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CCH® BENEFITS — 1/7/08

EEOC Final Rules Allow Differentials in Pre- and Post-Medicare Retiree Health Benefits

From Spencer's Benefits Reports: The Equal Employment Opportunity Commission has issued final regulations that exempt from the prohibitions of the Age Discrimination in Employment Act (ADEA) the practice of altering, reducing, or eliminating employer-sponsored retiree health care benefits when retirees become eligible for Medicare or a state-sponsored retiree health care benefits program. The final regulations appeared in the Dec. 26, 2007, Federal Register. The final regulations adopt the rules proposed in July 2003, with clarifying changes.

Sec. 9 of the ADEA authorizes the EEOC to “establish such reasonable exemptions to and from any or all provisions of the Act as it may find necessary and proper in the public interest.” In the preamble to the final regulations, the EEOC explains, “Rising health care costs, larger numbers of workers nearing retirement age, and mandated changes in the way employers must account for the long-term costs of providing retiree health coverage have been substantial factors contributing to the erosion of this valuable employment benefit. However, the EEOC believes that concern about the potential application of the ADEA to employer-sponsored retiree health benefits also has adversely affected the availability of this benefit. A wide range of stakeholders, including labor organizations, benefits consultants, state and local governments, and private employers, agree that ADEA concerns have created an additional incentive to reduce or eliminate employer-sponsored retiree health benefits.”

Terms Of The Exemption

The final regulations provide a “narrow” exemption under the ADEA that permits the practice of coordinating employer-provided retiree health coverage with eligibility for Medicare or a state-sponsored retiree health benefits program. In general, the rules allow employers to establish two classes of retirees, those younger than age 65 and those age 65 or older. Employers may thus establish plans that provide comprehensive health benefits to retirees younger than age 65 and more limited benefits that are coordinated with Medicare for those retirees age 65 and older.

According to the rules, “Some employee benefit plans provide health benefits for retired participants which are altered, reduced, or eliminated when the participant is eligible for Medicare health benefits or for health benefits under a comparable state health benefit plan, whether or not the participant actually enrolls in the other benefit program.” Thus, the final rules “exempt from all prohibitions of the [ADEA] such coordination of retiree health benefits with Medicare or a comparable state health benefit plan.”

The regulations permit employers and labor organizations to offer retirees a wide range of health care plan designs that incorporate Medicare or comparable state health care benefit programs without violating the ADEA. For example, in order to ensure that all retirees have access to some health care coverage, the ADEA will not prohibit employers and unions from providing retiree health coverage only to those retirees who are not yet eligible for Medicare.

Employers and unions also may supplement a retiree’s Medicare coverage without having to demonstrate that the coverage is identical to that of non-Medicare-eligible retirees. Thus, for example, employers providing prescription drug benefits to Medicare-eligible retirees under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 need not be concerned about whether the drug benefits provided to Medicare-eligible retirees differ from those provided to retirees not yet eligible for Medicare.

The final regulations stress that the rules concern only the ADEA. The regulations do not affect any non-ADEA obligation that employers may have to provide health care benefits under Medicare or any other law. For example, the regulations do not affect employers’ obligation to use Medicare as a secondary payer, when required by the Medicare law. The regulations also clarify that the rules apply to retiree health benefits and not to other non-health retiree benefits.

The rules only affect the practice of coordinating retiree health benefits with Medicare (or a comparable state health benefit plan). In all other contexts, the ADEA continues to apply to retirees to the same extent that it did before these rules.

Employers may offer a “carve-out plan” for retirees who are eligible for Medicare or a comparable state health plan. A “carve-out plan” reduces the benefits available under an employee benefit plan by the amount payable by Medicare or a comparable state health care plan. Employers may continue to offer such “carve-out plans” and make Medicare or a comparable state health plan the primary payer of health care benefits for those retirees eligible for Medicare or the comparable state health care plan.

The limited exemption applies to all retiree health benefits that coordinate with Medicare (or a comparable state health benefit plan), whether those benefits are provided for in an existing or newly-created employee benefit plan.

The exemption applies only to retiree health benefits, not to health benefits that are provided to current employees. Thus, health benefits for current employees must be provided in accordance with the ADEA. In addition, an employer must offer to current employees who are at or older than the age of Medicare eligibility the same health benefits, under the same conditions, that it offers to any current employee younger than the age of Medicare eligibility.

Litigation Regarding The Exemption

In the regulations, the EEOC cites the 2000 decision of the Third Circuit U.S. Court of Appeals in Erie County Retirees Association v. County of Erie (220 F.3d 193), in which the court held that employer-sponsored health plans that provide different benefits for Medicare-eligible retirees than for retirees younger than age 65 violate the ADEA. The EEOC then notes that after it implemented the Third Circuit’s ruling, “labor organizations, benefits experts, state and municipal governments, and employers informed us that our actions were further eroding employer-sponsored retiree health benefits by creating an additional incentive for employers to reduce, or eliminate altogether, health benefits for retirees.” Accordingly, the EEOC then studied the relationship between the ADEA and employer-sponsored retiree health benefits and published the 2003 proposed regulations to create a narrow exemption from the prohibitions of the ADEA for the practice of coordinating retiree health benefits with eligibility for Medicare or a comparable state health benefits program.

AARP filed suit to enjoin publication and implementation of the exemption on Feb. 4, 2005, alleging that the exemption violated the ADEA and the Administrative Procedure Act. AARP argued that the rules were age discriminatory because they would allow employers to reduce the benefits of older retirees. The EEOC agreed not to publish the exemption rules until the district court ruled on AARP’s challenges. Although the court initially ruled in favor of AARP in March 2005, it subsequently reversed itself and entered summary judgment in favor of the EEOC on Sept. 27, 2005, finding that the agency did not exceed its authority in issuing this exemption, that the exemption was not arbitrary or capricious, and that the Erie County case did not render the exemption invalid. However, the court did continue its injunction prohibiting publication of the exemption until the Third Circuit could resolve AARP’s promised appeal.

The Third Circuit resolved AARP's appeal on June 4, 2007, holding that the EEOC properly exercised its exemption power under Sec. 9 of the ADEA, thereby affirming the district court’s decision and lifting the injunction that prohibited publication of the final rules. The court, noting the EEOC’s evidence that (1) health care costs continue to rise, (2) employers are not required to provide any retiree health care benefits, and (3) some employers chose to avoid ADEA discrimination by reducing retiree health benefits, specifically rejected AARP’s argument that the EEOC exceeded its authority under the ADEA as follows:

“We recognize with some dismay that the proposed exemption may allow employers to reduce health benefits to retirees over the age of 65 while maintaining greater benefits for younger retirees. Under the circumstances, however, the EEOC has shown that [its] narrow exemption from the ADEA is a reasonable, necessary, and proper exercise of its section 9 authority, as over time it will likely benefit all retirees.”

AARP asked a full panel of the Third Circuit to rehear the case, but that request was denied on Aug. 21, 2007. AARP then petitioned the U.S. Supreme Court for a stay of the Third Circuit’s mandate pending AARP’s writ of certiorari, but that request was denied on Sept. 19, 2007. AARP filed its writ of certiorari asking the Supreme Court to review the Third Circuit’s decision on Nov. 20, 2007.

The final regulations were effective as of the date of publication. For further information, contact Raymond Peeler at (202) 663-4537 or Dianna B. Johnston at (202) 663-4637.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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