WASHINGTON (CNS) -- When the U.S. Supreme Court looked at the issue of pension benefits for employees at religious hospitals March 27, it seemed uncertain how the justices would decide this case.

The ambiguity was perhaps best described by Justice Sonia Sotomayor, who said at one point during the oral arguments: "I'm torn. This could be read either way in my mind."

The court was looking at three church-affiliated hospital systems sued for underfunding pension plans of about 100,000 employees. Officials from the hospitals argue they are exempt from complying with a federal law covering employee pension benefits, but lower courts have ruled in favor of employees.

The case involves two Catholic networks: St. Peter's Healthcare System of New Brunswick, New Jersey, and Dignity Health of San Francisco, along with Advocate Health Care of the Chicago area, a merged network of evangelical, Lutheran and United Church of Christ hospitals.

It hinges on interpretation of the federal Employee Retirement Income Security Act of 1974, which requires pension plans to be fully funded and insured. Congress amended that law in 1980 to carve out a narrow exemption for churches and other religious organizations.

The hospital officials -- who say their pension programs have long been viewed as "church plans" and are exempt from the law -- want the lower court rulings against them overturned. Hospital workers argue that the hospitals' actions could jeopardize their retirement benefits.

Five Catholic entities filed "amicus," or friend of the court, briefs with the Supreme Court in the case stressing that if the high court lets the lower court rulings stand, forcing religious schools, hospitals and charity organizations to comply with the federal law, it would "pose a grave threat" to their ability to provide charitable services.

The Becket Fund for Religious Liberty similarly filed a brief arguing that the lower court's interpretation of the law is too narrow, adding that the Supreme Court has long recognized that churches are not limited just to houses of prayer or worship but to "teaching and serving others."

Justice Anthony Kennedy pointed out that the Internal Revenue Service has issued hundreds of letters during the past 30 years approving the hospitals' actions and demonstrating that they were "proceeding in good faith with the assurance of the IRS that what they were doing was lawful."

Lisa Blatt, the attorney arguing for the hospitals, said Congress wanted to exempt church-sponsored pension plans from the law's requirements and that the IRS and the Labor Department had assured them of this exemption for decades.

She said a ruling against the hospitals would "jettison 30 years of settled expectations" and put the hospitals in jeopardy of paying billions in liability.

James Feldman, the attorney representing the workers, said the law "creates anomalies that are impossible to explain," but he argued that Congress never intended the law would exempt religious hospitals. He also said the IRS letters of support can't be relied on because they incorrectly interpreted the law.

Justice Samuel Alito questioned whether the hospitals would have to pay "billions of dollars" in retroactive penalties if they lost. Justice Ruth Bader Ginsburg recommended the court could avoid imposing retroactive penalties if it believes the hospitals acted in good faith thinking they were exempt from the law.

"It seems quite likely that the affiliated organizations will retain their exemptions," wrote Ronald Mann, law professor at New York's Columbia University, in a posting onscotusblog, a blog about the Supreme Court. "The justices might not like the way the amendment is written, but they do not seem likely to reject the IRS' reading of it," he said.

A decision is expected by the end of June.

- - -

Follow Zimmermann on Twitter: @carolmaczim.