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Church-Affiliated Organizations Reap Benefits of ERISA Exemption
On June 5, 2017, the United States Supreme Court came to a unanimous decision that the Employee Retirement Income Security Act of 1974 (ERISA) “church plan” exemption applies to church-affiliated organizations that sponsor these plans, even if the plan was not originally established by an actual church.
ERISA is a federal law created to govern the private sector retirement and health plans. The intent of the law is to protect the individuals who ultimately receive the benefits under an employer-sponsored plan. Many of the protections of the law are requirements to allow participation, full vesting of benefits, and proper accrual and funding of benefits in defined plans, all based on a set of minimum standards. But generally speaking, ERISA does not govern plans that are established or maintained by churches or governmental entities in order to respect the separation of church and state.
“Church plans” interpreted two different ways
As originally enacted, ERISA section 3(33)(A) defined church plans as:
“A plan established and maintained … by a church or by a convention or association of churches which is exempt from tax under section 501 of title 26.”
Due to the ambiguity of this language, the section was amended in 1980 to define church plans as:
“A plan established and maintained for its employees (and their beneficiaries) by a church or convention or association of churches includes a plan maintained by an organization . . . the principal purpose of 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.”
This revised definition could be interpreted in two ways:
- The exemption applies only to those plans originally established by an actual church
- The exemption applies to all “principal purpose” organizations that are affiliates of churches, and therefore can be a plan that was not originally established by an actual church, such as a hospital affiliated with a church.
Church-affiliated organizations continue with existing benefit plans
The Supreme Court’s clarification means that church-affiliated hospitals and schools relying on this exemption for their employee-sponsored benefit plans are now officially included in the law’s protections; no penalties or violations of ERISA are expected to be made to these existing plans.
While these organizations can continue their plans under the exemption without any required changes, Congress could act to reduce this exemption or include additional clarification in upcoming legislation. CliftonLarsonAllen’s (CLA) employee benefit professionals can help answer your ERISA questions and are actively watching as benefits laws continue to evolve.