Is Nothing Sacred? ERISA Attacks Move From Church Plans to Government Plans

Having settled many of its attacks on pension plans sponsored by several large church-affiliated healthcare organizations, the plaintiff’s bar appears to be shifting focus to pension and welfare benefit plans maintained by a healthcare entity that is at least nominally an instrumentality of a state. Specifically, in Shore v. The Charlotte-Mecklenburg Hospital Authority, a group of former employees of Atrium Health filed a putative class action under the Employee Retirement Income Security Act (ERISA) alleging that the healthcare organization wrongfully treated its employee benefit plans as ERISA-exempt governmental plans, thereby allegedly avoiding substantial compliance obligations imposed under ERISA and violating certain ERISA prohibitions on self-dealing transactions with affiliated entities. Although most employee benefit plans must comply with ERISA’s requirements, the statute exempts from its reach employee benefit plans “established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.”

One of the same firms that previously challenged the application of ERISA’s “church plan” exclusion several years ago represents the plaintiffs in Shore. In the “church plan” cases, plaintiffs alleged that religiously affiliated healthcare entities wrongfully operated their employee pension plans as ERISA-exempt church plans. Many of these cases settled after the Supreme Court of the United States held, in Advocate Health Care v. Stapleton, that an employee benefit plan need not be established by a church to qualify as a “church plan” for ERISA purposes, as long as the plan was maintained by an organization controlled by or associated with a church.

Atrium, the current public face of the Charlotte Mecklenburg Hospital Authority, has long operated its employee benefit plans as ERISA-exempt governmental plans. As alleged in the complaint, by claiming governmental status for its benefit plans, Atrium has historically been able to disregard ERISA’s requirements, including its minimum funding and disclosure requirements and prohibitions on certain kinds of financial transactions with related parties.

However, according to the complaint, Atrium is actually a nonprofit healthcare entity that has only a tenuous connection to the State of North Carolina or any of its agencies or instrumentalities. The plaintiffs argue that the governmental plan exemption does not apply to Atrium’s plans because, among other things:

• Atrium’s operations are not controlled or overseen by a governmental body;
• its employees are not treated as government employees;
• it does not receive government funding (aside from funding typically provided to hospitals);
• it does not have taxing authority to fund its operations or raise revenue to fund its plans; and
• the U.S. government and the State of North Carolina are currently suing it.

In other words, according to the plaintiffs, Atrium’s operations bear none of the hallmarks of governmental operations; therefore, Atrium’s plans are both subject to ERISA and noncompliant with it. The plaintiffs claim that Atrium’s persistent refusal to comply with ERISA has endangered the retirement and health benefits of its current and former employees, and that its alleged self-dealing transactions with affiliates have caused plan participants to pay higher healthcare costs. 

From Pension Plans to Health Plans

Notably, the “church plan” cases have thus far been limited to pension plans. The Shore case opens up a new front in the larger war being waged by the plaintiffs’ law firm by challenging the status of Atrium’s health plan as well. Because welfare plans are not subject to funding requirements—as ERISA-regulated pension plans are—the challenge raised by the plaintiffs focuses on Atrium’s contractual relationships with vendors to which it has some connection and the payments Atrium made to those vendors for services provided to the health plan. In general terms, the plaintiffs argue that the close relationships between Atrium and the health plan vendors are prohibited by ERISA and have led to greater costs of coverage for the plan’s participants than would’ve been the case with wholly independent vendors. This is a variation on a theme that has previously been explored in class action litigation focusing on administrative fees and costs in the world of 401(k) plans. 

Church Plans Versus Government Plans

Also of interest, there is a difference between the statutory definitions of “church plan” and “governmental plan” in ERISA that may or may not come to the fore as Shore progresses. While “church plans” must be established and maintained by a church or maintained by a church-related entity, governmental plans need only be established or maintained by a governmental organization.

The Shore case is in its early stages, and if the “church plan” cases offer any guide, it will be some time before the court’s view of the plaintiffs’ claims becomes evident. In the meantime, government-affiliated entities—particularly in the healthcare industry—may want to keep a close eye on developments in the case.