(The writer is a Reuters columnist. The opinions expressed are
By Mark Miller
CHICAGO May 23 The Internal Revenue Service may
be having a bad week, but Mary Rich isn't complaining about the
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 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
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.
(Editing by Frank McGurty and Bernadette Baum)