Mel Evans / AP

A small victory in the war over pensions

Religious exemptions to pension guarantees have led to theft, but workers at one New Jersey hospital fought back

May 6, 2015 2:00AM ET

Former employees of a defunct New Jersey hospital gathered at a modest banquet hall last week to celebrate their victory over one of the most pernicious forms of wage theft in America. Applause and cheers for the nurses and lawyers who saved the workers’ pensions filled the evening, as did dire warnings for millions of other workers.

The rare victory of Hospital Center at Orange workers in saving their pensions matters because hundreds of thousands of employees at hospitals, nursing homes, colleges and even a religious publishing house have been quietly cheated out of their retirement benefits. Many of those cheated are not even aware yet that wages they deferred until old age will never be paid, barring government action.

This is a multi-billion dollar crime that Congress can remedy. So far, though, Congress has not even held hearings. The lack of interest on Capitol Hill is surprising since these massive thefts were enabled by a favorite whipping boy — the Internal Revenue Service.

On the other hand most of the victims are clerks, cafeteria workers, janitors and nurses — people with virtually no political influence — while the beneficiaries are powerful institutions with politically connected advisers.

Beyond thievery, the technique used to steal pension funds also gives some nonprofit enterprises a competitive advantage, exactly the kind of unlevel playing field that supposed champions of competitive markets oppose. The silence from those in Congress who espouse such views is deafening.

IRS approved

The thievery stems from an adjustment to the 1974 Employee Retirement Income Security Act, which requires annual funding of pensions so that when workers reach old age the money they deferred will be there to sustain them until death. The law’s key principle is that pension plans must be run “solely and exclusively” in the interest of the workers.

To preserve separation of church and state, Congress granted an optional exemption for pension plans that are “established by a church or a convention or association of churches.” This exemption was intended for religious employees of religious institutions. A later amendment expanded the exemption to include church-run financial institutions that manage pension funds for church workers.

More than a decade ago accounting and human resource consultants advised religiously affiliated hospitals and other institutions that they could save a lot of money by withdrawing from ERISA.  All they needed was IRS approval, which they invariably got.

These approvals could not possibly be in the interest of the workers, making IRS rulings contrary to law. The IRS approved exemptions even when a hospital was a joint venture between a church and a Wall Street firm. Thus did Mammon gain legal and economic privileges that Congress said belonged only to God.

Many churches choose to operate their pension plans under ERISA because benefits are protected through premiums paid to the Pension Benefit Guaranty Corporation or PBGC. 

Faith shaken

The Hospital Center at Orange, which closed in 2004, had an ERISA pension plan. Each year the 800 participants were told how much money they had coming in old age.

Then in 1998 a corporation owned by the Archdiocese of Newark, Cathedral Healthcare System, acquired the hospital.

One of the nurses, Rosemary Gara, asked her accountant, Richard H. Levy, if she should have any concerns. Levy told her that when management introduced itself she should ask about pensions. 

We were a secular hospital for more than 100 years and then we were churched-up just before we closed.

Mary Rich

Nurse, Hospital Center at Orange

“Suddenly there was a lot of clearing of throats, shuffling of feet and looking around,” Gara told the 120 former employees and a few invited guests at the banquet. Only later did Cathedral acknowledge it had removed the pension from ERISA, in effect wiping out most benefits already earned.

As if often the case, not nearly enough money had been set aside in the pension plan to pay the benefits workers earned. The sums kept dwindling until near the end nothing went into the plan.

The pensions, potentially totaling $70 million by the time the last worker dies, lost in federal court. A federal judge said since benefits were still being paid there was no issue over the plan being removed from ERISA protections.

The pensions were rescued only because smart and determined nurses got their story before a few high-level federal officials, who paid heed to them just before the plans would have run dry. They persuaded the IRS to withdraw its approval of the church plant exemption and the PBGC then invoked its guarantee, so the pensions will be paid. 

“We were a secular hospital for more than 100 years and then we were churched-up just before we closed,” nurse Mary Rich told the audience.

What makes the Orange case unusual is that Rich was a part of management, in charge of nursing, when she took up the cause of all the workers. She also persuaded the lawyer for the church to work on a negotiated solution once the pension was down to its last $1 million and to give Rich the pension-plan files.

The files were in shambles. Rich, who has a background in financial planning, recalculated every benefit. “I found people overpaid, underpaid, not paid and paid after they died,” she said.

Many of those who would have lost their pensions are practicing Catholics. At the dinner some of them told me that their faith was shaken by what they described as callous disregard by church leaders. In the audience were several couples who worked their entire careers at the hospital, meaning the church action would have left them destitute except for Social Security benefits.

Persistence pays off

The church, like other religious organizations that claimed exemptions, has said it acted in accord with professional advice.

The pensions were saved with help from the Pension Rights Center, a tiny Washington nonprofit started four decades ago with a $10,000 gift from Ralph Nader. Karen Ferguson, the center’s founder, said consultants from three of the big four accounting firms devised the schemes used at Orange and many other hospitals to not deliver pension benefits. She cited Deloitte, Ernst & Young and KMPG.

“Persistence pays off,” Ferguson said, recounting years of work that saved the Orange hospital pensions. “You’ve focused attention on a truly outrageous situation,” she said, adding that her concern now was the hundreds of thousands of other workers being cheated.

Norman Stein, a Drexel University law professor, told the gathering “because of these consultants and weakness in the law, people in other plans without the protection of ERISA may never collect pension benefits they are expecting. Lots and lots of people may not have the same results you have had” because they lack savvy members who can press their case.

Those who lose their pensions are not to be blamed. Congress should hold public hearings and subpoena the IRS chief counsel’s lawyers and their files, along with consultants who devised the strategy.

Although the IRS for a time stopped issuing approvals of such exemptions, this temporary step did nothing for the many already swindled or cheated after the moratorium, because the IRS disregarded the fundamental principle of the 1974 pension protection law. One small victory for the determined hospital workers in Orange, New Jersey, does not negate the giant crime that the IRS enabled and Congress ignores.

Ask not for whom pension theft matters. It matters for us all. 

Editor's note: A previous version of this column misstated the IRS' current policy regarding exemptions for religious organizations.  We regret the error.

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and the editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

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