Recent Court Decision Paves Way for Coordination of Retiree Health Benefits with Medicare Benefits — AARP v. EEOC

Seven years ago, the U.S. Court of Appeals for the Third Circuit, in Erie County Retirees Ass’n v. County of Erie, 220 F.3d 193 (3d Cir. 2000) (“Erie County”) held that the employer-sponsored medical plans at issue discriminated on the basis of age by providing lesser health coverage to Medicare-eligible retirees than they provided to younger retirees. A ruling in June from the Third Circuit in AARP v. EEOC, 2007 WL 1584385 (3d Cir. June 4, 2007) (“AARP”), has circumvented the ruling in Erie County by permitting the Equal Employment Opportunity Commission (“EEOC”) to address, through regulation, the aspects of Erie County that many employers and employer groups found troubling.

On June 4, 2007, a unanimous panel of the Third Circuit in AARP upheld a proposed EEOC regulation that would allow employer-sponsored retiree health plans to coordinate benefits with Medicare or state-sponsored health benefits without violating the Age Discrimination in Employment Act (“ADEA”). As another (and perhaps final) chapter in the saga that began with the Third Circuit’s 2000 decision in Erie County, the AARP decision is a step towards long-awaited and welcome relief to those plan sponsors who offer health benefits to retired workers.

The 2000 Erie County Decision

In Erie County, a plaintiff class representing Medicare-eligible retirees had alleged that the county (their former employer) had violated the ADEA by providing inferior coverage to Medicare-eligible retirees when compared to the coverage provided to pre-Medicare eligible retirees. The county had provided pre-Medicare eligible retirees coverage under a hybrid point of service plan in which the participants could choose between an HMO and a traditional indemnity option on an as-needed basis. However, Medicare-eligible retirees were forced to accept a coordinated health care plan provided through an HMO and Medicare and to pay Medicare Part B medical insurance premiums. In August 2000, the Third Circuit decided the case in favor of the older retirees holding that, because Medicare eligibility is inherently age dependent, the ADEA prohibited the reduction of retiree health benefits that are provided to older individuals who are eligible to receive Medicare benefits unless a plan could satisfy the ADEA’s “equal cost/equal benefit” rule. The decision meant that, under the ADEA, plans could not treat Medicare-eligible retirees less favorably than other retirees by providing lesser benefits to Medicare-eligible retirees unless a plan demonstrated that the benefit cost incurred on behalf of older workers was no less than that incurred for younger workers.

The EEOC Initially Followed Erie County But Then Switched Course

Two months after Erie County was decided, the EEOC adopted the holding in Erie County in its national enforcement policy. Under the EEOC’s October 2000 compliance manual, retiree medical plans were required to prove either that the benefits provided to Medicare-eligible retirees were the same as those provided to younger retirees or that the plan sponsor pays the same costs for both groups of retirees. Otherwise, the plan sponsor could be deemed to have violated the ADEA.

The Erie County decision was troubling for employers. Faced with rising health care costs and the Erie County decision, many employers reduced or considered reducing all retiree health benefits to a lower level rather than face the financial strain of keeping all benefits at pre-Medicare eligibility levels. Benefits experts warned that Erie County would accelerate the decline of employer-sponsored retiree health benefits.

In August 2001, in apparent acknowledgement of the adverse effects of the Erie County decision, the EEOC rescinded the portions of its compliance manual that discussed the Erie County decision and undertook studies to research the relationship between the ADEA and employer-sponsored retiree health plans.

Employers, state and local governments, and labor organizations clamored for a change. In July 2003, recognizing that employer-sponsored retiree health benefits were decreasing and that employers are not required to provide retiree health benefits at all, the EEOC issued a proposed regulation to allow plan sponsors to coordinate retiree health benefits with Medicare benefits.

The EEOC’s proposed regulation purported to permit an employer to establish and maintain a plan that alters, reduces, or eliminates employer-sponsored retiree health benefits when retired participants become eligible for Medicare benefits or health benefits under a comparable state plan. The proposed regulation would exempt employers with such plans from the ADEA’s prohibition against age discrimination even where the level of benefits provided to older, Medicare-eligible retirees is less than that provided to younger, pre-Medicare eligible retirees. By providing this narrow exemption, the EEOC believed that the proposed regulation would encourage employers to provide retiree health benefits.

The AARP Challenged the Proposed Regulation as Age Discriminatory

In 2005, as the EEOC was preparing to publish its proposed regulation as a final rule, the AARP sued the EEOC in federal district court for the Eastern District of Pennsylvania to enjoin the EEOC from finalizing the proposed regulation. The AARP argued that the proposed regulation exceeded the EEOC’s authority because the regulation conflicted with the ADEA’s prohibition against age discrimination. Granting summary judgment in favor of AARP, the district court held that the proposed regulation was contrary to the Third Circuit’s decision in Erie County and issued a permanent injunction. The EEOC appealed the district court’s judgment to the Third Circuit. While its appeal was pending, the EEOC moved for relief from the district court’s judgment based on a Supreme Court decision which held that a judicial interpretation of a statute does not bar a government agency’s subsequent interpretation of the statute except where the judicial interpretation unambiguously forecloses the agency’s interpretation and no further interpretation is necessary. Persuaded by the EEOC’s arguments that it had the authority to adopt a reasonable interpretation of the ADEA, the district court vacated the judgment, but the injunction against the EEOC remained in place while AARP appealed to the Third Circuit.

AARP Decision Allows the EEOC’s Narrow Exemption

On appeal, the Third Circuit determined that the EEOC had properly exercised its exemption authority under the ADEA to establish a reasonable exemption that was necessary and proper in the public interest. Ruling in favor of the EEOC, the Third Circuit pointed to the reasoned analysis behind the EEOC’s proposed regulation: the regulation was intended to respond to the growing trend among employers toward terminating retiree health benefits instead of maintaining health benefits at a level that was too costly to sustain. The Third Circuit recognized that while the proposed regulation would allow employers to reduce health benefits to retirees over the age of 65 while providing greater benefits to younger retirees, the exemption would over time likely benefit all retirees by “permitting employers to provide a valuable benefit to early retirees who otherwise might not be able to afford health insurance coverage and allowing employers to provide valuable supplemental health benefits to retirees who are eligible for Medicare.”

What Does the AARP Decision Mean for Plan Sponsors?

Now that the injunction on implementation of the proposed regulation has been lifted, the EEOC is able to finalize the regulation. Whether the AARP will choose to challenge the Third Circuit’s ruling is not known at this time. If the EEOC’s proposed regulation is finalized, plan sponsors will have the ability to design their plans to coordinate retiree health benefits with Medicare or comparable state-sponsored health benefits without having to meet the “equal cost/equal benefit” rule under the ADEA. (Note that the EEOC’s exemption only applies to health benefits. The equal benefit or equal cost rule is still applicable to other benefits such as retiree life insurance.) If the EEOC’s proposed regulation becomes final, plan sponsors will be able to provide richer health benefits to pre-Medicare eligible retirees than those retirees who have become Medicare-eligible. Only time will tell whether such an exemption will resolve the problem the EEOC intended to address — the demise of employer-sponsored retiree health benefits.