A new lawsuit filed in the U.S. District Court for the Northern District of Illinois echoes many of the recent “church plan” lawsuits that have been filed by retirement plan participants against employers arguing their religious character should exempt them from certain requirements under employee benefits and tax law.
But this one goes a step further than some of the others, making the claim that, even if the employer in this case complied with the requirements of the Employee Retirement Income Security Act (ERISA) and the applicable tax laws, the entire concept of a church plan getting favorable tax treatment from the federal government violates the U.S. Constitution.
Background in case documents shows the pension plan in question was initially created and run by the Holy Cross Hospital (HCH) system, before the hospital was merged into the Sinai Health System. According to plaintiffs, the HCH pension plan promised the employees would accrue benefits based on hours of service, but in 1993 the hospital claimed church plan status for the pension—retroactive to the plan’s initial founding in 1975.
According to plaintiffs, “although HCH committed to funding the plan, it instead discontinued all contributions to the plan in 2007, causing the plan to become underfunded.” As this unfolded, HCH continued with plans to merge with Sinai, eventually effecting the merger on the condition that sponsorship and ownership of the plan be transferred to a third party, Sisters of Saint Casimir of Chicago (SSC), described by plaintiffs as “an entity [related to HCH but] with little or no assets the day before the HCH-Sinai merger.”
“To achieve this, HCH improperly amended the definition of ‘employer’ in the plan to SSC,” plaintiffs argue. “This change to the plan was invalid because HCH employees were not employees of SSC; HCH always operated independently from SSC; and HCH was governed by a separate board of directors.”
This is not the only problematic behavior alleged by the suit: “While HCH is a non-profit healthcare corporation … HCH’s pension plan does not qualify for ERISA’s church-plan exemption because, as the Seventh Circuit has recently held, a church plan must be established by a church or a convention or association of churches, via Stapleton v. Advocate, and HCH is not a church (or a convention or association of churches). By wrongfully claiming church plan status, HCH acted in its own interest by attempting to circumvent legal protections available to plan participants.”
NEXT: ERISA and constitutionality questions abound
According to plaintiffs, within two years of the illegal transfer, SSC notified participants that the underfunded plan would be terminated and benefits distributed in an amount “drastically less than what had been promised by the plan to its participants and beneficiaries based on the utilization of a termination discount rate of 13.5%.”
“A discount rate attempts to provide the ‘present value’ of a future payment of money,” plaintiffs explain. “Notably, a 13.5% discount rate assumes that participants could invest their lump sum payment and generate investment returns of 13.5%, which is three times higher than the 4% discount rate that would have been applied under ERISA.”
Plaintiffs want the court, “in light of the invalid transfer and termination of the plan,” to reinstate the plan as an ERISA-covered pension, granting plan participants and their beneficiaries “the full amount of benefits that they were promised under the Plan by HCH.”
Interestingly, the lawsuit takes a step further to argue that, “even if the law permitted certain non-church entities to establish church plans, the HCH plan does not meet the various other requirements of a church plan. And if the HCH plan did meet all the statutory requirements for church plan status, the statute would then be, to the extent, and as applied to HCH, an unconstitutional accommodation under the Establishment Clause of the First Amendment.”
The constitutionality argument is pretty straightforward and is not exactly novel, but plaintiffs feel this only strengthens their case: “The Establishment Clause guards against the establishment of religion by the government. The government ‘establishes religion’ when, among other activities, it privileges those with religious beliefs (e.g. exempts them from neutral regulations) at the expense of non-adherents and/or while imposing legal and other burdens on nonmembers.”
As such, plaintiffs argue that the extension of the church plan exemption to HCH, a non-church entity, would “privilege HCH for its claimed faith at the expense of its employees, who are told that their faith is not relevant to their employment, yet who are then denied the benefit of insured, funded pensions, as well as many other important ERISA protections. Similarly, HCH, a non-church entity, would have a privileged economic advantage over its competitors in the commercial arena it has chosen, based solely on HCH’s claimed religious beliefs. This too is prohibited by the Establishment Clause.”
Plaintiffs conclude that, “under Establishment Clause case law, an exemption from ERISA for HCH would be permissible only if the exemption was necessary to further the stated purposes of the exemption, which was to ensure the confidentiality of a church’s books and records, or if it relieved HCH of some genuine religious burden imposed by ERISA, or the exemption avoided government entanglement with religious beliefs. None of these requirements for granting the exemption are present here.”
Text of the complaint is here.