The ERISA Litigation Newsletter - April 2015

EDITOR'S OVERVIEW

In this month's Newsletter, Robert Rachal discusses recent "church plan" rulings where some federal judges have declined to give deference to long-standing, consistent guidance from the Internal Revenue Service on the scope of the "church plan" exemption. Robert argues that this lack of deference is defeating ERISA's twin-goals of uniformity and predictability, making it difficult for plan sponsors to offer and administer pension plans.

Please be sure to see this month's Rulings, Filings, and Settlements of Interest section where we review new HHS regulations as well as decisions pertaining to the potential fiduciary status of delinquent contributing employers to multiemployer funds, equitable relief, and the possibility of a fiduciary breach claim based on an oral representation.

Pension Plan Administration and Court Deference to the IRS: The "Church Plan" Cases as a Case Study on the Significance of Agency Deference to Plan Administration*

By Robert Rachal

ERISA, as the Supreme Court has often noted, reflects a "careful balancing" between the interests of plan sponsors and plan participants.1 Uniformity and predictability are critical protections that ERISA affords plan sponsors, and these goals have been used to justify important aspects of ERISA, such as the need for judicial deference to plan administrators. See Conkright v. Frommert, 130 S. Ct. 1640, 1649-51 (2010). This need for uniformity and predictability applies with added force to pension plan administration, in which the IRS plays a critical role in determining whether these plans are tax-qualified, and thus eligible for the tax benefits (e.g., deferral of income for participants until received) that justify their existence. Indeed, the need for predictability has been deemed so important to pension plan administration that the Supreme Court has protected plans and plan sponsors from retroactive liability caused by any "marked departure from past practice."2

In light of this need for uniformity and predictability, deference to the IRS's guidance on pension law should be uncontroversial, at least when it is long-standing and consistent guidance. Yet, as the recent rulings in the "church plan" cases aptly illustrate, federal judges have sometimes become quick to second-guess the IRS and to develop their own unique pension rules, even when these new rules are a "marked departure from past practice."3 Given the complexity of ERISA and the large number of federal judges (e.g., 677 district judges are currently authorized4) this lack of judicial deference can, unfortunately, create balkanized and unexpected legal rules, defeating some of the very protections ERISA is supposed to provide plan sponsors.

Background on the "Church Plan" Exemption

The "church plan" cases arise out of Congress's expansion of the "church plan" exemption in 1980. As originally enacted in 1974 with ERISA, the "church plan" exemption only exempted from ERISA plans established by "churches" for the church and a church agency. The IRS applied this original exemption narrowly, focusing on whether the activity of the organization seeking the exemption was, in the IRS's view, sufficiently "religious" to deem that organization to be part of a "church." Thus, the IRS concluded a Catholic religious order was not part of the church, as the order's operation of health facilities was not, per the IRS, deemed sufficiently "religious," that is, focused on worshipful or sacerdotal functions.5

This and other aspects of the original exemption led to complaints from churches that this exemption as originally enacted was too narrow. The churches proposed to Congress an expansion that would, among other things, include within the "church plan" exemption the churches' "good works" ministries, such as their schools, hospitals and charitable organizations.6 Notably, Treasury objected to this very expansion, but was overruled by the Senate Finance Committee.7

As amended and reenacted, subsection (A) of the "church plan" exemption remains unchanged substantively from its original enactment. Subsection (A) provides that a "church plan" is a plan established and maintained by a church. Subsection (C), however, was added by the 1980 amendment, and extends "church plan" status to include plans administered by organizations controlled by or associated with a church: "A [church plan] includes a plan maintained by an organization . . . if such organization is controlled by or associated with a church or a convention or association of churches." ERISA § 3(33)(C)(i) (emphasis added). Congress also deemed the church to be the employer of the employees of these church-affiliated organizations. ERISA § 3(33)(C)(ii)(II), (C)(iii).

Treasury, which had participated in this legislative process, and its bureau the IRS, revisited its guidance in I.R.S. General Counsel Memo 39,007, 1983 WL 197946 (Nov. 2, 1982). The IRS examined in detail the text of the expanded "church plan" exemption and reversed its earlier ruling, concluding that plans of organizations controlled by or associated with churches, in this instance plans for employees of hospitals run by religious orders, could be "church plans." Id. at *2-6. The IRS based its contemporaneous guidance on the newly added exemption in subsection (C)(i), which "includes" within the definition of "church plan," plans of church-affiliated organizations that are administered by an organization with a principal purpose to administer or fund the plan.8

Since the IRS issued its guidance, for the last thirty-plus years there has been a settled understanding among the federal agencies (the IRS, DOL and PBGC), the federal courts, and religiously affiliated plan...