IRS Reversal on Status Lets PBGC Save Plan

May 14, 2013 ( - The Pension Benefit Guaranty Corporation (PBGC) announced it will pay pension benefits for former employees of the Hospital Center at Orange.

The New Jersey hospital’s pension plan was originally covered by the Employee Retirement Income Security Act (ERISA) and protected by the PBGC. However, in 2003, after the hospital became affiliated with Cathedral Healthcare System Inc., the Internal Revenue Service (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 the past 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 and PBGC can now cover the pensions.
“Why did PBGC push to take on this substantial financial responsibility?” said PBGC Director Josh Gotbaum. “The answer is simple. Our job is to provide a safety net for pensions. In this case, we realized we could restore the safety net — so we did.”

In a letter posted May 10, the Pension Rights Center praised PBGC for pushing to protect the hospital’s retirees. “The PBGC’s actions helped rectify an injustice that the law never intended, and illustrate your agency’s strong commitment to the protection of pension plans and participants.”

According to PBGC estimates, as of January 1, 2009 (the plan termination date), the plan had $11 million in assets to pay $41 million in benefits. The agency expects to cover the entire $30 million shortfall and expects to pay the benefits owed under the plan.  

According to a New York Times report about the hospital’s situation, the IRS said the hospital’s circumstances were unique and the agency is not setting a precedent. The agency reversed its decision about the plan’s status after negotiations and an eight-year internal review.  

Certain employers with religious affiliations can avoid cost requirements of ERISA by obtaining an IRS ruling that their pension plans are church plans. The Pension Rights Center said tough economic times and pitches from benefits consultants have prompted more than 100 faith-based employers to seek church plan status.  

The Hospital Center at Orange sought church plan status in 2002 and received it the next year but did not tell employees, according to The New York Times. Employees found out when executives announced the hospital was in severe financial trouble, and a nurse asked whether everybody’s pensions were safe.   

The IRS put a moratorium on church plan rulings while it, the Department of Labor (DOL) and the PBGC contemplated issuing additional guidance about church and governmental plans (see “(b)lines Ask the Experts – Church Plan Issues”). The moratorium was lifted in 2011, with a new procedure requiring employers to notify workers that a ruling was being pursued, explaining what it could mean for workers’ pensions and giving workers 60 days to respond (see “IRS Issues Revised Procedures for Church Plans”).