So You’ve Filed Your 1095-C…Now What?

As companies complete their Section 6055 and 6056 reporting under the Affordable Care Act (ACA), now it’s time to be on the lookout for notices regarding ACA penalties.

Watch for Notice Letters:  According to CMS, the Federally-Facilitated Marketplace will begin sending batches of notifications to certain employers whose employees received premium subsidies when purchasing health insurance on the marketplace exchange.  Click here for a link to the publication from CMS regarding  the 2016 Employer notice Program:  Employers should be on the lookout for these notification letters; they might be hard to spot because it’s unclear whom they will come from or to whom they will be addressed.  They could look like junk mail, and employers don’t want them to get thrown away.

Why Would A Company Get A Letter If It Complied With the ACA?:  If an individual calls the helpline and attests that his employer failed to provide affordable minimum value coverage, the employee can receive coverage subsidies based on his own statements, whether accurate or not.  Uninsured part-time employees, contractors and temps might have received subsidies, claiming to be full-time employees.  Whether obtained by fraud or mistake, when an eligible employee receives subsidies, it brings risk to the employer.

90 Days to Appeal:  If an employer receives a notice, the company should act quickly because employers only have 90 days to appeal.  Click here for a link to the Employer Appeal Request Form:  Take note that only the Internal Revenue Service can determine whether an employer is subject to a penalty under 4980H(a) or (b).

ACA Retaliation Rules:  Employers should carefully consider how to proceed in light of the ACA retaliation rules, which say that a company cannot “discharge or in any manner discriminate against any employee with respect to his or her compensation, terms, conditions, or other privileges of employment because the employee (or an individual acting at the request of the employee) has received a credit under the ACA or reported any violation of, or any act or omission the employee reasonably believes to be a violation of the ACA.”  See our previous blog about the retaliation rules:

Action Steps:  We recommend that employers put a (documented) process in place to put outside counsel or other persons who are not responsible for employee discipline in charge of the notification letters and related appeals in order to help avoid or defeat a later adverse action claim.  If an employer can show that the person who made a termination or disciplinary decision did not have knowledge that the employee had received a credit under the ACA or reported any violation of the ACA, that will help the company prove that it would have taken the same adverse action in the absence of the employee’s protected activity.

Employee Benefit Plans and Data Security Issues

In recent weeks, much of the discussion around a recent Supreme Court case, Gobeille, has focused on ERISA preemption. But for fiduciaries of benefit plans the case can serve as a reminder of important duties that often go unexplored—protecting the private data of participants.

Briefly, the case challenged a Vermont law that required reporting of health care claim payments to a state agency for inclusion in a healthcare database. But in reading the case, I was reminded about how much data—sensitive and personal data—hovers in and around employee health and benefits plans. It seems like news of data breaches can be seen almost daily in the headlines. And anyone familiar with databases maintained for plans can imagine what alluring targets they must be. On top of that, when one considers how often this data is shared with third parties in day-to-day plan administration, (consultants, TPAs, payroll providers, investment advisors, etc.) data breaches will increasingly expose fiduciaries and plans to liability.

When a fiduciary sits down to think about its responsibilities to participants in regards to personal information, a complex and often unclear picture emerges. And a large part of that picture comes outside of the “ERISA-box” plan fiduciaries typically consider. The few court cases exploring this subject are generally not brought as ERISA claims but rather are based on financial regulations and consumer protection laws. As fiduciary standards continue to evolve and differences in privacy protection laws appear from jurisdiction to jurisdiction, there are a host of laws and regulations to keep in mind.

A short list of legislation that touch on the area includes: the Health Insurance Portability and Accountability Act, the Gramm-Leach Bliley Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act, along with numerous state laws relating to “personally identifiable information” and “protected health information.”

