Lawsuit Accusing Hospital of Underfunding Pension Plan May Continue

SAN FRANCISCO (CN) – A federal judge on Thursday indicated he would keep alive a five-year-old proposed class action accusing a hospital system with ties to the Catholic Church of exploiting a religious exemption in federal law to underfund its employees’ pensions by $1.5 billion.

U.S. District Judge Jon Tigar said he needed clearer rules to decide if Dignity Health’s retirement plan qualifies as a “church plan” exempt from funding requirements under the Employee Retirement Security Act to dismiss the case, concluding that Dignity had failed to provide any.

“It’s an area where I have to tread very cautiously,” Tigar said, “because you can’t find yourself in a situation where you’re asking, ‘How religious are you?'”

Former Dignity Health billing coordinator Starla Rollins sued Dignity in 2013, claiming the hospital system was underfunding its pension plan in violation of ERISA.

The 1974 law established minimum funding and vesting requirements and fiduciary responsibilities for plan administrators. But church plans are exempt from the requirements, sparking court challenges by employees wary of losing their pension benefits if the plans go broke.

Rollins and her newly-added co-plaintiff Patricia Wilson, a registered nurse at a Dignity affiliate in Arizona, claim 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.

“If Dignity does not honor its promises to adequately fund the promised pension benefits, plaintiffs and the other class members will retire with far less income than they expected and will have been deprived of the opportunity to make up for that lost pension income,” the plaintiffs state in their amended November 2017 complaint.

To qualify for ERISA’s church-plan exemption when Rollins first sued in 2013, a retirement plan had to have been established and maintained by a church. Rollins argued Dignity’s plan didn’t qualify for the exemption because Dignity isn’t a church.

Dignity countered that it is affiliated with the Sisters of Mercy and other Catholic women’s orders, the product of a 1986 merger of 10 hospitals run by two California-based Sisters of Mercy congregations. Dignity now runs 39 hospitals in California, Arizona and Nevada.

The Ninth Circuit ruled for Rollins in 2016, holding that Dignity’s retirement plan doesn’t qualify for ERISA’s church-plan exemption because it was not established by a church. Agreeing with other circuits, it held that a church plan must be established by a church and maintained either by a church or a church-affiliated “principal-purpose organization,” an organization whose principal purpose is providing benefits to church employees.

But last June, the Supreme Court held in Advocate Health Care Network v. Stapleton that religious hospitals can also establish church plans, and that the plans are exempt so long as they’re maintained by a principal-purpose organization. Dignity Health participated in that litigation.

With the question of whether Dignity can establish a church plan out of the way, the Dignity case now turns on whether Dignity is associated with a church, and whether the internal retirement committee that administers Dignity’s pension plan is a principal-purpose organization that also maintains it.

The plaintiffs contend that the committee doesn’t maintain Dignity’s plan because it doesn’t have the power to modify or terminate the plan. They argue Dignity maintains the plan, that Dignity isn’t affiliated with the Catholic Church, and that its principal purpose is providing health care, not retirement benefits.

Even if Dignity’s committee maintained the plan, they add, the plan wouldn’t qualify for the exemption because the committee is an internal Dignity entity, not a separate organization.

“If Congress wanted hospitals to have church plans, it would not have adopted the principal-purpose organization language,” said plaintiffs’ attorney Matthew Gerend of Keller Rohrback in Seattle.

He added that the archbishop of San Francisco and the Diocese of Phoenix have both stated that Dignity is a secular corporation.

Dignity insists nothing in Advocate established that a maintaining organization must have modification or termination powers; that its internal committee is a separate organization because it has voting members who assemble to maintain the plan, and that it has a “set of common bonds” with the Catholic Church.

“In our particular case, we have a company whose mission quite literally is the healing ministry of Jesus,” said Harvey Rochman, Dignity’s lawyer with Manatt, Phelps & Phillips in Los Angeles.

Although Tigar signaled that he will allow the case to proceed, he suggested he will toss the plaintiffs’ state alternative unjust enrichment claim. The plaintiffs are also suing on state alternative contract and fiduciary duty claims.



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