ERISA pension protections avoided through church affiliation

Legal exemptions that allow church-affiliated organizations to sidestep Employee Retirement Income Security Act protections for their defined benefit pension plans increasingly are being used for less-than-holy purposes, according to pension activists who see a disturbing trend among plan sponsors.

Pension plans run by church-affiliated organizations can choose to be covered by ERISA, but they are not required to do so. “Church plans are exempt from almost everything,” said Eric Loi, a staff attorney with the Pension Rights Center in Washington.

Companies that switch to a church plan designation can petition the Pension Benefit Guaranty Corp. for a refund of up to six years of premiums paid while the plan was under ERISA. To a cash-strapped organization, that can be enticing.

From 1999 until 2007, the PBGC received 85 requests for premium refunds, many from hospitals, according to the Pension Rights Center. “In many cases, they paid PBGC premiums for years, before this sudden religious conversion,” said Jim Keightley, a former PBGC general counsel who is now a partner with Keightley & Ashner L.L.P. in Washington.

PBGC officials familiar with the premium refund process were not available for comment.

One hospital, St. Peter's Healthcare System in New Brunswick, N.J., decided in 2006 to seek official church plan recognition from the Internal Revenue Service for its $25 million defined benefit plan after having been under ERISA rules for years.

The move came as a surprise to John Matuska, who served as the medical center's chief financial officer, chief operating officer and CEO for 24 years until leaving in 2001, and who sat on both the hospital board of trustees and the retirement planning committee. “We always treated it as an ERISA plan” for funding, reporting and PBGC premium purposes, he said.

Mr. Matuska, now retired, and fellow St. Peter's retirees who got their last summary plan descriptions in January 2006 became aware of the conversion only when St. Peter's asked the IRS for church plan designation that same year. That decision is pending because of an IRS moratorium on such rulings from 2007 until September 2011, as the agency considered complaints from plan participants and activists. The IRS has resumed recognizing plans on a case-by-case basis. IRS officials did not comment on the status of the St. Peter's request.

Phil Hartman, director of public relations for St. Peter's, said in an interview that operating as a church plan “allows us to spread the (contribution) payments, rather than making a lump-sum payment. The benefits are the same.”

Mr. Hartman added that St. Peter's continued to pay PBGC premiums through 2011 and would like to figure out how to continue being protected by the PBGC or a private insurer despite seeking the church plan designation. Plan officials have not asked the PBGC for a refund.

While many church plans may be well run, “the problem is that plan participants will lose their rights under ERISA and no longer be insured by PBGC,” said Mr. Matuska. “Plan participants and employees are really not getting clear answers to what changes will be made if it is granted church status.”

He noted that St. Peter's employees would not even be aware of the risk involved in losing ERISA protection if not for a September 2011 ruling by the IRS clarifying its procedure for determining whether a plan meets the test, including whether it is “established and at all times maintained” by church-affiliated entities. That ruling requires plan sponsors to notify participants that the “protections and rights” applicable to ERISA-covered plans would no longer apply, including PBGC insurance.

How well employees understand what is happening, even with the IRS ruling, is a big concern for activists. “We see a lot on this issue, but current employees are afraid to speak out,” a Pension Rights Center spokeswoman said. The IRS requirement to inform plan participants “only puts the brakes on the most egregious examples” by allowing for participant notification and comments, the spokeswoman said.

To help their employees understand the change, St. Peter's executives held a series of meetings with employees, “which led us to re-examine” our plans, said Mr. Hartman. “We heard those concerns, and we are looking at ways to address them.” In a Dec. 28 letter to plan participants, President and CEO Ronald C. Rak said that as a result of the concerns raised at the meetings, management is working with outside experts to “actively investigate ways to protect your retirement dollars” and would let participants know by the end of February.

In Washington, one cultural organization with a religious affiliation quickly rescinded its application for church-plan status recently after a storm of protest by participants that was triggered by the IRS-mandated disclosure letter. Noting the “great deal of confusion, anxiety and concern,” a second letter to plan participants promised to end the application, which the organization had sought to allow longer smoothing of contributions, according to sources. Further information could not be obtained.

The good news, from the PRC's perspective, is that the IRS notification process gives plan participants a voice.

Pension activists saw a setback in January 2011 when a federal judge in Minneapolis dismissed claims of ERISA violations against Augsburg Fortress Publishers, a subsidiary of the Chicago-based Evangelical Lutheran Church in America. Augsburg terminated its $9 million defined benefit plan on Dec. 31, 2009, and distributed $8.2 million in remaining assets in March 2010, on the grounds that it enjoyed church plan status.

But U.S. District Court Judge Michael J. Davis found that the plaintiffs had sufficient evidence to pursue breach-of-contract claims against both entities in state court. “We deny all claims of wrongdoing alleged in the complaint,” Augsburg Fortress President and CEO Beth Lewis said in a statement at the time of the court filing. “The complaint misrepresents the care with which the plan was administered and the communications that occurred with plan participants.”

In a statement, the ELCA said the ruling “is likely the first of other procedural matters still to be decided.”

Officials from the Catholic Health Assn. of the United States, an organization of Catholic hospitals, and the American Hospital Assn. did not return calls for comment.

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