Senior Living Alert – Church Plan Status: Employee Benefit Plan Administration for Senior Living Facilities Associated With Faith-Based Organizations

May 23, 2024

For employers that sponsor and administer employee benefit plans, various pieces of federal legislation create a multilayered regime of detailed regulatory requirements. Primarily, employer-sponsored benefit plans are governed by the Internal Revenue Code of 1986 (Code) and the Employee Retirement Income Security Act of 1974 (ERISA). There are few, but critical, exemptions from ERISA’s application.

For senior living organizations controlled by or associated with a church or a convention or association of churches, “church plan” status offers a potential exemption from many of the rules imposed by ERISA. If a senior living facility’s employee benefit plan is properly considered a “church plan,” the plan will be exempt from most of ERISA’s requirements (Non-Electing Church Plan) unless the senior living facility (i.e., the plan sponsor) makes a one-time irrevocable election to have the plan be subject to ERISA (Electing Church Plan).

This ERISA exemption, however, comes at a cost for Non-Electing Church Plans. While many of ERISA’s administrative requirements designed to add protections for plan participants do not apply, the protections of ERISA preemption also do not apply to such employee benefit plans and, in turn, their church plan sponsors. For example, a Non-Electing Church Plan, while not subject to ERISA, will be subject to state law.

This alert provides a high-level overview as to the scope of ERISA’s legal requirements and the church plan exemption and discusses certain considerations faith-based organizations may take into account when determining whether to “opt-in” to ERISA’s regime and maintain an Electing Church Plan.

What Is ERISA?

ERISA (and subsequent regulation and amendment) is comprehensive federal guidance designed to safeguard the interests of employees who participate in retirement and welfare benefit plans established by their employers. For employee benefit plans, ERISA sets standards to ensure transparency in benefit plan operations, provide for fiduciary responsibility and oversight of benefit plan administration, and maintain an overarching theme of fairness in benefit plan administration and design. For example, all employee benefit plans subject to ERISA are required to:

  • file annual reports regarding certain plan-related data (e.g., plan expenses, participant counts, external vendor costs);
  • provide understandable, easy-to-read summaries of plan terms; and
  • adjudicate participant claims according to specific procedures.

In the retirement plan context, ERISA-governed plans are subject to strict trust, funding, vesting and bonding requirements, which add financial and administrative burden to sponsoring such employee benefit plans.

During its enactment, Congress exempted certain employee benefits plans from ERISA’s purview, including employee benefit plans established or maintained by governmental entities and churches for their employees, and plans maintained solely to comply with applicable workers’ compensation, unemployment or disability laws.

According to legislative history, Congress included the church plan exemption out of concern that the review of a church’s records by federal agencies might be viewed as an “unjustified invasion” of the “confidential relationship” between “churches and their religious activities.” By exempting church plans from ERISA, Congress gave eligible church plan sponsors greater flexibility in employee benefit plan design, structure and operation.

What Is a Church Plan?

A church plan is any employee benefit plan established and maintained for the benefit of the employees (and/or their beneficiaries) of a church or a convention or association of churches that is exempt from tax under Section 501 of the Code. This term applies to all religious denominations. Additionally, a church plan includes a plan maintained by an organization whose principal purpose or function is the administration or funding of a plan or program for the provision of retirement benefits, 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.

Which Entities May Sponsor a Church Plan?

While the analysis regarding an actual church entity’s eligibility to sponsor a church plan is straightforward, whether a senior living facility is an entity eligible to sponsor a church plan is nuanced and highly fact-sensitive, and depends on the relationship between the facility and the applicable religious organization. To be considered eligible to sponsor a church plan, a senior living facility must be a “principal purpose organization” (“PPO”) that is “controlled by” or “associated with” a church or a convention or association of churches. Each term is discussed in more detail below.

The “controlled by” or “associated with” rules allow a nonprofit religious organization’s employee benefit plans to be exempt from ERISA as Non-Electing Church Plans.

Principal Purpose Organization: According to the plain language of ERISA, a PPO is one whose principal purpose or function is the administration or funding of a plan or program to provide retirement benefit, welfare benefits or both to the employees of a church or a convention or association of churches, where the organization is controlled by or associated with a church or a convention or association of churches.

This PPO definition does not add clarity to whether a senior living facility’s employee benefit plan qualifies for church plan status. In Medina v. Catholic Health Initiatives, however, the U.S. Court of Appeals for the Tenth Circuit considered the question of what qualifies a PPO, holding that ERISA imposes a three-step inquiry for entities seeking to use the church plan exemption for employee benefit plans maintained by a PPO:

  • Is the entity a tax-exempt nonprofit organization associated with a church?
  • If so, is the entity’s retirement plan maintained by a PPO? In other words, is the plan maintained (i.e., kept in a state of validity) by an organization whose principal purpose is administering or funding a retirement plan for entity employees?
    • In the Medina context, the Tenth Circuit found that a retirement plan maintained by a subcommittee qualified for church plan status where the subcommittee charged with administering the plan was a subdivision of a religiously affiliated hospital whose principal purpose was providing healthcare.
  • If so, is that PPO itself associated with the church?

