Sophie Esquier

Bernice Benson spent 37 years working in the business office at St. Clare’s Hospital in upstate New York before retiring in 2008. The exit interview didn’t go well.

Benson learned her defined benefit pension would not be “what she had expected.” She took the hospital up on an offer to work one day a week in retirement to supplement pension payments that fell short by $200 a month. Eight years later, participants learned the St. Clare’s pension plan had been woefully underfunded. Benson, now 75 and still working one day per week, expects her pension payments to stop entirely around the time she reaches age 80.

Many workers and retirees like Benson are not covered by the Employee Retirement Income Security Act, the 1974 law commonly known as ERISA, which protects the rights of defined benefit pension beneficiaries. The law always exempted plans offered by churches and, years later, an amendment extended that exemption to include related employers such as hospitals affiliated with qualifying religious organizations.

Those extended exemptions were challenged in court more recently. But a unanimous 2017 decision by the U.S. Supreme Court overturned lower court rulings and affirmed that religiously affiliated hospitals qualify for the ERISA exemption. Although Supreme Court left open the possibility of subsequent lawsuits, by not addressing the question of whether a hospital’s internal benefits committee is a “principal purpose organization,” the ERISA exemption is still permitted.

Sophie Esquier, staff attorney at the Gerontology Institute’s Pension Action Center, and Boston University law professor Maria O’Brien Hylton looked into the remaining legal options available to retirees affected by the decision. Writing in the New York University Review of Employee Benefits and Executive Compensation, they outline several ways employees and retirees affected by the exemption might use state laws to fight for their benefits when necessary.

“State law remedies are the only viable option for the thousands of elderly retirees left stranded by underfunded church plans,” and Esquier and Hylton write. “Benson and others like her are effectively living in a pre-ERISA world without the bare protections that statute affords against default risk.”

Maria O’Brien Hylton

How many people work without ERISA protection due to the expanded church exemption? The Catholic Health Association of the United States is a professional umbrella organization for members that collectively employ hundreds of thousands of workers at 700 hospitals and 1,614 continuing care facilities. Hospitals run by other religious groups employ many thousands more.

Though most church-related organizations have shifted toward 401(k) retirement benefits over time, along with most for-profit employers, many thousands of employees and retirees are no doubt still covered by defined benefit pensions.

The ERISA exemption afforded to church-related employers eliminates important financial and reporting requirements for their defined benefit pension plans. They are not obligated to regularly disclose the financial condition of their plans and do not participate in the Pension Benefit Guaranty Corp. insurance program that protects the earned benefits of workers. Church plans are not required to meet actuarialy sound funding standards and there is no fiduciary duty imposed on church plan administrators, including the duty of loyalty to the plan.

“The lack of reporting and disclosure by church plans to their participants has left many participants in the dark, unaware of the funding levels of their plans,” Esquier and Hylton wrote. “Even if a participant were to discover that his retirement is at risk due to underfunding, there is no uniform enforcement mechanism for the participant to utilize to ensure the plan becomes financially stable.”

The authors point to four possible legal strategies for beneficiaries of church-affiliated pension plans that fail to make full regular payments to retirees. They include:

• Breach of contract claims. Beneficiaries were promised a fixed and certain sum paid upon retirement and that promise was broken. This the most direct approach in state court.
• Tortious breach. About half the states recognize a cause of action for tortious or bad faith breach, according to the authors. Elements of such a claim are typically a contract breach so egregious to warrant compensation for emotional distress or even punitive damages.
• Fraud. Most state fraud claims allege one party expressly or recklessly misrepresented a material fact to induce reliance or action on the part of the other party.
• Intentional infliction of emotional distress. This is the greatest reach among the four options. Extreme conduct, intent to cause harm and actual mental or emotional injury are usually required.

The lack of church pension plan reporting requirements make it impossible to determine how many employees and retirees are at risk, and to what degree their benefits are in danger. When beneficiaries become aware of a problem, they have no insurance to cover the shortfall and those few legal options.

“Perversely, they must consider the panoply of pre-ERISA state law claims which Congress preempted more than forty years ago,” Esquier and Hylton wrote.