In Rollins v. Dignity Health, the US Court of Appeals for the Ninth Circuit held that an employee benefit plan must be established by a church, and not a church-affiliated organization, to be a church plan exempt from the major requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
On July 26, 2016, the US Court of Appeals for the Ninth Circuit issued a decision in Rollins v. Dignity Health, holding that an employee retirement plan established and maintained by a Catholic religious order is not a church plan under ERISA. The Ninth Circuit held that the church plan exemption is available only to plans that are both:
Established by a:
association of churches.
Maintained by a:
church-controlled/affiliated organization whose principal purpose or function is to provide benefits to church employees (a principal-purpose organization.)
The retirement plan at issue is sponsored by a nonprofit hospital system established in California by two branches of a Catholic religious order known as the Sisters of Mercy. In the early 1980s, the Sisters of Mercy established two separate nonprofit hospital systems that were merged into a single system, Catholic Healthcare West (CHW), in 1986. Employees of CHW received benefits from seven retirement plans maintained by the Sisters of Mercy, an individual hospital, or CHW. These seven plans were later merged into a single plan (the Plan), and in 1992, CHW's board of directors adopted a retroactive resolution to treat the plan as a church plan. (CHW was later renamed Dignity Health.)
The plaintiff is a participant in the Plan and filed a putative class action against Dignity Health and other plan fiduciaries, alleging:
The Plan is not a church plan and violates the requirements of ERISA.
ERISA's church plan exemption is unconstitutional.
Dignity Health argued that the Plan is not required to comply with ERISA because it falls within the church plan exemption under ERISA Section 3(33)(C)(i) (29 U.S.C. § 1002(33)(C)(i)).
The US District Court for the Northern District of California granted partial summary judgment against Dignity Health, holding that an employee benefit plan qualifies for ERISA's church plan exemption under ERISA Section 3(33)(C)(i) only if the plan is:
Established by a church.
Maintained either by a church or by a principal-purpose organization.
(The district court did not reach the question of whether the church plan exemption is constitutional.)
However, the district court certified its order for interlocutory appeal to the Ninth Circuit because of the importance of the church plan issue in this litigation, and the Ninth Circuit accepted jurisdiction of the appeal.
On appeal, the Ninth Circuit affirmed the district court's partial summary judgment and remanded the case for further proceedings. The Ninth Circuit agreed with the district court that an employee benefit plan qualifies for the church plan exemption under ERISA Section 3(33)(C)(i) only if the plan is both:
Dignity Health argued that a plan is a church plan if it is maintained by a principal-purpose organization, even if it was established by an organization other than a church. The Ninth Circuit rejected this interpretation and followed the interpretation recently applied by the Third and Seventh Circuits: Section 3(33)(C)(i) broadens the definition of organization that can maintain a church plan to include principal-purpose organizations, but it does not alter the requirement that all church plans must be established by a church.
The Ninth Circuit addressed the other arguments raised by Dignity Health and rejected all of them, including its arguments based on:
Several statutes enacted after MPPAA, including the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which do not require a church plan or "retirement income account provided by a church" to be established by a church. The Ninth Circuit held that Congress did not intend the term "church plan" in ERISA to have the same meaning as these statutes.
An IRS General Counsel Memorandum (GCM) stating that a retirement plan that was not established by a church, but maintained by a church or a principal-purpose organization, was a church plan under ERISA (Gen. Couns. Mem. 39,007 (July 1, 1983)). The Ninth Circuit held that the GCM, which is only persuasive authority, is based on an "obvious misreading" of the statute. The Third Circuit in Kaplan and the Seventh Circuit in Stapleton also refused to follow this GCM.
Constitutional concerns, including the Free Exercise Clause and Establishment Clause of the First Amendment.
In the Ninth Circuit, hospitals, schools, and other institutions operated by church-affiliated organizations should evaluate the status of their employee benefit plans in light of Rollins. If these plans were not established by a church, they will not qualify for the church plan exemption, even if they are currently maintained by church-affiliated organizations. This means that these organizations will have to bring their plans into compliance with ERISA.
Plans maintained by church-affiliated organizations outside of the Third, Seventh, and Ninth Circuits should be attentive to how other courts rule on pending church plan cases.