Employee Benefit Plan Review – From The Courts

U.S. District Court in Illinois Holds Two Benefit Plans Exempt from ERISA Under ERISA’s Church Plan Exemption, and Upholds Exemption’s Constitutionality

The Employee Retirement Income Security Act of 1974 (ERISA) exempts “church plans” from its requirements. A federal court in Illinois recently considered whether certain plans sponsored by a non-profit corporation associated with an Order of Roman Catholic Sisters are church plans and whether the church plan exemption runs afoul of the First Amendment’s Establishment Clause.

Under ERISA:

The term “church plan” means a plan established and maintained (to the extent required in clause (ii) of subparagraph (B)) for its employees (or their beneficiaries) by a church or by a convention or association of churches.… 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.

29 U.S.C. § 1002(33)(A) and (C).

The Case

OSF Healthcare System, an Illinois non-profit corporation founded by The Sisters of the Third Order of St. Francis (the St. Francis Order), operates 11 acute care hospitals, home health care services, and other health care facilities in Illinois and Michigan.

Some years ago, the St. Francis Order formed an Illinois non-profit corporation, The Sisters of the Third Order of St. Francis (STOSF), to “serve as an integral part of the Roman Church and to carry out its mission; [and] to carry on the corporal works of the mercy of the Roman Catholic Congregation of Sisters.” The Sisters in the St. Francis Order are the only members of STOSF, which in turn is the sole member of OSF.

STOSF’s authority over OSF is governed by OSF’s governing documents and the canonical and civil guidelines pertaining to Church properties.

In 2014, the Saint Anthony’s Health Center (SAHC), a nonprofit Catholic hospital operated by The Sisters of St. Francis of the Martyr of St. George in Thuine (the St. George Order), merged into OSF with the permission of the Roman Catholic Church .

OSF requires that its president and a majority of its board of directors be Sisters. All directors (including lay members) are required to meet certain qualifications, including “Commitment to the Philosophy, Mission, Values and Vision of [STOSF,]” and “Commitment to uphold the Catholic Code of Ethics in all dealings and deliberations pertaining to the Board’s responsibilities.” Among the powers reserved to STOSF (as the sole member of OSF) is the power to appoint, approve, or remove OSF’s chairperson, vice-chairperson, chief executive officer, president, chief medical officer/chief clinical officer, regional chief executive officers, and operating division presidents and chief executive officers.

STOSF also has the power to “approve the introduction or termination of value sensitive ministries or services, and to eliminate services or activities which are in conflict with the philosophy and purposes of the established ministry.”

In the event OSF is dissolved, its assets revert to STOSF. OSF is recognized as a Catholic institution in the Official Catholic Directory. Its bylaws provide that any medical staff bylaw or rule is invalid if it conflicts with the Ethical and Religious Directives for Catholic Health Care Services (ERDs) promulgated by the United States Conference of Catholic Bishops.

OSF sponsors defined-benefits plans covering its employees (the St. Francis Plan) and employees of St. Anthony’s Health Center (the St. Anthony’s Plan).

The Retirement Committee for the Saint Anthony’s Plan (the St. Anthony’s Committee) is the administrator of the St. Anthony’s Plan, and the Sisters of the Third Order of St. Francis Employees’ Pension Plan Administrative Committee (the St. Francis Committee)is the administrator of the St. Francis Plan (together, the Plan Committees).

Two former employees of the SAHC, vested participants in the St. Anthony’s Plan, and three former OSF employees, vested participants in the St. Francis Plan, sued OSF, claiming that OSF improperly treats the St. Anthony’s Plan and the St. Francis Plan (together, the Plans) as “church plans” exempt from ERISA’s requirements.

As a result, the plaintiffs alleged, OSF failed to fund the Plans’ trust accounts to the levels required under ERISA to cover all accrued benefits; failed to follow certain notice, disclosure, and managerial requirements; and breached its fiduciary duties. The plaintiffs also asserted that the church plan exemption violates the Establishment Clause of the First Amendment and, therefore, is unconstitutional.

OSF moved for summary judgment, arguing that the Plans properly qualify for the church plan exemption and, therefore, are not subject to ERISA, and that the church plan exemption does not violate the Establishment Clause.

The Court’s Decision

In its decision granting OSF’s motion, the court explained that the U.S. Supreme Court, in Advocate Health Care Network v. Stapleton, 137 S. Ct. 1652 (2017), held that the church plan exemption applies not just to a benefit plan established by a church, but to a plan established by a non-church, as long as the plan is “maintained by a principal-purpose organization.” The court then introduced the three-step inquiry applied by other courts to determine whether the church plan exemption applies to a plan maintained by a non-church organization:

1. Is the entity whose employees the plan benefits a tax-exempt nonprofit organization associated with a church?
2. If so, is the entity’s retirement plan maintained by an organization whose principal purpose is administering or funding a retirement plan for entity employees?
3. If so, is the principal-purpose organization associated with a church?

