There have been two recent developments affecting church plans. One has to do with how broad the church plan exemptions is from the Employee Retirement Income Security Act (ERISA) and the other relates to controlled group rules.
In the Third Circuit Court’s decision in the case Kaplan v. Saint Peter’s Healthcare System, the court decided that a church-affiliated hospital was not covered by ERISA’s church plan exemption. In May 2013, Laurence Kaplan, an employee at St. Peter’s Hospital from 1985 to 1999, filed a class action for a group of employees claiming that St. Peter’s failed to comply with various ERISA obligations. Among other things, the complaint stated that, in the years after St. Peter’s filed the application for a church plan exemption, it did not provide ERISA-compliant summary plan descriptions.
St. Peter’s moved to dismiss the suit, claiming that it qualified for ERISA’s church plan exemption and hence was not required to comply with the provisions Kaplan claimed it had violated.
The court denied St. Peter’s dismissal affirming that a plain reading of ERISA’s church plan definition describes what entities are able to qualify. It reads “a plan established and maintained by a church or a convention or association of churches”.
The plan that was established by St. Peter’s Hospital, a tax exempt organization. Even though the hospital was affiliated with the Roman Catholic Church, it is not a church, and is not qualified to be a church plan.
The appropriations bill signed by President Obama included a provision that addresses how the controlled group rules apply to church related organizations. This provision clarifies several rules for § 414(c). An organization that is eligible to participate in a church plan shall not be grouped with another organization and treated as a single employer with the other organization for a plan year beginning in a taxable year unless:
- An organization provides at least 80 percent of the operating funds for the other organization during the preceding taxable year of the recipient; and
- There is a degree of common management or supervision between the two organizations.
An organization that is a non qualified church-controlled organization shall be grouped with one or more other non qualified church-controlled organizations, or with an organization that is not exempt from tax under section 501, and treated as a single employer with the other organization, if at least 80 percent of the directors or trustees of the other organization are either representatives of, or directly or indirectly controlled by a non qualified church-controlled organization. The term non qualified church-controlled organization means a church-controlled tax-exempt organization.
The church or convention or association of churches, may elect to treat such organizations as a single employer for a plan year. Such an election, once made, shall apply to all succeeding plan years unless revoked with notice provided to the federal government.