At this point, even though the scope of a fiduciary’s duty under ERISA with respect to data protection has yet to be addressed by the courts and the DOL, there are still a number of practical steps that plan sponsors and other fiduciaries can take in the hope of preventing problems. These include:

  • Performing due diligence on all data and security protocols when selecting and monitoring vendors;
  • Developing privacy provisions for contracts with TPAs and other service providers over and above standard confidentiality agreements;
  • Limiting access to sensitive information to necessary personnel;
  • Training personnel on the law and the fiduciary responsibilities;
  • Developing written policies and procedures detailing for personnel the applicable state and federal laws;
  • And continuing to monitor and watch over service providers with access to sensitive data.

Unfortunately, data breaches are here to stay and so are government agencies’ attempts to develop guidance on how they should be handled. Plan sponsors and other fiduciaries need to be aware of these sensitive issues and put into place defensible policies and procedures. Such actions will not only help protect participant information but will also help limit exposure to liability for the plan and the fiduciaries to the myriad of laws aimed at these issues.

Supreme Court Looks for ACA Contraceptive Coverage Compromise for Religious Nonprofits

Less than one week after hearing oral arguments on seven consolidated cases in which non-profit organizations challenged the opt-out process for religious organizations opposing the Affordable Care Act’s contraceptive coverage mandate, the United States Supreme Court took the unusual action of ordering the lawyers on both sides to brief additional issues. The Court’s Order asked the attorneys to address whether contraceptives could be provided to employees of objecting religious nonprofits without requiring them to comply with the current ACA opt-out process. See Order, March 29, 2016. The opt-out process — outlined in final regulations — requires religious nonprofits (and for-profit companies with religious objections) to submit a form with their insurer or the government stating their objection to providing contraceptive coverage. See Treasury, Labor and Health and Human Services, Final Regulation, July 14, 2015.

The Order proposes an example of a compromise solution which would allow the nonprofit to inform their insurance company of their objection to providing contraception coverage as part of the process of contracting for the organization’s health insurance. Under this scenario, not only would the nonprofit have no obligation to provide or pay for contraceptive coverage (as is already permitted under the ACA), but they would not be required to provide any form of opt-out notice to the government or their employees. The Court further suggests that the insurance company then would be responsible for notifying the employees of the nonprofit that cost-free contraceptive coverage would be provided by the insurer and would be completely separate from the objecting nonprofit organization’s health plan.

If the Court is deadlocked in a 4 to 4 vote on the nonprofit contraceptive cases, the lower court rulings would stand and religious nonprofits would be required to comply with the opt-out notice requirements. The issuance of this highly unusual Order suggests that in the face of a potential tie vote on these cases, the Court is seeking an extra-judicial compromise that would permit religious nonprofits to avoid any type of notice requirement.

The Court established tight filing deadlines – with the first briefs due on April 12, and reply briefs due on April 20. No additional hearings on the cases have been scheduled.

Government Contractors: Some DOL/Wage and Hour Guidance on How to Coordinate the Fringe Benefit Requirements with the Affordable Care Act

We each had to hold our collective breath, but the Wage and Hour Division (WHD) of the Department of Labor (DOL) finally issued an All Agency Memorandum 220  (AAM) last week on March 30, 2016 to provide guidance to governmental agencies on how the Affordable Care Act’s (ACA) provisions regarding the employer shared responsibility provisions interact with the fringe benefit requirements of the McNamara-O’Hara Service Contract Act (SCA) and Davis-Bacon Act and the Davis-Bacon Related Acts (DBRA) (together DBA/DBRA).

What is particularly nice about the AAM is that there are no surprises in the WHD’s position.  We feel prescient!

What we have counseled and anticipated for our government contractor clients, as we awaited the WHD’s views on the intersection of these three laws, actually is the position of the WHD. We thus summarize the salient provisions of the AAM.

SCA, DBA/DBRA, and ACA are Separate Laws.

The AAM underscores that the SCA, DBA/DBRA, and ACA are separate federal laws.  It is why we at Jackson Lewis stress that a government contractor applicable large employer (ALE) should be mindful that each law is independent.  Thus, for example, just because an ALE satisfies SCA does not necessarily mean it satisfies ACA.  None of the guidance in the AAM contradicts this principle.

ACA Employer Shared Responsibility.