Applying this  three-step inquiry, the court first found that OSF is a nonprofit organization, as the plaintiffs conceded, and that it is “associated with” a church as it “shares common religious bonds and convictions” with the Catholic Church.

The court recognized that a plan is not a church plan “if less than substantially all of the individuals included in the plan” are employees of a church or are deemed employees of a church. The court stated, however, that this exclusion does not apply to the Plans because all of the employees participating in the St. Anthony’s Plan and all but 60 employees out of the approximately 18,000 individuals participating in the St. Francis Plan are employees of OSF’s nonprofit ventures.

With respect to the second part of the three-step inquiry, the court found that the Plan Committees are principal-purpose organizations in that their “principal purpose or function” is to administer or fund the Plans for church employees.

The court also recognized that the Plan Committees – which are the administrators of the Plans – “maintain” the Plans within the meaning of ERISA even though they do not have the power to modify or terminate the Plans. The court observed that the Plans entrust decisions about participant claims, eligibility, and benefits to their respective Plan Committee, including the eligibility of an employee, beneficiary, or other person to receive Plan benefits as well as the interpretation of Plan provisions and the administration of claims procedures.

The court then found that the Plan Committees meet the third part of the three-step inquiry as they are “tightly connected with the Roman Catholic Church.” The court added that the Plan Committees both are “dominated by members of a recognized Roman Catholic religious order” and, to the extent the Plan Committees are internal organizations of OSF, they share OSF’s Catholic affiliation.

Accordingly, the court concluded that the Plans are exempt from ERISA, because they are church plans.

Finally, the court rejected the plaintiffs’ contention that the church plan exemption violates the First Amendment’s Establishment Clause. The court applied the test articulated by the U.S. Supreme Court in Lemon v. Kurtzman, 403 U.S. 602 (1971), holding that governmental action does not violate the Establishment Clause if:

1. It has a secular purpose;
2. Its principal or primary effect is one that neither advances nor inhibits religion; andIt does not foster an excessive government entanglement with religion.

The court decided that ERISA’s church plan exemption met these requirements. Among other things, it observed that the church plan exemption has a secular purpose, it neither inhibits nor advances religion, and it does not foster an “excessive government entanglement with religion”; indeed, it “avoids entanglement.” Accordingly, the court concluded, the church plan exemption does not violate the Establishment Clause. [Smith v. OSF Healthcare System, No. 16-CV-467-SMY-RJD (S.D. Ill. Sep. 28, 2018).]

Fourth Circuit Decides Claim Administrator Acted Reasonably in Denying AD&D Benefits to Plaintiff Following Husband’s Death from Pulmonary Embolism

The U.S. Court of Appeals for the Fourth Circuit has affirmed a decision by the U.S. District Court for the Eastern District of Virginia upholding a determination by the claim administrator of an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) to deny a claim for accidental death and dismemberment (AD&D) benefits under the plan following the death of the plaintiff’s husband.

The Case

The plaintiff’s husband, who participated in an employee benefit plan that provided basic and supplemental AD&D benefits, flew from Binghamton, New York, to Los Angeles, California, on a business trip for his employer. Two days later, he collapsed and died at his employer’s Los Angeles office.

The plaintiff applied for AD&D benefits, but the plan’s claim administrator determined that she was not eligible for benefits, because her husband’s death had not resulted from a traumatic accidental injury independent of all other causes as required by the plan for coverage. The claim administrator further determined that the claim was excluded from coverage, because the death had been caused or contributed to by sickness or disease.

The plaintiff sued and the parties filed cross-motions for summary judgment.

Applying an abuse of discretion standard, the district court granted summary judgment to the plan administrator, and the plaintiff appealed to the Fourth Circuit.

The Fourth Circuit’s Decision

In its decision affirming the district court, the Fourth Circuit explained that the claim administrator had discretionary authority to determine eligibility for AD&D benefits under the plan and to construe and interpret the terms of the plan. As a result, the court stated, it would review the plan administrator’s decision “only for abuse of discretion” and would not disturb the determination if it was “reasonable,” even if it would have reached a different conclusion.

The plaintiff cited to multiple circuit court and district court cases for the proposition that a pulmonary embolism – the cause of death listed in the autopsy report and death certificate – is accidental.  The court distinguished these cases and found them inapposite.

