Long-Running Church Plan Case Reaches $25M Settlement

The 7th U.S. Circuit Court of Appeals last year overturned a lower court’s decision to summarily dismiss the lawsuit, which argued OSF Healthcare System’s retirement plan should be subject to ERISA protections.

Details of a settlement agreement have emerged in the Employee Retirement Income Security Act (ERISA) lawsuit known as Smith v. OSF Healthcare System.

The plaintiffs in the case are a class of former employees and participants of one OSF’s pension plans. Their lawsuit argued that OSF was inappropriately relying on the “church plan exemption” included in ERISA, which provides that retirement plans run by “principal-purpose” religious organizations do not have to meet certain participant protection standards and funding requirements demanded of corporations and most other employers sponsoring tax-qualified pensions.

Specifically, the plaintiffs alleged that OSF, in violation of ERISA, relied on the exemption to allow its plans to become severely underfunded. They alleged that the OSF pension plan’s holding assets are only sufficient to fund roughly 56% of accrued benefits.

In the settlement agreement, OSF admits no wrongdoing, but the hospital system agrees to pay a sum of $25 million to better fund the plan, to be paid in equal annual installments over the next five years. The agreement permits a maximum attorneys fee of $1.75 million for the class counsel.

The settlement agreement also provides certain non-monetary relief. For example, beginning 60 days after the effective date of settlement, the administrator for the OSF pension plans will put in place “certain new arrangements concerning the OSF plans’ administration, notices and procedures.” These include regular pension benefit statements to be sent to each participant in the plan, providing the “latest available information regarding his or her accrued benefits and information regarding which of his or her benefits are non-forfeitable benefits, if any, or stating the earliest date on which the benefits become non-forfeitable.”

Additionally, any participant in the OSF pension plan who has terminated service during a plan year and who is entitled to a deferred benefit under the plan will be provided with “a statement, upon request, regarding the nature, amount and form of such terminated plan participant’s non-forfeitable benefit.”

This conclusion to the church plan lawsuit comes only after multiple rulings in district and appellate courts. Most recently, the 7th U.S. Circuit Court of Appeals overturned a lower court’s decision to summarily dismiss the lawsuit while discovery was still ongoing. The ruling stated that the true underlying issue in the case is whether ERISA applies at all to the pension plans offered by OSF, a religious nonprofit organization that operates 11 hospitals in Illinois and Michigan.

The appeals court also noted that ERISA defines church plans in a specific way, as follows: “A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.”

The full text of the settlement is available here.