January 3, 2008
Details
Employers continue to provide substantial, but decreasing, coverage to retirees for health care costs. The EEOC's issuance of a final rule, effective December 26, 2007, creating a narrow exemption from application of the Age Discrimination in Employment Act (ADEA) for plans that coordinate retiree health coverage with "Medicare or a comparable State health benefit plan," removes a hurdle for employers to continue providing retiree health benefits.
In general, the ADEA prohibits age-based employment discrimination and age-based discrimination in the employee benefits context.Based on legislative history indicating that coordination of retiree health benefits with Medicare was lawful under the ADEA, many employers designed retiree health plans to coordinate with Medicare eligibility by eliminating, reducing or altering employer-sponsored health benefits for retirees when, upon turning 65, they became eligible for Medicare. The Third Circuit's 2000 decision in Erie Cty. Retirees Ass'n v. Erie Cty. upset this understanding. In Erie County the Third Circuit held that an employer violated the ADEA if it reduced or eliminated retiree health benefits when retirees became eligible for Medicare, absent proof that Medicare benefits fell within ADEA's equal benefit/equal cost safe harbor. This provided employers an incentive to reduce retiree health benefits for pre-65 retirees to the benefits afforded by Medicare or to eliminate retiree health benefits altogether. After Erie County, the EEOC adopted the Third Circuit's position as its enforcement position, placing employers nationwide whose retiree health program coordinated with Medicare in the precarious position of being in violation of ADEA. Labor unions, employers, municipalities and state counties all believed that the Erie County rule would substantially increase the number of employers that would stop offering any retiree health benefits due to the spiraling costs of health insurance. The EEOC, reversing the position it held at the time of Erie County, promulgated the final rule to eliminate the Erie County incentive for employers to reduce or eliminate retiree health benefit plans designed to coordinate with Medicare or state-sponsored plans. The equal benefit/equal cost safe harbor generally allows an employer to offer disparate plans to retirees or older workers as long as, in the aggregate, the benefits provided to the older workers or retirees do not amount to a "lesser benefit" than the benefits offered to younger workers or younger retirees.
The EEOC's final rule exempts from ADEA's prohibitions an employer's modification, reduction or elimination of health benefits for retirees when they become "eligible for Medicare health benefits or for health benefits under a comparable State health benefit plan," regardless of whether the retiree enrolls in Medicare or the state program. The final rule, by allowing the "unrestricted coordination of retiree health benefits with Medicare eligibility to continue," expressly permits employers to provide retiree health benefits only to pre-65 retirees and to freely modify benefits to Medicare-eligible retirees.
The EEOC's exemption is narrowly tailored. In particular, it does not to apply to plans where there is coordination with Medicaid (rather than Medicare) eligibility, to plans covering active employees (whether pre- or post-65) or to benefits other than retiree health care. Accordingly, employers can use the EEOC's rule only with respect to providing health benefits to pre-65 retirees.
While the EEOC continues to affirm its position that the ADEA applies generally to retirees (and not just active employees), the EEOC did note that "employers are under no legal obligation to offer retiree health benefits." The EEOC's statement is consistent with the general view that neither the Employee Retirement Income Security Act of 1974 nor the Labor Management Relations Act requires an employer to offer retiree health and other welfare benefits or that, if offered, they vest in the absence of an individual contract or collective bargaining agreement vesting such benefits.
The EEOC's final rule does not yet provide complete assurance to employers, because AARP sought review of the EEOC's action by the Supreme Court in a certiorari petition filed on November 19, 2007. Until the Supreme Court denies certiorari or affirms the appellate court's decision approving the final rule, there remains a potential (albeit minimal) litigation risk to employers that provide pre-65 retirees with health benefits different than those provided to post-65 retirees.
For More Information
Please contact Jack F. Fuchs or any member of our Employee Benefits & Executive Compensation practice group for more information.
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Last modified: July 10, 2008
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