Background

In a controversial decision in 2000, the Third Circuit U.S. Court of Appeals in Erie Country Retirees Ass'n. v. County of Erie, Pa. case (220 F. 3d 193 (3d Cir. 2000)) ruled that it is a violation of the ADEA for a plan sponsor to provide lower health coverage to Medicare-eligible retirees than it provides to retirees who are not yet eligible for Medicare, because Medicare-eligible retirees are, by definition, age 65. (For information about that decision, see The Segal Company's May 31, 2001 Capital Checkup.

The EEOC's initial response to the Erie County decision was to take the position in its enforcement manual that it could be a violation of ADEA to reduce or eliminate health coverage for retirees over 65. In August 2001, however, the EEOC announced its intention to reconsider that stance. (See Segal's August 27, 2001 Capital Checkup.) At that time, the EEOC rescinded the retiree health portion of its enforcement manual pending further review.

In 2002, the EEOC announced its intention to propose a regulation on the coordination of retiree health benefits with Medicare to "ensure that the application of the ADEA does not discourage employers from providing health benefits to their retirees." (See Segal's May 29, 2002 Capital Checkup.)

The EEOC issued the proposed regulation in 2003, after an extensive analysis of the economic environment surrounding retiree health care, and the real-life consequences of the Erie County decision. (See Segal's July 14, 2003 Capital Checkup.) The regulation would grant an exemption from the ADEA's general ban on age-based discrimination, and allow employers to reduce or terminate retiree health benefits for Medicare-eligible retirees without regard to the coverage they provide for younger retirees. On April 22, 2004, the EEOC approved the final rule establishing the exemption, in essentially the same form as the proposed regulation.

As the EEOC was preparing to publish the exemption in the Federal Register, the American Association of Retired Persons (AARP) filed suit, challenging its authority to grant the exemption. The suit was filed in a federal trial court in Pennsylvania, in the same jurisdiction that decided Erie County. AARP alleged that the exemption is illegal because it would allow employers to violate the ADEA. The EEOC maintained that the ADEA gives the EEOC broad authority to exempt employers from provisions in the ADEA that are "reasonable" and "necessary and proper in the public interest." The EEOC found that the exemption met that standard because it concluded that, without the exemption, employers were likely to eliminate health coverage for early retirees rather than expanding the coverage they provide to over-65 retirees.

The Court's Decision

On March 31, 2005, the trial court agreed with the AARP and ruled that the EEOC is bound by the appeals court's holding in the Erie County case that it is clearly illegal to provide inferior coverage to older retirees, based on their age. The court said that the EEOC's authority to issue exemptions under the ADEA is limited to circumstances where Congress has left a gap for the agency to fill. This is not the case here, the court stated, where the EEOC was purporting to override part of the law.

Implications of the Latest Decision

This decision effectively prevents (for the time-being) the EEOC from implementing an exemption that many plan sponsors were counting on as additional legal support for coordinating their retiree health benefits with Medicare. This is especially significant in light of the new prescription drug benefit that will become part of Medicare in 2006. The EEOC has indicated that it will appeal the latest decision.

Although the Erie County decision has always only applied to plan sponsors in the Third Circuit, plan sponsors in other areas still remain vulnerable to suit for providing lesser benefits to Medicare-eligible retirees than they provide to other retirees. Other federal circuits have not yet had the opportunity to issue decisions in this area. Consequently, plan sponsors in other circuits should only implement this kind of benefit distinction with the advice of counsel. The most important question, however, is how two different health plans are compared to determine whether one is inferior to the other, since EEOC regulations allow Medicare's benefits to be counted in weighing the coverage provided for the older group.

Segal consultants can be retained to assist plan sponsors with their retiree health benefits design, including working with attorneys to determine whether and how to respond to this court decision, as well as the new Medicare prescription drug coverage. Segal will provide information about significant further developments in this area.

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