In general, the ACA’s employer shared responsibility provisions require an employer with an average of at least 50 full-time employees (including full-time equivalents) to provide its full-time employees (and their dependents) affordable health care offering minimum value.  If the ALE to whom this applies chooses not to offer such health care, then it may make a non-deductible payment (by way of an excise tax) to the Internal Revenue Service (IRS).

Employer Contribution to Health — Appropriate Credit to SCA and DBA/DBRA Fringe.

Under SCA and DBA/DBRA, an employer cannot take credit against the required prevailing wage benefits for those benefits required by federal, state, or local law (such as the federal obligation for an employer to contribute to Social Security).  The AAM provides long-awaited guidance that, because an ALE may offer ACA-compliant health care or, alternatively, may simply pay an excise tax to the IRS, the ACA does not require an employer to provide health care.  Consequently, WHD permits ALEs to credit contributions to a health plan towards SCA or DBA/DBRA fringe obligations.

Employer Payment of Excise Tax – Inappropriate Credit to SCA and DBRA Fringe Care.

If an ALE decides alternatively to forego providing health care by instead paying the excise tax to the IRS, the employer cannot credit the payment of such tax towards SCA or DBA/DBRA fringe obligations.  The AAM notes that such a payment does not confer benefits specifically on the workers and therefore is not a bona fide fringe benefit as that term is defined and interpreted under SCA and DBA/DBRA.

The Choice of Providing Cash or Benefits Remains the Employer’s.

Government contractors’ employees often wrongly believe they should have the choice in receiving cash in lieu of SCA or DBA/DBRA mandated benefits.  The AAM reconfirms that whether to provide employees with benefits or cash in lieu is the ALE’s option (so long as not otherwise required under a collective bargaining agreement):

Thus, for example, if an ALE covered by SCA/DBRA chooses to provide all employees with fringe benefits in the form of health coverage, it may do so even if some or all of its employees might prefer to receive. . . cash.  * * *  [A] contractor need not obtain an employee’s concurrence before contributing the [entire fringe to health care].

Bear in mind, however, that an employee’s concurrence (and a writing authorizing deductions) is needed for any benefit the employer intends to provide that requires an employee payment or premium from wages.  For example, if pays 100% of a medical plan benefit for an employee than the employer simply can provide the benefit (and take credit under SCA/DBA/DBRA).  On the other hand, if the employer pays only 80% of the medical plan benefit, then the employee must agree to the benefit and the employee portion deductions.



Those government contractor ALEs needing guidance on the how to comply with each of the SCA, DBA/DBRA, and ACA (and how to coordinate the intersection of those independent federal laws) should contact Jewell Lim Esposito or Leslie Stout-Tabackman at 703.483.8300.

Will Your Forfeiture Account Disqualify Your 401(k) Plan?

In the last six months, several clients called me regarding substantial balances in a so-called “forfeiture account” in their 401(k) plans.  A few of these clients have forfeiture accounts that violate the ERISA requirements.  It is imperative that forfeitures be handled properly since both the IRS and the Department of Labor (DOL) on audit generally review how forfeitures have been handled by the plan.

The basic rule is that forfeitures must be allocated on an annual basis.  Forfeitures should not be held over into later years.  Failure to comply with this requirement can result in disqualification of the plan or potential penalties imposed by the DOL.  Sometimes this failure is due to an accidental failure to timely deal with the forfeitures.

Proper disposition of forfeitures depends upon the terms of the 401(k) plan.  For example, many plans first use forfeitures to pay proper plan expenses.  However, the employer should make sure that the plan document specifically allows for payment of plan expenses.  Otherwise, the payment of such expenses may result in plan disqualification or a prohibited transaction. We see many adoption agreements for prototype plans that do not provide for payment of plan expenses.

In addition, forfeitures can be used to reduce employer contributions including matching contributions and non-elective contributions.  Finally, forfeitures can merely be reallocated to participants’ accounts as an additional amount for participants.  Reallocation is somewhat typical for employers who have profit sharing plans that are not 401(k) plans.

