EEOC Proposes to Ease ADEA Limits on Health Benefit Reductions for Medicare Eligible Retirees

Concerned that the decision in Erie County Retirees Ass'n v. County of Erie, 220 F.3d 193 (3rd Cir. 2000) has caused many employers to simply terminate or cut back their retiree health coverage to avoid problems under the Age Discrimination in Employment Act of 1967 ("ADEA"), the Equal Employment Opportunity Commission ("EEOC") proposed regulations on July 14, 2003 that would permit employers to alter, reduce or eliminate employer-sponsored retiree health benefits when retirees become eligible for Medicare or a similar State-sponsored retiree health care program. The proposed regulation is designed to ensure that ADEA will not discourage employers from providing retiree health benefits.

The ADEA prohibits employers from discriminating against any individual with respect to "compensation, terms, conditions, or privileges or employment, because of such individual's age." Protected individuals include retired employees. Since the enactment of the Older Workers Benefit Protection Act of 1990 (OWBPA), this prohibition has extended to employer-provided health benefits. In the past, many employers relied on legislative history to OWBPA which appeared to indicate that eliminating, reducing, or altering employer-sponsored retiree health benefits with Medicare eligibility is permissible under ADEA.

In August 2000, however, the Third Circuit, in Erie County, became the first federal circuit court to examine whether an employer's coordination of its retiree health plans with Medicare eligibility violated ADEA. Before 1992, Erie County offered current employees and retirees separate but similar traditional indemnity health insurance coverage. In February 1998, however, to control rising costs, the county began requiring all eligible retirees over age 65 to accept a coordinated health plan provided through an HMO and Medicare. Eligible retirees were required to have Medicare Part B Medical Insurance in order to participate. Retirees not yet eligible for Medicare continued to be covered by a traditional indemnity plan until October 1998 when they were transferred to a hybrid point of service plan where they could choose between an HMO and the traditional indemnity plan. The Medicare-eligible retirees alleged that the county violated ADEA by offering them health insurance coverage that was inferior to that offered to the county's younger retirees. The Third Circuit agreed, holding that ADEA prohibits an employer from treating "retirees differently with respect to health benefits based on Medicare eligibility," unless the employer can satisfy one of ADEA's affirmative defenses. Specifically, the court examined ADEA's "equal benefit/equal cost" defense. The Third Circuit held, however, that the costs Medicare incurs on behalf of retirees over age 65 could not be considered in determining whether an employer had satisfied the equal cost prong and remanded the case so the district court could determine whether the county nonetheless could satisfy the equal benefit/equal cost test.

On remand, the county conceded that it could not meet the equal cost prong using the Third Circuit's standard. The district court then found that the county did not provide equal benefits to its retirees because (1) retirees over age 65 had to pay a greater portion of the total cost of their health insurance premiums than younger retirees; (2) the health plan offered to older retirees did not allow participants to alternate between different forms of coverage, while the one offered to younger retirees did; and (3) the plan for younger retirees did not restrict participants to a prescription drug formulary, while the plan for older retirees did.

Under Erie County, an employer that voluntarily provides its pre-age 65 retirees with a bridge to Medicare (intending to terminate all employer-sponsored retiree coverage at that time) can do so without violating ADEA only if the benefits provided by the bridge coverage are either the same as, or less generous than, those provided by Medicare. Where bridge coverage exceeds Medicare coverage, ADEA would prevent the employer from ending its coverage when retirees become eligible for Medicare.

In its October 2000 Compliance Manual, the EEOC adopted the Third Circuit's position in Erie County as its national enforcement policy. The EEOC, however, announced in August 2001 that it wished to further study the relationship between ADEA and employer-sponsored retiree health plans and rescinded those portions of the manual.

The EEOC, in reconsidering its position, now states that it has determined that applying the equal cost/equal benefit rule is impractical in the retiree health plan context, given the variety of features that most health plans contain and given that Medicare benefits are not purchased at a market rate and contain an employee contribution feature. The EEOC has stated that its current regulations do not provide a sufficient safe harbor to protect and preserve employer-provided retiree health coverage. As a result, it now explains, many employers have terminated or cut back retiree medical benefits, leaving retirees under age 65 without health insurance.

The regulations therefore propose to allow employers to coordinate their retiree health coverage with eligibility for Medicare or a State-sponsored retiree health benefits program. Employers could provide health benefits for retirees that are altered, reduced or eliminated when the retiree becomes eligible for Medicare health benefits or for benefits under a similar State-sponsored program. The regulation would become effective upon its publication in final form. It would apply to existing, as well as newly created, employer-provided retiree health plans. The exemption also would apply to dependent and/or spousal health benefits that are included as part of the benefits provided to retirees. However, dependent and/or spousal benefits need not be identical to the health benefits provided for retirees. Dependent and/or spousal benefits therefore may be altered, reduced or eliminated whether or not the health benefits provided for retired participants are similarly altered, reduced or eliminated.

The proposed regulations, if finalized, would substantially decrease the cost to employers of providing retiree health benefits by allowing such benefits to be coordinated with Medicare. Should the regulations be finalized in their current form, employers that have been considering eliminating their retiree health benefits due to cost considerations may wish to retain such benefits as an employee retention tool and simply coordinate their coverage with Medicare.

If you would like to discuss cost-effective design options for providing retiree health care and bridge benefits or have questions about the EEOC action, please contact your regular Crowell & Moring contact or any attorney on our Health Care team.