In considering whether the claim administrator’s interpretation of “accident” was unreasonable, the court stated that under the abuse of discretion standard of review, the administrator “only had to offer a reasonable, and not the most reasonable, interpretation of plan terms.” Under the plan, AD&D benefits are payable when there has been an accident and a “bodily injury resulting … directly from [the] accident.” Because the plaintiff’s husband died from natural causes, e.g., a pulmonary embolism, the claim administrator determined benefits were not payable.  The court deferred to the administrator and found its determination reasonable.

Further, the court took no issue with the administrator:

1. Relying on the autopsy report and death certificate to assess the “biological factors contributing to [the] death,” in considering whether the death was accidental;
2. Having the claims review process performed by a benefits specialist, without input from or analysis by a medical professional; or
3. Consulting with in-house counsel during the plaintiff’s administrative appeal.

Accordingly, the Fourth Circuit concluded that the claim administrator had not abused its discretion in determining that the plaintiff’s husband’s death was not an accident under the plan. [Grabowski v. Hartford Life & Accident Ins. Co., No. 17-2108 (4th Cir. Sep. 4, 2018).]

Supplemental Disability Policy Acquired Through Employer Was Not Subject to ERISA, District Court Says

A federal district court in Minnesota has held that an individual disability policy an employee obtained with the assistance of his employer was not subject to the Employee Retirement Income Security Act of 1974 (ERISA) and, as a result, ERISA did not preempt the state-law causes of action asserted in his lawsuit against the insurer.

Courts typically consider five factors when analyzing whether ERISA governs. For ERISA to govern there must be:

1. a plan, fund or program
2. established or maintained
3. by an employer or by an employee organization, or by both
4. for the purpose of providing medical, surgical, hospital care, sickness, accident, disability, death, unemployment or vacation benefits, apprenticeship or other training programs, day care centers, scholarship funds, prepaid legal services or severance benefits
5. to participants or their beneficiaries.

However, ERISA’s regulatory safe-harbor provision provides that ERISA does not govern a benefit plan if the following requirements are met:

1. No contributions are made by an employer or employee organization;
2. Participation in the plan is completely voluntary for employees or members;
3. The sole functions of the employer or employee organization with respect to the plan are, without endorsing the plan, to permit the insurer to publicize the plan to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and
4. The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the plan, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.

29 C.F.R. § 2510.3-1(j).

A plan must meet all four criteria to be exempted from ERISA.

The Case

The plaintiff’s employer offered long-term disability coverage to its employees under its ERISA-governed benefit plan. The employer also invited its employees to purchase an individual disability policy through an insurance company as a supplemental disability benefit. The plaintiff accepted this offer and purchased an individual policy.

The plaintiff indicated in his application for the policy that his employer would pay all the premiums. The insurer issued the policy as part of an employee security or employer sponsored plan (ESP) referred to as “Risk Group No. 083242.” ESPs were for “employers who wished to insure/provide supplemental coverage to multiple employees through individual policies.”

The insurer provided a 35 percent premium discount to policies in Risk Group No. 083242, under which 89 individual policies were issued, at least 40 of which were issued the same year as the plaintiff’s policy.

The plaintiff became disabled and began to receive benefits under the policy in 2001. The insurer paid disability benefits to the plaintiff until 2016, when it determined that the plaintiff was no longer disabled.

The plaintiff sued, alleging breach of contract. The insurer moved for summary judgment, arguing that the policy was governed by ERISA, which would preempt the plaintiff’s state law breach of contract action. A magistrate judge issued a report and recommendation (R&R) to deny the insurer’s motion. The insurer objected to the R&R.

The Court’s Decision

In its decision overruling the insurer’s objections to the R&R, the court found that the policy was not an employee welfare benefit plan governed by ERISA.

The court explained that because the insurer failed to show that the plaintiff’s employer “established or maintained a separate ongoing administrative scheme,” a factor courts typically consider when analyzing whether an employer has established and/or maintains a benefit plan, the policy was not an employee welfare benefit plan governed by ERISA.

The insurer argued that the employer established or maintained a plan. It argued that the employer paying premiums to the insurer constituted evidence that the employer established and maintained a plan. The court disagreed. It stated that simply because the employer was “a conduit for payments” did not create an administrative scheme as contemplated by ERISA. The employer “merely deduct[ed] and remit[ed] payments” it received from its employees.  It exercised no discretion.

The insurer also argued that the employer established or maintained a plan, because the application form for the policies requested occupational and income information, i.e., the employer determined eligibility requirements. The court rejected this argument, as well. Simply because an insurer requires employment and income information on an insurance application does “not mean that employer set those conditions as an eligibility criteria.”

Accordingly, the court concluded that ERISA did not govern the policy; thus, the plaintiff’s state-law claims challenging the termination of benefits under the policy were not preempted. [Christoff v. Paul Revere Life Ins. Co., No. 17-3515 (JRT/TNL) (D. Minn. Sep. 14, 2018).]