranty Corp. covered a $30 million shortfall for 800 employees. The Hospital Center is now closed.

"These private letter rulings--nobody knew about them except the applicant and the IRS," Ferguson said. "These cert petitions essentially say: 'The sky is falling; these innocent hospitals mostly relied on these rulings.' We darn well know they didn't. They were ERISA plans until told 'We have a deal for you--we can save you millions and get you a refund on your pension premiums paid.' They knew darn well what they were doing--saving money at the expense of retirees."

Ferguson said the Pension Rights Center needed lawyers and found Cohen Milstein and Keller Rohrback. The two firms are "terrific and have immersed themselves" in the problems with these pension funds, she said.

"The churches do not stand behind these plans," Ferguson said. "They stand behind the plans they establish. That means these folks are left to go out on ice floes."

There have been "hundreds and hundreds" of church-plan confirmations by the IRS in the past 35 years, said Mark Chopko of Stradley Ronon Stevens & Young, which filed an amicus brief supporting the petitions on behalf of the Catholic Health Association.

"If you've got a government benefit that is available, and you ask if you're entitled, and get back that you are, I think you should be able to rely on it as a practical matter," Chopko said. "The time for someone to have raised a challenge would have been in the 1980s. Now you have decades of reliance on the part of some health systems."

This would not be the first time an interpretation of a law was mistaken or changed, and an agency had to deal with the retroactive impact of a change, said James Keightley of Washington's Keightley & Ashner, which specializes in matters involving the Pension Benefit Guaranty Corporation.

"It's relatively clear that the internal [agency] interpretation cannot alter the statutory provisions," Keightley said. "It's also pretty clear that three circuit courts have reached a conclusion regarding the interpretation. If the law goes the way I think, it's going to be a real mess."

Contact Marcia Coyle atmcoyle@alm.com. On Twitter:@MarciaCoyle.
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Publication:Inside Counsel Breaking News
Date:Nov 8, 2016
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