Church Plan Lawsuits Could Reverse 30 Years of Precedent

March 7, 2014 ( - Recent court cases are not the first efforts to try to protect retirement assets for employees in plans that have been designated as “church” plans by the Internal Revenue Service (IRS).

The pension plan for the Hospital at Orange in New Jersey was originally covered by the Employee Retirement Income Security Act (ERISA) and protected by the Pension Benefit Guaranty Corporation (PBGC). However, in 2003, after the hospital became affiliated with Cathedral Healthcare System Inc., the IRS granted the pension plan “church plan” status, which removed it from the PBGC’s protection. Soon after that, the hospital began winding down its operations and laying off employees. 

Over several years, at the request of the Pension Rights Center, the PBGC worked with the hospital’s former staff and the IRS to revisit that designation. IRS reversed its designation in 2013 and the PBGC now covers the pensions (see “IRS Reversal on Status Lets PBGC Save Church Plan”). About the reversal of its decision, the IRS said the hospital’s circumstances were unique and the agency was not setting a precedent. The agency reversed its decision about the plan’s status after negotiations and an eight-year internal review. 

While the negotiations were ongoing with the Hospital at Orange, another church plan facing a lawsuit had its status confirmed by a federal court.  In the case of Thorkelson v. Publishing House of the Evangelical Lutheran Church in America, d/b/a Augsburg Fortress Publishers, the plaintiffs alleged the pension plan of Augsburg was not a church plan, and defendants breached their duties under ERISA, or alternatively under state law, by among other things failing to adequately fund the plan; failing to prudently and loyally manage the plan’s assets; failing to disclose necessary information to co-fiduciaries and participants; and breaching their contractual and trust-law duties to the participants (see “Law Firms File ERISA Class Action Against Lutheran Publishers”).

The court found the statutory language defining “church plan,” as well as IRS determinations and various court decisions supported a finding that the plan is a church plan.

Fast forward to December 2013, and a federal court deciding the case of Rollins v. Dignity Health dismissed the legal and regulatory precedent. The court declined to defer to IRS private letter rulings interpreting whether plans qualify as church plans exempt from ERISA, and said it is not persuaded by other court rulings, but by the principle Congress “says in a statute what it means and means in a statute what it says there.” Basically, it was saying everyone has been reading statute wrong for 30 years (see “Court Weighs In on Church Plan Issue”).

The IRS has not so far responded to the court’s decision, and prior to the decision, even issued another church plan ruling for a plan involved in a lawsuit (see “Disagreement Voiced on IRS Church Plan Ruling”).

However, prior to the December decision, the United States intervened in the five current cases, saying “Federal Rule of Civil Procedure 5.1(c) permits the Attorney General to intervene in an action when, as here, the constitutionality of a federal statute has been challenged. However, the U.S. is not filing a brief in the cases at this time because the courts have a duty “to resolve plaintiffs’ threshold statutory claims before adjudicating their constitutional contention.”

The Attorney General will decide when and if to address the constitutionality claims depending on further developments in the cases (see “U.S. Intervenes in Church Plan Lawsuits”).

With the Rollins decision, any 501(c)(3) entity that is not a church—health plans, schools, any entity not known as steeple churches that have services—are in danger. If the Rollins court is right, and all this time these plans have not been church plans, the potential liabilities and tax penalties are massive.

All plans would be tax disqualified, would have to file 5500s, would have to provide ERISA notices. If a plan is disqualified, participants would have to report benefits as income. The plans could possibly correct under the IRS voluntary compliance program, but what would the IRS require to fix plan qualification? ERISA Section 3(33)(D) provides the ability to correct retroactively any plan maintained by church that fails to meet the standards of the Section. The correction period doesn’t actually start until there is deemed to be a failure. This was argued in the Augsburg case, but since the court agreed it is a church plan, it didn’t need to address the correction.

However, the plan sponsor has no obligation to correct the qualification issue, and the question is, if the courts all go the way of the Rollins court, will the plan sponsors decide not to put the time, money and effort into correcting or will they just issue 1099s to participants?

It is still possible the other district courts handling these cases and the appellate court for the Rollins case may agree with the Augsburg court.

Of note, following the Augsburg case, the IRS issued Revenue Procedure 2011-44, which modified the procedures for plans that are filing a request for a determination letter of church plan status. The revenue procedure provides that plan participants and other interested parties be notified of the letter request (see “IRS Issues Revised Procedure for Church Plans”). 

In addition, following the filing of the first of the current church plan lawsuits, two U.S. senators introduced a bill in Congress to help resolve what they term as “an unfortunate application of our current pension rules on church pension beneficiaries.” (See “Bill Addresses Issues with Church Retirement Plans”)