Most notably, the IRS has recently taken the position that forfeitures cannot be used to offset safe harbor contributions under a regular or QACA safe harbor plan.  Use for safe harbor contributions can also result in plan disqualification.

In addition, forfeitures cannot be used for certain corrections under the IRS Employee Plans Compliance Resolution System (EPCRS).

When a regulatory agency determines that forfeitures have been carried over, the agencies may require the plan sponsor to retroactively determine who should have received allocations each year.  If your plan has a forfeiture account that includes amounts carried over from one year to another, you should review that account and take appropriate action so that the account does not include any carryovers.  Of course, this creates a monetary burden and a significant administrative burden on employers.


An IRS plan audit uniquely focuses an employer’s mind on the core identity of its qualified retirement plan, which is that of a tax exempt organization, but one whose exemption (or “qualification”) requirements are far pickier than those applicable to one’s favorite charity. Any single material operational violation or non-conforming written plan provision risks disqualification and loss of the related special tax benefits.

And disqualification was in fact the Tax Court’s ruling in Family Chiropractic Sports Injury & Rehab Clinic, Inc. v. Commissioner, decided January 19, 2016. The plan victim was an Employee Stock Ownership Plan (“ESOP”), a type of qualified plan primarily designed to invest in the stock of the employer and whose sole participants were a divorced chiropractor and his ex-wife.  Without acknowledging the ESOP’s ownership of virtually all of the stock of the company sponsor, the couple’s divorce decree awarded each one-half of the plan sponsor’s outstanding stock.  By later documents the ex-wife transferred all of her ESOP share account to her former husband’s ESOP account.  Plan disqualification was held effective as of the date of that transfer principally because: (1) it was not pursuant to a properly approved qualified domestic relations order (“QDRO”) and, therefore, violated the anti-alienation rules of the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code — which generally prohibit assignment of a participant’s plan benefit before it is properly distributed under the plan, and, independently, (2) the transfer violated the terms of the ESOP plan document regarding the distribution rights of participants.

In addition to ERISA fiduciary liability, the consequences of disqualification include for open tax assessment years (generally three years back): taxes on the income of the plan’s trust, taxation of participants on vested undistributed benefits, taxation of otherwise tax-free rollovers from the plan, and disallowance or deferral of the plan sponsor’s deductions for contributions to the plan.  In an IRS plan audit, a plan sponsor can avoid disqualification by not only fixing the mistake financially, but also paying as a sanction a negotiated percentage of the income tax amounts described above — potentially quite expensive, but normally far preferable to actual disqualification, which occurs only rarely.

Fortunately, the IRS’s Voluntary Correction Program (“VCP”) and other IRS Employee Plans Compliance Resolution System (“EPCRS”) correction procedures can reduce exposure resulting from the inevitable plan failures. But these procedures are most attractive when the employer discovers the failures and can voluntarily propose correction before the IRS announces an audit.  Also, no standard IRS correction procedure exists to remedy a transfer of a plan benefit by a participant outside of the QDRO rules.  In Family Chiropractic, undoing the illegal assignment of the ex-wife’s ESOP account may have simply been unacceptable to the IRS and/or the parties under the circumstances.

Disqualification exposure is reduced through regular administrative and legal review of plan operations in order to discover and deal with failures before the IRS does. IRS officials have stated that an employer’s probability of plan audit is reduced if the annual Form 5500 does not contain blank fields, internal inconsistencies, large unvested benefits for terminated participants (a partial termination risk) or substantial amounts of hard-to-value “other” assets.

Vermont’s Health Plan Reporting Law Impermissibly Impacts National Plan Administration and Falls to ERISA Preemption, Supreme Court Holds

If you were to ask most employers whether reporting is a core function of employee benefit plan administration, they would likely say yes, particularly as many are currently in the middle of completing IRS Forms 1094-C and 1095-C. On top of the numerous reporting requirements for group health plans imposed by IRS and other federal agencies, a number of states, including Vermont, have enacted laws that add a layer of state reporting obligations for plans, including self-funded group health plans.  In what is clearly welcome news for employers and plan sponsors, this added state law burden has been lessened by yesterday’s Supreme Court decision in Gobeille v. Liberty Mutual Ins. Co., No. 14-181.

