Holy Cross Hospital and Sinai Health Systems, Chicago, are being sued by participants of a terminated defined benefit plan who are challenging its church-plan status.

The lawsuit filed Monday in U.S. District Court in Chicago alleges that Holy Cross Hospital transferred plan sponsorship and liabilities to an order of nuns, Sisters of Saint Casimir, the day before completing a merger with Sinai Health System in 2012. At the time, the plan had $31 million in liabilities after Holy Cross stopped making contributions in 2007, according to the lawsuit.

When SSC terminated the plan two years later, participants were informed that lump-sum benefits would be calculated using a termination discount rate of 13.5%, instead of the 4% rate applied under ERISA, causing some participants to receive less than half the original benefits promised, according to the lawsuit, which claims that Holy Cross’ conduct “was even more egregious” because the pension plan complied with the Employee Retirement Income Security Act for 19 years. In 1993, it won approval from the IRS to qualify as a church plan retroactively as of March 1974. That made it exempt from ERISA funding and reporting rules, and benefit guarantees from the Pension Benefit Guaranty Corp.

The lawsuit notes that in March, the 7th U.S. Circuit Court of Appeals in Chicago denied a bid by Advocate Health Care Network Pension Plan, Downers Grove, Illinois, to be considered a church pension plan on the grounds that it was not established by a church or association of churches.

Plaintiffs are asking for joint and several liability for Holy Cross and Sinai Health Systems, payment of the unfunded liabilities plus interest, civil penalties per day per plaintiff, court costs and the appointment of an independent fiduciary.

Rachel Dvorken, executive vice president and general counsel for Sinai Health System, declined to comment on the new lawsuit.

Karen Handorf, a partner at Cohen Milstein Sellers & Toll representing the plaintiffs in Butler et al. vs. Holy Cross Hospital et al., said some former employees have been forced to find additional work and live on reduced incomes. “Holy Cross is an example of why the wrongful claim to church-plan status has serious consequences for retirees who have been denied the benefits that they earned through their years of employment,” Ms. Handorf said in an e-mail.

Hazel Bradford writes for Pensions & Investments, a sister publication of Business Insurance.