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Exemptions From ERISA: What Employers Should Consider

A five-year-old class action suit against a hospital system with ties to the Catholic Church will continue, according to a recent ruling by a U.S. federal district judge.

The suit claims that Dignity Health Hospital exploited a religious exemption in federal law to underfund its employees' pensions by $1.5 billion. The court ruled that Dignity failed to establish that it qualified as a "church plan" and therefore was not entitled to an exemption to retirement funding requirements imposed by the Employee Retirement Income Security Act (ERISA).

A former Dignity employee sued the hospital in 2013, alleging the hospital was underfunding its employee pension plan. ERISA establishes minimum funding and vesting requirements and fiduciary responsibilities for plan administrators. However, church plans are exempt from the requirements.

To qualify for ERISA's church-plan exemption, a retirement plan has to have been established and maintained by a church. The plaintiffs argued Dignity's plan does not qualify for the exemption because Dignity is not a church, but a hospital. Dignity contends it does qualify because it is affiliated with the Sisters of Mercy and other Catholic women's orders. Dignity Hospital is the product of the merger of 10 hospitals run by two California-based Sisters of Mercy congregations. Dignity now runs 39 hospitals in California, Arizona, and Nevada.

The class action plaintiffs allege Dignity's plan in 2016 held assets sufficient to fund only 72 percent of accrued benefits, siphoning money from more than 101,000 current and former Dignity employees. "Lawsuit Accusing Hospital of Underfunding Pension Plan May Continue," www.courthousenews.com (Mar. 22, 2018).


ERISA was passed in 1974 and was designed to protect the retirement assets of Americans by implementing rules that qualified plans must follow to ensure plan fiduciaries do not misuse plan assets.

However, not every retirement plan is subject to the terms of ERISA. In particular, ERISA does not cover retirement plans set up and maintained by government entities and churches. This is the exception Dignity Hospital seeks to claim for itself in the case above. Similarly, if a company sets up a plan outside of the United States for its nonresident alien employees, ERISA does not govern that plan.

ERISA does not require any employer to establish a retirement plan. It only requires that those who do establish plans must meet certain minimum standards. ERISA requires accountability of plan fiduciaries.

A fiduciary is generally defined as anyone who exercises discretionary authority or control over a plan's management or assets, including anyone who provides investment advice to the plan. Fiduciaries who breach these duties may be held responsible for restoring losses to the plan. These duties include the obligation to act solely in the interest of plan participants and their beneficiaries, and fiduciaries must act with the exclusive purpose of providing benefits to them. Fiduciaries must carry out their duties with skill, prudence, diligence, and follow plan documents, unless those documents are inconsistent with ERISA rules. The fiduciaries must diversify plan investments and pay only reasonable expenses of administering the plan and investing its assets. Above all, fiduciaries must avoid conflicts of interest.

Fiduciaries can be held personally liable. They can also be removed from their positions as fiduciaries if they fail to follow the standards of conduct.

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