The Court decided that state reporting mandates, like the one in Vermont, are preempted by the Employee Retirement Income Security Act of 1974 (ERISA). The essence of the Supreme Court’s rationale is that ERISA’s goal of having a uniform plan administration system — especially for core functions like reporting — would be frustrated by multi-jurisdictional mandates that impose conflicting administrative obligations, resulting in wasteful administrative costs and subjecting plans to wide-ranging liability.

Vermont’s law was intended to create a resource — a database known as an “all–payer claims database” — for insurers, employers, providers, and the state to examine health care utilization, expenditures, and performance. To create the database, the law required covered entities (which included self-funded group health plans and any third party administrators) to provide information such as health care costs, prices, quality, utilization, and health insurance claims and enrollment data. Reporting intervals could be as often as monthly, and the failure to comply could expose covered entities to penalties as high as $2,000 per day and disqualification of administrators from performing services in the state.

Liberty Mutual sponsors a self-funded group health plan which provides health benefits to over 80,000 individuals across the United States. Concerned about the burden Vermont’s law placed on its self-funded group health plan, as well as its fiduciary obligations to maintain the confidentiality of sensitive plan information that could be made available to entities with access to the database, Liberty Mutual challenged Vermont’s law, arguing it was preempted by ERISA. In short, ERISA’s preemption doctrine holds that, except for laws regulating insurance, state laws that relate to employee benefit plans covered by ERISA are preempted.

The reach of the ERISA preemption doctrine has been an area of frequent litigation, finding its way to the high court several times. Some commentators see the Court trending toward a more narrow view of ERISA preemption.  However, this decision makes clear that when core plan administrative functions such as reporting are at stake, state laws like the one in Vermont will not survive ERISA preemption.

“The fact that reporting is a principal and essential feature of ERISA demonstrates that Congress intended to pre-empt state reporting laws like Vermont’s, including those that operate with the purpose of furthering public health.”   Justice Kennedy

Thus, even though the state law’s purpose was to further the public good, it will not necessarily be enough to overcome ERISA preemption. Additionally, the state’s argument that its law had little, if any, economic impact did little to persuade the Court.  It reasoned that employer-sponsored plans should not have to wait until they are burdened by multiple state laws with inconsistent obligations resulting in growing costs before seeking protection under the preemption doctrine.

The Supreme Court’s decision may prompt many plan sponsors to look more critically at state reporting and other requirements which affect their plans, particularly larger plan sponsors with employees in multiple states. But they should proceed cautiously as the Supreme Court’s decision does not invalidate all state reporting laws.  Even though the decision places employers in a strong position, particularly with respect to onerous state and local requirements, the decision not to follow a similar law, or even to challenge it in court, should include an appropriate cost/benefit analysis.

It is also anticipated that the decision may change the focus of efforts to collect health plan data from individual states to national efforts by the federal government, notably the U.S. Department of Labor and the U.S. Department of Health and Human — the agencies vested with such authority by ERISA and the Affordable Care Act, respectively, as noted by Justice Breyer’s concurring opinion in Gobeille.


ERISA provisions are like fruity rum drinks. A little inattention and they can sneak up on you with most unpleasant consequences.   No place is this more true than with severance pay.  Many employers still believe that if they make just a single payment to a departing employee, they have not created a plan subject to the Employee Retirement Income Security Act of 1974 (“ERISA”).  Employers who meet this test trust that the severance payment can be classified as an ERISA-exempt payroll procedure, rather than as separate and ongoing administrative scheme, i.e., an ERISA plan.  The Supreme Court in Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987) took the view that simply writing a check hardly constitutes the operation of a benefit plan.   Over the years, however, courts have chipped away at, polished, refined and in some cases disagreed as to the applicability of this decision.

