Church Plan Administrators Are Subject to State Law Claims

A “church plan” – whether maintained by an actual church or by a church affiliated organization (such as a college or hospital that is church controlled) – is exempt from ERISA unless it makes an irrevocable electionto subject itself to ERISA. Most church plans do not make that election and, therefore, most church plan administrators are not subject to the high fiduciary standards imposed by ERISA. However, the recent case of Johnson v. The Evangelical Lutheran Church in America provides a reminder that church plan administrators can be subject to breach of fiduciary duty claims and breach of contract claims under state law. Because many church retirement plans are underfunded, administrators of those plans will want to pay close attention to the Johnson case as it moves forward.

In its decision in the Johnson case, the Federal District Court of Minnesota refused to dismiss certain state law claims asserted against the Board of Pensions (the “Board”) of the Evangelical Lutheran Church in America (the “ELCA”). The Board is responsible for managing the ELCA Retirement Plan. The case was brought by four retired Lutheran pastors who were receiving monthly annuity payments pursuant to the terms of the ELCA plan. In January 2010, the Board authorized a 9 percent reduction in the annuity payments, and the pastors were informed that their annuity payments would likely be reduced by an additional 9 percent in both 2011 and 2012. The annuity payment were reduced because the Plan – which was underfunded by 26 percent – simply lacked the asset base necessary to sustain the annuity payments as originally called for under the plan.

The pastors sued the 17-member Board alleging that it: (1) breached its fiduciary duties under Minnesota law by failing to prudently invest and manage the annuity fund and failing to preserve the trust corpus, which caused the annuity fund to become significantly underfunded and reduce the pastors’ monthly annuity payments; and (2) violated Minnesota contract law by failing to follow the terms of the Plan (which ELCA did not dispute constituted a contract) when it reduced their annuity payments.

In response to the law suit the Board filed a motion with the Court asking it to dismiss the case at this early stage on the basis that the pastors failed to state any claim upon which relief could be granted. While the Court did dismiss claims brought against ELCA itself, it held that the pastors adequately pled the state law claims against the Board. As a result, the law suit will move forward against the Board.

Although the Johnson case is still at an early stage, it highlights the need for church plan administrators to: (1) follow a prudent process in administering the plan and monitoring the investment of plan; (2) follow the terms of the plan document; and (3) ensure they have adequate fiduciary liability insurance that will cover the cost of a legal defense and potential liability. If that sounds a lot like what an ERISA plan administrator should do, it is. While church plans are free of the requirements of ERISA, we generally advise church plan “fiduciaries” to look to ERISA principles for guidance on how best to conduct their activities.