Compliance Alert: Supreme Court Rules Against Those Claiming Certain Church Plans Were Not Actually Church Plans

In a fairly uneventful 8-0 decision, the Supreme Court struck down several district and circuit court rulings that had ruled in favor of certain defined benefit plan participants who claimed that plans not directly established by a church, specifically those established by church hospitals, were not actually church plans.

To give some background, for many years, the IRS Code and regulations have recognized two types of church plans:

  1. Those established directly by “steeple” churches and by qualified church-controlled organizations (QCCOs) controlled directly by those churches, such as church secondary schools
  2. Those established by non-QCCO organizations affiliated with a church, such as church hospitals, nursing homes, and faith-based universities  

While there are different IRS rules for the two church plan types, historically, neither has been subject to ERISA.  For defined benefit plans, this means that church plans are not subject to ERISA’s minimum funding standards. Additionally, these plans are not subject to the Pension Benefit Guaranty Corporation (PBGC) rules requiring a minimum guaranteed benefit (in the event a plan was terminated due to the plan sponsor's inability to meet the benefit obligations). These latter provisions were the impetus for the participant lawsuits, which claimed losses due to the church plan not being required to follow ERISA rules.

The participants attempted to argue that due to alleged ambiguities in the statute, only “steeple” churches/QCCOs could establish church plans. However, the Supreme Court refused to set aside decades of precedent in which the IRS and DOL have administered these plans as ERISA-exempt (unless a church elects ERISA coverage, which rarely happens).

For church hospitals, faith-based universities and the like, the ruling is welcome news. The prospect of retroactive ERISA coverage for all retirement plans sponsored by such entities would have been a legal and practical nightmare, not only for the defined benefit plans that were the subject of the lawsuit, but for defined contribution plans as well.  Despite the ruling, church plan sponsors must still administer their retirement plans in accordance with IRS rules, as well as state and common laws, where applicable.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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