The IRS Grinch That Stole Christmas?

David Cay Johnston, contributing editor at Newsweek and columnist for Al Jazeera, National Memo and Tax Analysts, sent me his latest article, District Court Rebukes IRS Church Plan Rulings:
The IRS Office of Chief Counsel came in for sharp criticism from a federal judge in the first significant decision in five lawsuits by workers who complain that the IRS is helping employers quietly strip away their pension rights.

Hundreds of thousands of workers at hospitals and other nonprofit organizations have been moved into so-called church pension plans, which are exempt from ERISA. IRS private letter rulings enabled each of these moves.

Most of the nonprofits that were granted IRS approval to operate as church plans exempt from ERISA were seriously under funded, the trustees having failed to set aside enough money to pay the old-age benefits workers had earned. The federal government guarantees the pensions of workers in ERISA plans, although when a plan fails, workers typically get less than they had been promised. Workers moved into church plans, however, lose the federal guarantee.

The five cases don't involve plans run by churches, but those operated by groups that claim a religious affiliation of some kind even though they may have for-profit partners, operate commercial businesses, and engage in activities that violate the doctrine of the affiliated religion. If the workers lose the five cases, there will be a swift expansion of church plans.

In some cases the plans always operated outside ERISA. In most cases, however, workers in ERISA plans were absorbed into church plans following approval from the IRS chief counsel.

Workers generally were not told about the valuable government guarantee they lost, although current IRS policy requires notifying workers. Many of these plans asked for, and got, refunds of insurance premiums paid to the Pension Benefit Guaranty Corporation when they operated subject to ERISA.

Rollins v. Dignity Health

The action in the first case came after a motion to dismiss by lawyers for Dignity Health, which covers 60,000 workers in Arizona, California, and Nevada. Dignity sought to dismiss a putative class action lawsuit brought by Starla Rollins, a longtime billing office employee.

District Judge Thelton E. Henderson denied the motion. His ruling amounts to a public thrashing of IRS chief counsel.

The chief counsel's private letter rulings are shocking because ERISA makes pension administrators fiduciaries, a necessity because the administrators are typically employees of the sponsoring nonprofit or company and have divided loyalties. Section 404(a)(1) requires plan administrators to act "solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses."

Taking away a guaranteed income in old age cannot possibly meet the "solely and exclusively" test, indicating IRS chief counsel turned a blind eye to this standard in these private letter rulings.

The complaint filed by Bruce F. Rinaldi and Karen L. Handorf of Cohen Milstein Sellers & Toll PLLC and by Lynn Sarko of Keller Rohrback LLP argues that "Dignity plainly is not a church or a convention or association of churches" and that the pension was "not established by a church or a convention or association of churches," as the law requires of church plans. "Dignity is not owned by the Catholic Church" and "does not receive funding from the Catholic Church or other religious organizations," according to the plaintiffs.

The plaintiffs argue that Dignity:
is long since removed from the days when nuns once ran the hospitals, spread the gospel, and faithfully stewarded retirement assets for their employees. Dignity deliberately chooses to distance itself from, or even abrogate, many religious convictions of the Catholic Church, when it is in its economic interest to do so, such as when it hires employees, performs or authorizes medical procedures forbidden by the Catholic Church, and encourages divergent and contrary spiritual support to its clients.
Only two of nine Dignity directors are nuns. The executive ranks are composed entirely of lay people. CEO Lloyd H. Dean was paid more than $6 million in 2011, including more than $1 million to his retirement plan. A dozen other employees made between $1.1 million and $2.9 million. Last year Dignity paid more than $2.7 million just to persuade four executives to go away, its Form 990 shows.

In 2012 Dignity bought U.S. HealthWorks, a for-profit operator with 2,700 employees, which has "no claimed ties to religion." "Dignity's current growth model specifically targets the acquisition of additional healthcare facilities that have no claimed ties to religion," according to the complaint. "These facilities do not purport, and have never purported, to adhere to the moral and doctrinal teachings of the Catholic Church."

That point is significant because if Dignity prevails, it would open the door to organizations claiming religious affiliation to get exempted from ERISA and then take over for-profit enterprises and operate for-profit affiliates, just as Dignity does. That could strip multitudes of their government-guaranteed pensions.

The plaintiffs say that allowing Dignity a church plan exemption "violates the establishment clause [of the First Amendment] because it harms Dignity employees, puts Dignity competitors at economic disadvantage and relieves Dignity of no genuine religious burden created by ERISA."

Dignity operates ERISA-governed health and welfare benefit plans, dependent life insurance plans, and short-term disability plans, filing the necessary Forms 5500 each year with the IRS and the Labor Department. So Dignity runs ERISA plans, fully complying with the law, when it chooses, but claims a church plan exemption for its pension plan. How could the IRS chief counsel fail to have noticed this discrepancy?

Significantly, Dignity's lawyers do not assert that it is owned and operated by the Catholic Church. Instead, they write about how a "healing ministry is a central component" of the church's mission and note that Dignity "operates 24 Catholic and 15 non-Catholic hospitals."
I thank David Cay Johnston for sending me this and will let you read the rest of his lengthy analysis here. He also shared this with me:
This column was my first piece on this. I am especially proud of the legal analysis, which focuses on the fact that not only are workers ripped off, but the trustees get a get-out-of-litigation (and perhaps indictment) free card from the IRS.
David is an outstanding investigative reporter and his column exposes how the IRS chief counsel truly bungled this case up and opened the door to more pension abuse at a time when American workers are getting squeezed from all sides and are facing pension poverty.

Once again, I invite you to read my New York Times article on the U.S. public pension problem as well as my follow-up blog post answering some comments.  I also invite you to read my recent comment on solving the global pension crisis.

Importantly, if policymakers truly want American workers to retire in "dignity," they have to drop the 401(k) charade and move forward on bolstering defined-benefit plans for public and private sector workers and implement a shared risk model and top notch governance standards. That is the only solution to solving the pension crisis.

President Obama should be ashamed of himself. He squandered a golden opportunity to tackle the pension problem, but as we all know, his administration is having a tough time handling healthcare reforms. Unfortunately, Obama isn't concerned about pensions. In fact, his administration has done everything in its power to derail U.S. pension reforms.

Now, that's hope and change you can believe in! This is all part of money, power, Wall Street and disability. You see while Main Street is still hurting, the sharks on Wall Street have a license to steal, charging pension funds huge fees while their algos keep refining the Wall Street code.

But don't fret dear readers, I will be back after Boxing Day and throughout this holiday season, providing you with timely and wise insights on how you can beat the algos and their dumb code as well as big hedge funds that have become large and lazy asset gatherers.

We will use Warren Buffett's pension wisdom and piggyback on what top funds are buying and selling. But most of all we will use common sense knowing full well that while market timing is a loser's proposition, there are always investment opportunities in any market, even one where bubble anxiety is on the rise.

I wish you all a Merry Christmas and Happy Holidays but before you stuff your faces tonight, please remember to donate to those less fortunate.

Below, a brief history of The Montreal Gazette's Christmas Fund came to be, narrated by Gazette reporters Marian Scott and James Mennie. You can donate to the Montreal Gazette's Christmas Fund by clicking  here and remember the true spirit of Christmas is giving, not shopping.

I also embedded a Christmas Special with Luciano Pavarotti (1978) at Notre Dame Cathedral in Montreal, joined by a boys choir, Les Petits Chanteurs du Mont-Royal, and an adult choir, Les Disciples de Massenet (conductor: Franz-Paul Decker).