The Appellate Court's Erie County Decision

In the Erie County decision, the Third Circuit U.S. Court of Appeals 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 (220 F. 3d 193 (3d Cir. 2000)). (For information about that decision, see The Segal Company's May 31, 2001 Capital Checkup.)

EEOC Involvement

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 the ADEA to reduce or eliminate health coverage for retirees over 65 unless the plan sponsor could show that either the benefits provided to the Medicare-eligible retirees are equal to those provided to younger retirees or the cost of the benefits are equal ("equal cost or equal benefit" defense). 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 At that time, the EEOC rescinded the retiree health portion of its enforcement manual pending further review.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 that it would 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. Section 9 of the ADEA gives the EEOC the authority to grant exemptions from prohibitions in the ADEA that are necessary and proper in the public interest. On April 22, 2004, the EEOC approved the final rule establishing the exemption, in essentially the same form as the proposed regulation.

AARP's Challenge to the EEOC's Course of Action

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 the U.S. District Court for the Eastern District of Pennsylvania, a federal trial court 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.

On March 31, 2005, in an opinion in AARP v. EEOC, 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. This decision effectively prevented 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.

In May 2005, the EEOC appealed the case to the Third Circuit U.S. Court of Appeals.

U.S. Supreme Court Decision May Have an Impact on Decision in AARP v. EEOC

In June 2005, the U.S. Supreme Court issued a decision in an unrelated matter that deals with whether the decision of a court binds the decisions of lower courts (judicial precedence) when a federal agency has a conflicting interpretation. Courts are generally bound by decisions made on the same issue in prior cases and in cases decided by higher courts in the same jurisdiction. This means that courts must generally defer to these prior decisions and rule consistently, even if the court has a different opinion. In addition, under federal law, agency interpretations of statutes are also generally given deference. Courts must defer to agency interpretation of a statute on questions where the statute is silent or ambiguous, even if it differs from what the court believes is the best statutory interpretation. In National Cable and Telecommunications Association v. Brand X Internet Services, the U.S. Supreme Court (the Court) had to address the question of whether judicial precedence should trump a conflicting agency interpretation.*

The U.S. Supreme Court in Brand X reversed the decision of the Ninth Circuit stating that, "only judicial precedent holding that the statute unambiguously forecloses the agency's interpretation, and therefore contains no gap for the agency to fill, displaces a conflicting agency construction." In other words, an agency determination should trump judicial precedent, unless prior court decisions (judicial precedent) on the issue have held that the statute in question is clear and unambiguous, leaving no gaps for an agency decision to fill.

The Latest Activity

In response to the Brand X decision, in June 2005, the EEOC motioned the U.S. district court to reconsider its March 2005 ruling in AARP v. EEOC, arguing that Brand X would require that the court determine whether judicial precedent "unambiguously forecloses" the EEOC's interpretation of the part of the ADEA statute that allow the EEOC to issue exemptions in the public interest. EEOC argues that the relevant issue is the EEOC's authority to issue exemptions from the ADEA. Erie County did not address this issue, it simply held that plans cannot coordinate retiree health benefits with Medicare. Because the EEOC's exemption authority was not an issue in Erie County, the EEOC argues that the decision in Erie County has no relevance to whether the EEOC is authorized to issue the proposed exemption. Thus, the court erred, the EEOC argues, in tying its decision to Erie County.

Both sides filed detailed briefs on the issue July 14, 2005. The decision by the U.S. district court is pending. The court will have to evaluate whether it was correct in determining that they were bound by Erie County in enjoining the proposed exemption, or whether they simply needed to evaluate the EEOC's authority in the ADEA to issue exemptions from actions that are prohibited by the ADEA.

If the district court reverses its decision that had blocked the EEOC from releasing its final rule on the exemption, the EEOC could, presumably, go ahead with its plans to finalize the exemption. Other legal challenges could possibly follow that decision.

This is the latest development in what is expected to be a continuing effort by the EEOC to implement an exemption to the ADEA that it believes is necessary to avoid the unintended consequence of discouraging plan sponsors from offering retiree health coverage.

Implications for Sponsors of Plans that Provide Retiree Health Coverage

Although the Erie County decision has always only applied to plan sponsors in the Third Circuit, which covers Delaware, New Jersey, Pennsylvania, and the U.S. Virgin Islands, 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.

Many plan sponsors hope that the EEOC's exemption will be finalized. The concern is that in a health care system where the provision of health benefits is voluntary, requiring plan sponsors to provide equal benefits to retirees that are Medicare-eligible as provided to those not yet Medicare-eligible, would discourage plan sponsors from providing health benefits to any retirees, regardless of Medicare eligibility. Some argue that the exemption would allow plan sponsors greater flexibility in coordinating retiree benefits with Medicare.

Segal Company 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.

* Specifically, the U.S. Supreme Court had to decide whether cable companies selling broadband Internet services are entities covered under the Communications Act of 1934 (the "Act"). Even though a Ninth Circuit decision in an earlier opinion has ruled that the cable companies were regulated under the Act, the Federal Communications Commission (FCC)(the federal agency with the authority to interpret the Act) reached the opposite conclusion, ruling that the cable companies were not covered by the Act. When the same issue came before the Ninth Circuit again (after the FCC's ruling), rather than evaluating whether the FCC interpretation was reasonable and should be given deference, the court based its holding on the fact that it was bound by its earlier decision that cable companies in their provision of broad band Internet services were covered under the Act. The Ninth Circuit vacated the FCC's conflicting decision on the issue, in much the same way as the federal district court in AARP v. EEOC has prevented the EEOC from implementing the proposed exemption concerning retiree health benefits under the ADEA. (To return to the Capital Checkup text, click here.)

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