A recent example is the 3rd Circuit district court case of Zgrablich v. Cardone Industries, Inc.  In that case, an executive was promised severance benefits payable over more than two years with the level of benefits varying based upon whether the termination was for cause, without cause or based on factors such as death or disability.  When the employer didn’t pay, the employee sued in state court and the employer removed the matter to federal court under the view that the severance agreement was governed by ERISA.

In finding that the severance agreement was an ERISA plan — and, accordingly, denying remand — the court cited these important factors:

First, the court found that from the surrounding facts one could determine the intended benefits, the beneficiaries, a source of financing and procedures for receiving benefits — all the factors necessary for an ERISA plan.

Second, the court looked for an administrative scheme — something more than just writing a check.  A scheme was found in the provisions that provided severance benefits could vary based on the reason for termination.  The court also found on-going administration in the fact that severance payments, including health and other benefits, could be terminated if there was a breach in the severance agreement’s non-compete and non-solicitation provisions.   Also, health coverage continuation could be terminated if coverage was obtained from a new employer.

Third, the court rejected the argument that because the severance provisions were contained in an individual agreement, they could not amount to a plan governed by ERISA.

Finally, the court found that ERISA applied because the dispute was over the right to payments — a claim that implicates coverage and benefits established under a plan — and not a contractual matter dealing with the mere computation or execution of the amount of such payments.

So, what is the take away from this case? If your severance benefit is more than two years’ pay or if payments extend over more than two years, the plan likely is beyond the ERISA severance pay exception.  If the plan involves more than one check which is easily calculated, don’t look back.  Get help.  You likely have an administrative scheme and, accordingly, ERISA provisions — including plan document, reporting and disclosure requirements — could be sneaking up on you.

The Continuing Downward Spiral of the Multi-Employer Pension Plan

We have been monitoring and reporting on several disquieting events which have occurred in the multi-employer pension plan world within the past few months.

In September 2015, the Central States Southeast and Southwest Area Pension Fund availed itself of the relief permitted under the Kline-Miller Multiemployer Pension Reform Act of 2014 (“Kline-Miller Act”) by applying to the Department of Treasury (“Treasury”) to reduce “core benefits” in light of the Fund’s “critical and declining” status. Within the succeeding three months, two other funds — the Iron Workers Local 17 Pension Fund and the Teamsters Local 469 Pension Plan — made similar applications.

Recently in the Central States situation, Special Master Kenneth Feinberg — appointed by Treasury to oversee the Kline-Miller Act — has been conducting a series of public meetings around the country to permit Teamsters — both active and retired — to voice their concerns over the cuts, thereby “putting a face” on this problem. The proposed cuts have been reported as ranging between 39.9% to 60.7%.  So, for example, a participant currently receiving a monthly benefit of $3,000 who suffered a 60.7% reduction would see his or her benefit decline to $1,179.99!  Reflecting uncertainty as to what to do, Treasury has once again extended the comment period concerning the reduction in core benefits to March 1, 2016.

It is not clear whether the relief sought by the three funds that have applied to the Treasury will be granted.

The situation is not limited to the three funds that have already sought relief. The Department of Labor reports that there are approximately nine other funds in “critical and declining status” that are also eligible to reduce core benefits.

To further worsen the situation, last week the director of the Pension Benefit Guaranty Corporation (“PBGC”) announced that the agency’s assistance to the United Mine Workers of America 1974 Pension Fund would be a “significant factor” in the PBGC’s multiemployer insurance program’s insolvency. In a September 2015 report, the PBGC reported that its multiemployer pension insurance program was projected to be insolvent by 2025.

These events underscore what has been recognized for years:  employers should not agree to begin contributions to a multiemployer defined benefit pension plan under any circumstances.  As reflected above, there are far too many factors over which the employer will have no control.

Those employers that are currently enmeshed in multi-employer pension plans should not remain passive. Rather, they should begin to consider strategies to exit these plans in future union negotiations.  A first step would be monetizing the withdrawal liability costs and comparing them to possible savings that could be achieved at the bargaining table if the pension fund contributions were to be eliminated.  In some instances, the comparison may reveal that it might be beneficial to negotiate out of the pension fund obligation.

