St. Peters Hospital, New Brunswick NJ.
St. Peters Hospital, New Brunswick NJ. (Carmen Natale)

A New Jersey hospital operator with a saintly name underfunded its pensions to the tune of $70 million by improperly claiming entitlement to ERISA’s “church plan” exemption, a federal judge says.

U.S. District Judge Michael Shipp held Monday that St. Peter’s Healthcare System in New Brunswick, which employs 2,800 people at 478-bed St. Peter’s University Hospital, is not entitled to the exemption under the statute because it was not established by a church or association of churches.

The suit, Kaplan v. St. Peter’s Healthcare System, filed on behalf of plan participants and beneficiaries, is one of a half-dozen suits pending nationwide that challenge the award of church plan status to pension plans at hospitals with religious affiliation.

Shipp, denying a motion to dismiss, said an Internal Revenue Service letter ruling granting church plan status to St. Peter’s was not entitled to deference on the entity’s eligibility for the exception.

The St. Peter’s plan was established in 1974 and operated under ERISA until 2006, when it applied to the IRS for church plan status. Church benefit plans are exempt from ERISA’s requirements for minimum funding and vesting and rules for reporting, disclosures and fiduciary responsibilities because examination of a church’s finances by the government is generally disfavored.

The plaintiffs say St. Peters did not notify employees of the change in status until 2011. In fact, it was not until last Aug. 14 that the IRS wrote to St. Peter’s to say the hospital pension plan is a church plan as defined under ERISA.

In its motion to dismiss, St. Peter’s relied on a decision from federal court in Minnesota, in Thorkelson v. Publishing House of Evangelical Lutheran Church, that a tax-exempt group associated with a church can establish and maintain a church plan.

But Shipp said the Thorkelson court did not undertake a detailed statutory analysis. He relied on a decision last December by the Northern District of California, in Rollins v. Dignity Health, that a health-care organization was not entitled to the church-plan exemption because it was not established by a church or group of churches.

Shipp said IRS rulings like the one given to St. Peter’s “seem to be somewhat responsible for the overbroad application of the church-plan exemption.”

He said the IRS letter conflicts with the plain text of the statute, lacks statutory analysis and was issued in a non-adversarial setting based on information St. Peter’s supplied. “The judiciary is the final authority on issues of statutory construction and must reject administrative constructions which are contrary to clear congressional intent,” he said.

St. Peter’s lawyer, Jeffrey Greenbaum of Sills, Cummis & Gross in Newark, says he and his client are considering options. “We believe Congress intended to include agency plans within the definition of church plans when those agencies are controlled by or associated with the church,” he says.

The St. Peter’s plaintiffs are represented by Cohen, Milstein & Toll of Washington, D.C., and Keller Rohrback of Seattle.

Cohen Milstein’s Karen Handorf, who argued the motion, says, “The St. Peter’s Hospital System complied with ERISA until 2006, at which time it abruptly converted to a church plan, thus denying its 4,700 workers the protections of ERISA. It is a great day for St. Peter’s employees, who will now have the same protections that other hospital workers have.”

Cohen Milstein and Keller Rohrback also represented the class members in the Dignity Health case and in four others around the country claiming healthcare providers improperly claimed the church-plan exemption:

Chavies v. Catholic Health East, in which a judge in the Eastern District of Pennsylvania on March 28 denied a motion to dismiss without prejudice and on whether the defendant is a church as defined by ERISA and the IRS code. Catholic Health East operates 35 hospitals, including four in New Jersey: St. Michael’s Medical Center in Newark, St. Francis Medical Center in Trenton, Our Lady of Lourdes Medical Center in Camden and Lourdes Medical Center of Burlington County in Willingboro.

Medina v. Catholic Health Initiatives, in the District of Colorado against a conglomerate that operates 78 hospitals and 40 nursing homes, is in discovery.

Overall v. Ascension Health, in the Eastern District of Michigan against an operator of 77 hospitals, has a defense motion to dismiss pending.

Stapleton v. Advocate Healthcare Network was filed March 17 in the Northern District of Illinois against an operator of 12 hospitals. ■

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