Introduction
Most private sector employee benefit plans are subject to ERISA. Plans sponsored by churches and church-related entities are not covered by ERISA, unless an election is made to have ERISA coverage. (The Department of Labor takes the position that this election can only be made for retirement plans, not health and welfare plans. Courts and the Internal Revenue Service have not always agreed with that position.)
There are advantages and disadvantages to electing ERISA coverage. ERISA coverage requires compliance with the participation, vesting, and funding requirements of ERISA and the prohibited transaction provisions of ERISA and the Internal Revenue Code.
One significant advantage to ERISA coverage for the church or church-related entity that sponsors the plan is that ERISA significantly limits liability. ERISA preempts state law remedies like punitive damages, pain and suffering, and consequential damages. Moreover, jury trials are typically not available for claims relating to ERISA-governed plans.
In 1980, ERISA was amended with respect to the types of organizations that could sponsor a "church plan." Congress amended the statute to allow church plans to cover employees of related tax-exempt agencies that were controlled by or associated with a church, or a convention or association of churches. ERISA§ 3(33) (c) (i) provided for a plan established for the employees of an organization other than a church (or a convention or association of churches) to be considered a "church plan," where the organization was controlled by or associated with the church, and the plan was established and maintained by an organization, the principal purpose of which was to administer or fund the plan. We refer to this method as the "committee approach."
Until fairly recently, church-related organizations-- including certain schools, hospitals, and charitable organizations--often operated under a belief that their plans that did not follow the committee approach were governed by ERISA. Conversely, plans that followed the committee approach would be considered church plans, and therefore exempt from ERISA regulation. This belief appeared to be warranted by the language of ERISA.
However, recent court decisions make it imperative for church and church-related organizations that want their plans to be covered by ERISA to review their plans' status and determine whether they should affirmatively elect ERISA coverage. Given the recent trend in the cases, plans established for the benefit of church-related organizations that have not affirmatively elected to be governed by ERISA are vulnerable to a determination that they are, in fact, church plans subject to state law. That, in turn, potentially exposes plans, plan sponsors, and fiduciaries to the full range of remedies that are not otherwise available in the context of ERISA-governed plans.
Recent Decisions Affecting The Scope of The Church Plan Exception
A series of recent court decisions including Rinehart v. Life Ins. Co. of North America in the Western District of Washington, has forced church-related organizations to rethink whether their plans are governed by ERISA.
In that case, Rinehart was an employee of a hospital that was founded by a religious order of Catholic nuns. The hospital sponsored a long-term disability insurance plan. Rinehart became disabled and began receiving benefits under the plan. When the insurance company subsequently terminated his benefits, he sued the insurance company, alleging several state law based theories of relief — and no claims under ERISA. The insurance company argued that the plan was governed by ERISA and, therefore, that ERISA preempted the Plaintiff 's claims.
The Rinehart court focused almost exclusively on whether the hospital was "controlled by" or "associated with" the Catholic Church, and concluded that it was both controlled by and associated with the Church. Essentially, the court concluded that as long as the hospital was controlled by or associated with the Church, it was irrelevant whether it followed the committee approach or not. Because the court also determined that there was no election for ERISA coverage, it was a church plan. Therefore, the court held that ERISA did not apply to the plan and could not preempt Rinehart's state law claims or state law remedies for those claims.
Until Rinehart, many plans operated on the assumption that they were ERISA plans simply because they intentionally did not follow the committee approach and operated the plans as if they were governed by ERISA. Since Rinehart, several federal district courts have followed its reasoning, making the committee approach all but irrelevant to those courts' analysis of whether a plan is a church plan or not.
A Lesson To Be Learned
Rinehart, and cases following its reasoning, almost invariably lead to the conclusion that plans sponsored by church-related entities are church plans, unless an affirmative election for ERISA coverage has been made. As mentioned above, while the Department of Labor takes the position that the election is only available to retirement plans, and not welfare plans, courts in cases since Rinehart have largely rejected that position — thus opening the door to allow welfare plans to elect ERISA coverage.
Notwithstanding the DOL's position on the subject, sponsors of these plans should not assume that the ERISA election is not available to their welfare benefit plans. Indeed, the vast majority of benefit claim cases arise in the context of welfare benefit plans, such as health, life and disability plans. Consequently, church related entities such as hospitals and schools should engage in a serious review of both their retirement plans and their welfare plans, and determine along with their counsel whether they should elect ERISA coverage (assuming they have not already done so). If they conclude ERISA coverage is beneficial, and no election has previously been made, they should make the election.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
