The ruling by the U.S. Supreme Court doesn't relieve funding obligations, but does help hospitals avoid large near-term payments to bring pension plans up to ERISA standards.
A note from Moody’s Investors Service says faith-based healthcare organizations will benefit from a recent Supreme Court ruling that deems “church plans” are exempt from the Employee Retirement Income Security Act’s (ERISA) minimum funding requirements.
The ruling benefits hospitals with “church plans,” which include the three hospital systems that appealed to the Court—Advocate Health Care Network, Dignity Health and Saint Peter’s University Hospital—and dozens of other hospitals whose church plan status had been questioned in the lawsuit the court considered.
While the ruling does not change the hospitals’ overall pension liability or the legal obligation to fund it, it does mean these organizations can maintain the generally lower funding ratios they have used in the past than plans operated by hospitals that are subject to the ERISA funding guidelines, says Moody’s.
The ruling basically improves flexibility for the affected pension plans, as hospitals with church plans have generally maintained funding ratios that are less than the 80% funding level threshold required by the federal Pension Benefit Guaranty Corporation, an independent government agency that was created by the 1974 ERISA law to provide insurance to private defined benefit pension plans. The agency charges insurance premiums to organizations deemed to be subject to the ERISA law to guarantee that benefits will still be paid to pension beneficiaries in the event of the company’s bankruptcy.
Not only does the ruling relieve funding ratio requirements, but it also relieves the plans of PGBC oversight and exempts them from paying the insurance premiums. Those premiums are set to rise to at least 4.1% by 2019, Moody’s says, up from 3.4% in 2107 and as low as 0.9% in 2013.
Moody’s will still treat funding shortfalls as a credit negative, adding unfunded pension liability to individual rated hospitals and health systems as a debt equivalent when evaluating that organization’s debt burden.
Philip Betbeze is the senior leadership editor at HealthLeaders.