Economy & Finance

Column: Hallelujahs ring after IRS reverses church pension rule

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CHICAGO (Reuters) – The Internal Revenue Service may be having a bad week, but Mary Rich isn’t complaining about the taxman.

The former nurse and hospital executive recently won a 10-year battle to get the IRS to reverse a ruling that would have cost her and her husband, Riz Corpuz, $2,500 a month in pension benefits from their former employer, the now-defunct Hospital Center at Orange (HCO) in New Jersey.

HCO had become the poster child in a broader, contentious battle over special exemptions to federal pension law granted by the IRS to plans claiming affiliation with churches.

The exemption allowed 85 pension plans to avoid funding requirements under the Employee Retirement Income Security Act, and to drop out of the Pension Benefit Guarantee Corp (PBGC), an insurance program that backstops private-sector plans. When plans go belly up, PBGC takes them over and makes payments, and most participants receive 100 percent of promised benefits.

HCO went bankrupt and shut down a year after winning its 2003 “church-plan” exemption, leaving the pensions of Rich and more than 800 other former employees at risk.

The IRS revoked HCO’s church-plan status last month after a highly unusual collaboration between pension rights activists and Josh Gotbaum, director of the PBGC.

Gotbaum led a successful effort to engineer an IRS reversal, and he promptly announced that PBGC would bring the HCO plan back under its wing.

It came just in time: the plan was on course to run out of money at the end of this year, leaving about 400 pensioners without their benefits, Rich says.

“I call these deathbed conversions,” says Gotbaum. “I’m about to die, so I’m joining the church. HCO went out from under the safety net one year before their employees actually needed it. It’s like dropping your car insurance just before you hit the wall.”

The HCO pension rescue is energizing efforts by pension advocates to reverse other exemptions they believe were granted improperly by the IRS over the past three decades.

Four lawsuits, filed recently, allege at least $2.1 billion in improper pension-plan underfunding – and other unspecified damages – at four other large Catholic non-profit hospital conglomerates, according to an analysis by Thomas E. Clark Jr., chief compliance officer of pension consulting firm FRA PlanTools, and a former ERISA litigator.

“I think we’ll see more cases like this,” says Clark. “Given the amount of money at stake and the dramatic story of harm to participants, you can see this is picking up speed quickly.”

The Employee Retirement Income Security Act (ERISA) has always exempted plans operated directly by churches for their clergy and employees.

That makes it easier for the churches to operate their plans, and to guard against potential unwarranted government intrusion into the affairs of church organizations. A 1980 amendment to the act clarified that the exemption also applies to church pension boards, which administer group pension plans for church employees.

Since then, a growing number of plan sponsors with less-direct ties to religious organizations have declared themselves church plans and asking the IRS to issue private-letter rulings confirming the exemptions, which free the plans from ERISA.

HCO, for example, was a freestanding, non-profit hospital from its founding in 1873 up until its affiliation in 1998 with Cathedral Healthcare System, a Catholic hospital system controlled by the Archdiocese of Newark. The deal wasn’t an outright merger or sale, but Cathedral nonetheless used the affiliation to file for church plan status.

“The IRS has been misinterpreting the law for 30 years, and there’s no indication yet that they will say they were wrong,” says Karen Ferguson, director of the Pension Rights Center, a non-profit advocacy group that has championed the church-plan issue.

PBGC will inherit a $30 million shortfall in the HCO plan – and the rescue comes at a time when PBGC faces its own financial problems. The agency doesn’t receive taxpayer dollars, and is funded entirely by insurance premiums paid by pension plans, and assets and recoveries from failed plans. This year, plans pay a flat rate of $42 a year, plus another $9 a participant for every $1,000 of underfunded assets in the pension plan.

PBGC is operating with a deficit of $34 billion, the largest in its 38-year history. The agency has been chronically underfunded due to a mismatch between the premiums charged and the risks it manages. Premium levels are set by Congress, and PBGC has no control over the type of risk it insures.

The Obama administration has been lobbying Congress to give the PBGC power to set its own premiums, much as the Federal Deposit Insurance Corp does. No luck on that so far, but perhaps lawmakers will get around to the question when it’s done grilling the IRS.

(The writer is a Reuters columnist. The opinions expressed are his own.)

(Editing by Frank McGurty and Bernadette Baum)

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