Saint Peter's University Hospital, a non-profit hospital sponsored by the Diocese of Metuchen, founds a defined-benefit pension plan for its employees. The Saint Peter's University Hospital Retirement Plan is a vital element of each employee's pay package going forward.
Since Saint Peter's is not a church, the hospital tasks its trustees to manage the Saint Peter's Plan as an ERISA plan. The hospital funds the Plan in compliance with ERISA, files annual reports with the Department of Labor, and pays regular premiums to the PBGC. Plan documents distributed to employees describe members' rights under ERISA and note that benefits are insured by PBGC.
Congress amends ERISA, making permanent a temporary exemption for plans established and maintained by churches for the churches’ own employees which also include the employees of church-affiliated organizations. This exemption also provides that plans maintained by "church pension boards" are also exempt from the law. Saint Peter's, which does not meet this requirement, continues managing its pension plan as an ERISA plan through the end of 2005.
1990s - 2000s
Benefits consultants approach organizations with some link to a religion, such as hospitals, schools, and nursing homes, and advise them that they can save money by exploiting ERISA's church exemption. The move would allow the organization to skirt ERISA's funding requirements and avoid paying PBGC insurance premiums, leaving the fund members without the protections ERISA was created to provide. The IRS, perhaps not foreseeing the consequences, begins granting such requests in a series of private letter rulings. Though such rulings should not serve as precedent for future cases, they nonetheless establish a trend. In many cases members are not notified of their pension plan's switch to church plan status.
Cases come to light of financially strapped organizations with "church plan" status stranding their pension plans. For instance:
- Financially-strapped Medical Center at Orange (NJ) claims "church plan" status in 2003 and immediately stops contributing to its pension plan. When the organization declares bankruptcy in 2004, it pays off creditors but stiffs the pension plan. As of 2010, according to the Wall Street Journal, its funding was down to 30% of promised benefits, expected to run dry in 2013.
- St. Francis Medical Center in Lawrenceville, PA, goes bankrupt in 2002, leaving a funding deficit and no insurance. It had applied for church plan status in 1994.
Medical Center at Orange employees file suit against the PBGC.
St. Peter's applies to the Internal Revenue Service for church plan status. Though it removes references to the PBGC and ERISA protections from plan documentation; it does not notify plan members of the move. It continues paying PBGC premiums through 2010.
In response to the Medical Center at Orange lawsuit, and to evidence that organizations are misusing the church plan designation to escape their pension responsibilites, the IRS places a moratorium on church plan rulings.
Saint Peter's stops offering new employees membership in the pension plan, enrolling them instead in a defined contribution plan managed by an outside contractor.
The IRS lifts the moratorium on church plan rulings, with a new requirement: employers must notify plan participants and beneficiaries ("interested persons") of the planned change in status, and give them 60 days to comment.
Saint Peter's issues the mandated Notice to Interested Persons, finally informing participants that they have requested a church plan ruling "for the plan year beginning January 1, 2006." In employee town-hall meetings, management claims that "we've been a church plan since 2006;" however, in subsequent written communications, the hospital claims that the plan "has never been – and is not currently – an ERISA plan" and "has always been – and continues to be – a church plan."
Plan members, including former Saint Peter's CEO John Matuska and former VP of Human Resources Bruce Pardo, write the IRS urging them to deny the ruling request.
Saint Peter's announces that it plans to freeze the Plan for current employees, moving them to the defined contribution plan going forward. The transition takes effect in January 2013.
The IRS overturns its 2003 decision to award "church plan" status to Hospital Center at Orange, reinstating PBGC coverage and restoring retirement benefits for hundreds of former HCO employees. Also, the first of five class action lawsuits challenging "church plan" status of hospital systems, claiming a funding shortfall of over $2.1 million, is filed in federal court. In light of numerous cases of abuse, the IRS appears to be reconsidering its prior willingness to grant church plan status to church-related organizations which are not churches themselves.
Saint Peter's changes its application for church plan status, now requesting a ruling for the 1974 plan year, the year ERISA first took effect. This effective re-application opens another 60-day IRS comment period.
A new class action suit, Kaplan v. Saint Peter's Healthcare System, is filed in federal court alleging a funding shortfall of $77 million and challenging Saint Peter's claim to church plan status.