We will continue to monitor the situation and keep you advised.

Recent Decision in Colorado Expands Church Plan Exemption Under ERISA While Third Circuit and Other District Courts Uphold Narrow Interpretation

Does a benefit plan, to fall within the so-called “church plan exemption,” have to be directly established by a religious entity? Or is it enough for the benefit plan to be established by an organization, such as a medical institution, that is itself established by a religious entity?  That is the question that a number of courts are attempting to answer through their holdings in recent cases.

A church plan is defined in the Internal Revenue Code (Code) as a plan established and maintained for its employees or their beneficiaries by a church or by a convention or association of churches which is exempt from tax under Code §501.  Generally, a church plan is not subject to various requirements that apply to tax-qualified plans under the Code and Employee Retirement Income Security Act of 1974 (ERISA), such as ERISA’s rules governing reporting, disclosure, and fiduciary conduct.

For many years, it was the broad interpretation that seemed to rule due in part to IRS private letter rulings, which included in the church plan exemption plans sponsored by non-profit organizations that were controlled by or associated with a church (and not just plans directly established by a church).  Consequently, the IRS and DOL have issued hundreds of rulings to church-affiliated organizations exempting their plans from ERISA.  Recently, however, class actions have been filed across the country against religiously-affiliated healthcare institutions, challenging whether their benefit plans fall under the church plan exemption.

Specifically, on December 8, 2015, the U.S. District Court for the District of Colorado held in Medina v. Catholic Health Initiatives that the defined benefit pension plan sponsored by Catholic Health Initiatives, a Catholic non-profit health care system, qualified as a church plan under ERISA and was, therefore, exempt from ERISA. The court found that a plan does not need to be established by a church to qualify as a church plan; rather, such plans can also qualify as church plans if they are maintained by a tax-exempt organization controlled by or associated with a church whose principal purpose or function is the administration or funding of the benefits plan. The court then interpreted the church plan exemption under ERISA to apply to plans sponsored by church-affiliated non-profit organizations and administered by the organization’s plan committee if the principal purpose or function of the committee is administering the plan and the committee is controlled by or associated with a church.

In contrast, on December 29, 2015, the U.S. Court of Appeals for the Third Circuit upheld a decision of the U.S. District Court for the District of New Jersey in Kaplan v. Saint Peter’s Healthcare System, which held that a retirement plan sponsored by St. Peter’s Healthcare System was ineligible for the church plan exemption and must, therefore, comply with ERISA. In August 2013, the U.S. District Court for the District of New Jersey concluded that St. Peter’s Healthcare System could not establish an exempt church plan because it was not a church. St. Peter’s Healthcare System then appealed that decision to the Third Circuit. The Third Circuit stated that, as of 2012, religiously affiliated hospitals accounted for seven of the nation’s ten largest nonprofit healthcare systems and that applying the church plan exemption to these hospitals would defeat the purpose of ERISA.

Other district courts have sided with the narrow interpretation used in Kaplan:

In Stapleton v. Advocate Health Care Network and Subsidiaries, the U.S. District Court for the Northern District of Illinois held that the defined benefit retirement plan of Advocate Health Care Network is not a church plan under ERISA, and is instead fully subject to ERISA’s requirements. The court stated that although affiliated with the United Church of Christ and the Evangelical Lutheran Church in America, Advocate Health Care Network was not owned or financially supported by either church. Advocate Health Care Network has appealed that decision to the Seventh Circuit.

In Rollins v. Dignity Health, the U.S. District Court for the Northern District of California ruled that a pension plan sponsored by Dignity Health was not a church plan exempt from the ERISA because it was not directly established by a church or convention of churches. The court rejected the IRS’s broad interpretation of the church plan exemption described above. Dignity Health has appealed that decision to the Ninth Circuit.

It is unclear how the circuit courts will rule in these cases. What is clear, however, is that there is disagreement between the government agencies and certain courts as to how to apply the church plan exemption — the effects of which could have hefty consequences for religiously-affiliated healthcare institutions and/or the participants in their benefit plans.