A pension plan established by New Brunswick, N.J.- based Saint Peter's Healthcare System does not qualify as a "church plan" that is exempt from the Employee Retirement Income Security Act, ruled a U.S. federal appeals court this week.

ERISA is the federal pension law that requires such plans to be fully funded and provides employees with certain rights related to benefit entitlements. St. Peter's employs more than 2,800 people through 27 centers and facilities.

The unanimous decision, written by Judge Thomas Ambro, of the U.S. Court of Appeals for the Third Circuit on Dec. 29, 2015, upheld a U.S. District Court decision that Saint Peter's Healthcare System was ineligible for the church-plan exemption because it was not established by a church, reports GlobeNewswire.

Kaplan v. St. Peter's Healthcare System is part of a "new wave of litigation" throughout the United States challenging the exempt status of pension plans established by religiously affiliated hospitals. It is likely to set the tone for litigation pending against Advocate Health in the Seventh Circuit and Dignity Health in the Ninth Circuit, both of which are on appeal from decisions also holding that religiously affiliated hospitals cannot avoid federal pension regulations by claiming that their pension plans are "church plans."

Saint Peter's established its retirement plan in 1974, according to GlobeNewswire, and then operated the plan subject to ERISA, representing to its employees in plan documents and other materials that it was complying with ERISA. In 2006, Saint Peter's staffers filed an application with the Internal Revenue Service seeking a determination it was exempt for tax purposes.

"We are pleased with the court's decision, which upholds the rights of Saint Peter's pension fund participants to a fully funded pension plan and to other federal  protections  designed to insure that the money is there when workers need it for their retirement," said co-lead plaintiff's counsel Karen Handorf, of Cohen Milstein Sellers & Toll PLLC.

In May 2013, Laurence Kaplan, who worked for Saint Peter's from 1985 to 1999, filed a putative class action lawsuit on behalf of himself and other pension participants alleging that St. Peter's failed to comply with various ERISA obligations in the years after the healthcare system applied for church-plan exemption. The most serious allegation was that, as of the end of 2011, the plan was underfunded by more than $70 million, as reported on Yahoo Financial News.

In August 2013, while the lawsuit was pending, Saint Peter's received a private letter ruling from the IRS affirming the plan's status as an exempt church plan for tax purposes. The system moved to dismiss the lawsuit claiming that it qualified for ERISA church plan exemption and, therefore, was not required to comply with the provisions the lawsuit claimed it had violated.

The District Court denied the motion after concluding that Saint Peter's could not establish an exempt church plan because it is not a church. Saint Peter's subsequently appealed that decision to the Third Circuit.

In addition to rejecting the IRS' interpretation of the church-plan exemption, the Third Circuit further noted that as of 2012, religiously affiliated hospitals accounted for seven of the nation's 10 largest nonprofit healthcare systems and that to construe the church plan exemption to apply to such hospitals would defeat the purpose of ERISA. The Court also rejected Saint Peter's argument that the IRS interpretation was necessary to avoid entanglement in religion, noting that Congress regularly distinguishes between churches and church agencies.

Because the Court has determined the Saint Peter's plan is not an exempt church plan, it must now comply with all of ERISA's protections which require, among other things, that the Plan be fully funded.