While the Tenth Circuit’s approach is not binding in every jurisdiction, it provides a useful baseline. Thus, for a senior living facility attempting to determine whether it qualifies as a PPO, the initial inquiry begins at whether the facility is a tax-exempt nonprofit organization associated with a church.

• Controlled By: While ERISA does not specify what “controlled by” means for purposes of church plan status, case law has interpreted this term as referring to corporate control — i.e., a religious organization, order or institution appoints, and can remove, a majority of the senior living facility’s officers or directors.

• Associated With: A senior living facility satisfies the “associated with” requirement if it shares common religious bonds and convictions with the religious organization, order or institution. This requirement is evaluated on a facts and circumstances basis. For example, a senior living facility’s inclusion in the religious institution’s official directory or inclusion in the religious organization’s determination letter regarding tax-exempt status under Section 501 of the Code would indicate that the senior living facility is associated with the religious institution. Three factors have been identified as important but not conclusive when evaluating whether an organization shares common bonds and convictions with the religious institution:

  • whether the religious organization plays any official role in the governance of the senior living facility;
  • whether the organization receives assistance from the religious institution; and
  • whether a denominational requirement exists for any employee, patient, or customer of the organization.

Agency Approval of Church Plan Status

The analysis regarding church plan status is highly subjective for nonchurch entities. As a result, church plans have become the subject of increased participant litigation. To elevate some litigation concerns, a prospective plan sponsor may seek an Advisory Opinion from the Department of Labor (DOL) or a Private Letter Ruling from the Internal Revenue Service (IRS) regarding church plan status. Advisory Opinions and Private Letter Rulings apply the law to a specific set of facts proffered by a prospective plan sponsor as to whether the plan at issue qualifies for church plan status. While a prospective plan sponsor cannot rely on Advisory Opinions or Private Letter Rulings filed by another plan sponsor, the DOL or IRS ruling does provide binding guidance as applied to the filer’s facts. Importantly, a prospective plan sponsor who obtains a Private Letter Ruling receives an additional benefit as the DOL often accepts an IRS Private Letter Ruling as sufficient to establish a church plan under ERISA. However, the DOL reserves the right to review the underlying IRS Private Letter Ruling.

ERISA Exemption Disadvantages

While an exemption from ERISA allows plan sponsors to retain more control over benefit design and administration, the exemption comes with consequences. For Non-Electing Church Plans, state law, rather than ERISA’s uniform administration provisions, govern the administration and operation of employee benefits — i.e., multiple, and perhaps conflicting, state laws could apply in administering one Non-Electing Church Plan. As a result, Non-Electing Church Plan participants can bring lawsuits in state court and file state law claims, which may include claims for punitive damages and the ability to request a jury trial.

ERISA provides a framework pursuant to which plan administrators can rely in administering their employee benefit plans. ERISA specifically outlines the fiduciary duties of plan administrators — such as a duty of loyalty, duty of prudence or duty to avoid prohibited transactions — which set forth an informative roadmap for plan administrators (i.e., the “dos” and “don’ts” of operating employee benefit plans). Without specific state law standards in many instances or with state law standards in some areas (e.g., trust law or insurance), but not others, it can be difficult for a Non-Electing Church Plan sponsor to determine whether it is operating its employee benefit plan in compliance with all applicable state law requirements.

Electing Church Plans

The plan administrator of a church plan may elect to be covered by certain aspects of ERISA by executing a written statement that indicates an election is being made under Code Section 410(d) and the first plan year for which the election is effective. To effectuate the election, the plan administrator’s written statement may attach an affirmative statement to a Form 5500 or by requesting a determination letter from the IRS (only applicable to retirement plans). If an election is made alongside a written request for a determination letter, the plan sponsor may condition the election upon issuance of a favorable determination letter. Electing Church Plans are typically done in the retirement plan context. Once an election is made, however, it is irrevocable.

Key Takeaways

For senior living facilities affiliated with or controlled by a church or association of churches, a Non-Electing Church Plan offers eligible plan sponsors the opportunity to customize plan design, structure, and operation in a manner not typically available under ERISA. At the same time, however, a Non-Electing Church Plan loses the benefits and protections ERISA can provide for plan sponsors and may require the plan sponsor to seek guidance from those familiar with certain areas of state law.

When determining whether a senior living facility is an entity eligible to sponsor an employee benefit plan that qualifies for church plan status, careful consideration of all facts and circumstances of the relationship between the facility and the religious organization, order or institution and consult legal counsel to ensure the senior living facility is in the best position to support implementation of a Non-Electing Church Plan.