Insurance

A federal court in Alabama ruled that a health plan maintained by Baptist Health Services for its employees was subject to the complex requirements of ERISA.

Church Law and Tax 2000-07-01

Insurance

Key point. Health plans maintained bychurches and church-affiliated entities may qualify for exemption from ERISA as church plans. However, thisexemption may be lost if a religious employer waives its exemption. Theexemption can be waived either by formally notifying the IRS of an electionto be covered by ERISA, or by voluntarily complying with some or all ofERISA’s administrative and reporting requirements.

A federal court in Alabama ruled that a health plan maintainedby Baptist Health Services for its employees was subject to the complexrequirements of ERISA because it did not qualify as a “church plan.” A woman(the “plaintiff”) was employed by Baptist Health Services, Inc. (“Baptist Health”).In September of 1996 the plaintiff became a participant in a Group Health andDental Care Plan (“Baptist Plan”) sponsored by her employer. Theplaintiff’s son is a beneficiary under the Baptist Plan, which provided medical,surgical, dental, and other health benefits to Baptist Health’s employees anddependents. The Baptist Plan is administered through the AdministrativeServices Agreement between Blue Cross and Baptist Health. According to Blue Cross, theBaptist Plan is self-funded, meaning “that the cost of claim ultimately ispaid from the assets of [Baptist Health], not Blue Cross.”

In December of 1995, before enrolling in the Baptist Plan, theplaintiff’s son was diagnosed with ulcerative colitis and had surgery in Julyof 1996 to remove his large intestine. Plaintiff, at that time, was coveredunder a different health insurance policy which she believed wouldpay all claims relating to her son’s illness. In May of 1997, afterplaintiff had received insurance through Baptist Health, her son was diagnosed withCrohn’s Disease. According to the plaintiff, the first identification of Crohn’sdisease was May of 1997.

The plaintiff submitted a claim under the Baptist Plan for $35,000for medical expenses related to her son’s diagnosis of Crohn’s disease.In July of 1997 the plaintiff received notification from Blue Crossthat it was denying coverage because of a “pre-existing medical condition.”According to Blue Cross, the treatment received by plaintiff’s son, which wasthe subject of the claim, was “rendered within the 270-day waitingperiod [for pre-existing conditions] and, therefore, [was] excluded fromcoverage.”

The Summary Plan Description explains the benefits provided by theBaptist Plan. The Introduction states that “[t]his is a Summary PlanDescription under the Employee Retirement Income Security Act (ERISA).” TheSummary Plan Description further assures employees that they are “entitledto certain rights and protections” under ERISA, including the following: (1)The right to examine and obtain copies of all “plan documents”; (2) the rightto “receive a summary of the plan’s annual financial report”; (3)protections against discrimination for obtaining benefits and exercising anyrights under ERISA; and (4) the right to have a benefit claim reconsideredif denied. The Summary Plan Description further explains an employee’sremedies to enforce his or her rights and provides the name and address ofthe Baptist Health Administrator to contact regarding any questions.

The plaintiff sued Blue Cross for breach of contract and otherclaims under state law. Blue Cross claimed that the Baptist Plan was governed bythe Employee Retirement Income Security Act (“ERISA”), because itqualified as an “employee welfare benefit plan.” ERISA establishes acomprehensive scheme for regulating the administration of employee welfarebenefit plans and abolishes “any and all state laws insofar as they may now orhereafter relate to any employee benefit plan.” On this basis, Blue Crossinsisted that the plaintiff’s claims under state law had to be dismissed.

The court agreed that the Baptist Plan was an “employee welfarebenefit plan.” ERISA defines an “employee welfare benefit plan” as “anyplan … maintained by an employer … for the purpose of providingfor its participants or their beneficiaries, through the purchase ofinsurance or otherwise … medical, surgical, or hospital care or benefits,or benefits in the event of sickness, accident, disability, death orunemployment.” However, the court noted that even if an employee welfare benefitplan satisfies the general ERISA definition, the plan can avoid ERISA’scoverage if it is exempt. The plaintiff asserted that the Baptist Plan isexempt as a “church plan,” and therefore she could pursue her claims understate law.

The court concluded that the Baptist Plan was not a “church plan.”A “church plan” is defined by ERISA as “a plan established and maintained forits employees (or their beneficiaries) by a church or by a conventionor association of churches which is exempt from tax.” The court noted that theplaintiff had failed to produce any evidence to establish that the BaptistPlan met this definition. It observed, “Plaintiff, for example, has notsubmitted any tax records or documents to show that Baptist Health iscontrolled by a church, such as evidence that a majority of the officers ordirectors are appointed by a church’s governing board. In fact, plaintiff’sargument that the Baptist Plan is an exempted church plan appears to bebased merely on the fact that the word ‘Baptist’ is in the employer’s name andplan.”

The court further noted that Baptist Health not only has assuredits employees that the Baptist Plan is covered by ERISA, but in addition

it has represented to the IRS, by the filing ofa Form 5500, that it maintains an ERISA plan. By filing a Form 5500 and treating theBaptist Plan as one under ERISA, Baptist Health loses all benefits, tax andotherwise, of being classified as a church plan (if it could be classified assuch). All the evidence, which is undisputed, demonstrates that BaptistHealth is an ERISA plan, not a church plan. For example, the Summary PlanDescription and Form 5500 indicate that Baptist Health is complying withERISA’s provisions pertaining to reporting and disclosure, minimum participation andfunding and fiduciary responsibilities. A church plan would, on the otherhand, be exempt from complying with ERISA’s tedious administrativerequirements.

Application. Church plans are exempted from the complexreporting, disclosure, minimum participation, funding, and fiduciary responsibilitiesimposed by ERISA on “employee welfare benefit plans.” The definitionof a “church plan” is comprehensive, and includes “a plan established andmaintained for its employees (or their beneficiaries) by a church or by aconvention or association of churches which is exempt from tax.” However, thiscase illustrates that an employee welfare benefit plan offered by achurch or church-affiliated entity may fail to qualify as a church plan if itrepresents to its employees that the plan is subject to ERISA and the plancomplies with some or all of the reporting requirements (including theannual Form 5500) that apply to ERISA-covered plans. This is an importantpoint, because it indicates that plans that may otherwise qualify as a church planmay lose that status, and thereby subject the employer to thecomprehensive and complex requirements of ERISA and extend to employeessubstantial rights under federal law. Duckett v. Blue Cross and Blue Shield, 75F.Supp.2d 1310 (M.D. Ala. 1999).

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