“Church Plan” Exemption to ERISA Does Not Violate Establishment Clause, Illinois District Court Decides

The U.S. District Court for the Southern District of Illinois has rejected a constitutional
challenge to the so-called “church plan” exemption to the requirements of the Employee
Retirement Income Security Act of 1974 (“ERISA”).

ERISA-governed employee benefit plans are subject to a host of regulations and
requirements under federal law. ERISA, however, exempts church plans from those

The plaintiffs in Smith v. OSF Healthcare System sued, among other defendants, the
administrators of two defined-benefits plans associated with The Sisters of the Third Order of St.
Francis. The plaintiffs asserted a number of claims, including that the church plan exemption as
applied to the plans violates the Establishment Clause of the First Amendment to the U.S.
Constitution and, therefore, is unconstitutional.

The Establishment Clause provides that, “Congress shall make no law respecting an
establishment of religion or prohibiting the free exercise thereof.”
The Illinois district court concluded that the church plan exemption does not violate the
Establishment Clause.

The district court explained in its decision that challenges under the Establishment Clause
are analyzed based on the three part test enunciated by the U.S. Supreme Court in its 1971
decision in Lemon v. Kurtzman.

Under Lemon, governmental action does not violate the Establishment Clause if:
(1) It has a secular purpose;
(2) Its principal or primary effect is one that neither advances nor inhibits religion; and
(3) It does not foster an excessive government entanglement with religion.

The district court then applied that test to the church plan exemption under ERISA.
First, the district court found that the church plan exemption has a “secular purpose” of
alleviating significant government interference with the ability of religious organizations to
define and carry out their religious missions.

Then, the district court found that the church plan exemption’s principal or primary effect
is one that neither advances nor inhibits religion. The district court observed that the church plan
exemption is one of a number of statutes (including the Internal Revenue Code and the
Americans with Disabilities Act of 1990) that relieve religious organizations from otherwise
generally-applicable requirements. The district court found “no principled distinction” between
those exemptions and the church plan exemption.

Finally, the district court decided that the church plan exemption does not foster “an
excessive government entanglement with religion” but, rather, avoids the entanglement. It
concluded that, by exempting eligible plans from ERISA requirements, “religious organizations
and their associated entities are relieved from government mandates about how they conduct
their affairs, structure their finances and pursue their missions.”

Religious organizations should welcome the district court’s decision and its application
of the Lemon test to church plans.

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