CRS_April_2005_Final_EEOC_Rules_on_Retiree_Health_Plans.pdf: 417 downloads, before Oct. 1, 2020

Dale, Charles V.

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UNT Digital Library

Congressional Research Service ˜ The Library of CongressCRS Report for CongressReceived through the CRS WebOrder Code RS21845Updated April 13, 2005Final Equal Employment OpportunityCommission Rules on Retiree Health Plansand the Age Discrimination in Employment ActCharles V. DaleLegislative AttorneyAmerican Law DivisionSummaryUnder the Age Discrimination in Employment Act (ADEA), the EqualEmployment Opportunity Commission (EEOC) has authority to issue reasonableexemptions the Commission finds “necessary and proper in the public interest.” 29U.S.C. § 628.  Recently, the EEOC approved a narrowly-drawn exemption, forcirculation to other federal agencies, to permit the practice of coordinating employer-provided retiree health coverage with eligibility for Medicare.  The proposed final rulestates that it is not a violation of the ADEA to alter, reduce or eliminate health benefitsfor retirees when the participant becomes eligible for Medicare or comparable statehealth benefits.  An Appendix to the final rule makes clear that the exemption is alsointended to apply to dependent and/or spousal health benefits that are included as partof the health benefits provided to retirees.  However, dependent and/or spousal benefitsneed not be identical to benefits provided to retirees, and may be altered, reduced, oreliminated, regardless of how corresponding benefits for retirees are treated.  No otheraspect of ADEA coverage, or other employee benefits, are affected.  The ADEAexemption is intended to apply to existing and newly-created employer-provided retireehealth plans from the date of publication of a final rule in the Federal Register.  Theproposed final rule had completed an interagency review process required by law when,on March 30, 2005, the federal district court in Philadelphia issued a permanentinjunction blocking its implementation.  The EEOC plans to ask the Justice Departmentto appeal the order of District Judge Brody in AARP v. EEOC to the Third Circuit Courtof Appeals.  Meanwhile, the EEOC proposed final rule has not been put into effect.Employers have frequently sought to trim the high cost of providing  group healthcoverage for their workers by reducing retiree benefits or narrowing the group of retireeseligible for coverage. One commonly used formula is to differentiate in health planbenefits between retirees eligible for Medicare and younger retirees.  But in Erie CountyCRS-21 220 F.3d 193 (3d Cir. 2000).2 See EEOC, Age Discrimination in Employment Act; Retiree Health Benefits (Final Rule),published at [http://www.eeoc.gov/policy/regs/retiree_benefits.html]3 29 U.S.C. § 623.4 See Older Workers Benefit Protection Act of 1990, P.L. 101-433, 104 Stat.9780(1990)(OWBPA), Final Substitute: Statement of Managers, 136 Cong. Rec. S25353 (Sept.24, 1990).  In addition, the Conference Report for the recently enacted Medicare PrescriptionDrug Improvement and Modernization Act of 2003, P.L. 108-173, 117 Stat. 2066)(2003), alsoprovides that “the conferees reviewed the ADEA and its legislative history and believe thelegislative history clearly articulates the intent of Congress that employers should not beprevented from providing voluntary benefits to retirees only until they become eligible toparticipate in the Medicare program.”  H.R. Conf. Rep. No. 108-391, at 365 (2003).5  Section 4(f)(2) of the ADEA provides that it is not unlawful for an employer to observe theterms of any bona fide retirement plan that is not a subterfuge to evade the purposes of the act.Under ADEA regulations, a “safe harbor” was created  for employers who provide equal benefitsto older and younger workers, or who incur equal costs on behalf of each.  The OWBPA codifiedthis “equal benefit or equal cost” standard. 29 U.S.C. § 623(f)(2)(B)(i).Retirees Ass’n v. County of Erie,1 a federal appeals court ruled that the AgeDiscrimination in Employment Act (ADEA) applies to retirees and prohibits the practiceof coordinating retiree health benefits with Medicare eligibility, an “explicitly” age-relatedfactor.  In October 2000, the Equal Employment Opportunity Commission (EEOC)adopted the court’s reasoning as the agency’s national enforcement policy, but laterrescinded its position to further review the issue.  Following two years of study, on April22, 2004, the  Commission proposed a “final rule,” for circulation to other federalagencies, that would allow employer-sponsored retiree health plans to reduce or eliminatebenefits for Medicare-retirees without violating the ADEA.2Background.The ADEA prohibits discrimination against workers over 40 years of age incompensation or with respect to employment “terms, conditions, or privileges.”3  Theact’s legislative history contained a Statement of Managers, which suggested that thepractice of coordinating retiree health plans with Medicare was not prohibited.4  In ErieCounty Retirees, however, the Third Circuit disregarded that evidence of congressionalintent when it ruled that providing inferior benefits to Medicare-eligible retirees thanyounger retired workers may be illegal age discrimination.  It remanded the case for atrial court determination of  whether the plan was saved by the equal-benefit or equal-costsafe harbor provisions of the Older Workers Benefit Protection Act (OWBPA).5    In that case, a group of retirees who were over the age of 65 sued the Countyclaiming that their retiree health program was inferior to the program offered to youngerretirees. Designed to supplement Medicare benefits, older retirees were offered an HMOplan that coordinated all  health care services  through a primary care physician.  Thecounty  provided former employees who were not Medicare-eligible with a “hybrid pointof service program “ that combined the features of an  HMO with a traditional indemnityplan.  The district court granted partial summary judgment for the county, holding that theADEA was not intended to apply to retirees such as plaintiffs, who based  their agediscrimination claim on disparities in health coverage arising from Medicare eligibility.CRS-36 124 S.Ct 1236 (2004).In its reversal, the Third Circuit found that age discrimination had occurred since themedical benefits for older retirees were based solely on their eligibility for Medicare, and“Medicare eligibility follow[s] ineluctably upon attaining age 65.”  Reviewing the ADEA, the Third Circuit concluded that an age-based disparity inretiree health benefits is only lawful if the program falls within a “safe harbor” establishedby  the “equal benefit/equal cost” standard.  Both the legislative history of OWBPA andthe “plain language” of the safe harbor provision indicated Congress’ intent that thesection apply when an employer reduces health benefits on the basis of Medicareeligibility.  In other words, the County of Erie could only prevail if it established that thebenefits offered to Medicare-eligible retirees were equal to those provided to youngerretirees or that its costs for providing benefits to the two groups were equal.  The ThirdCircuit remanded the case back to the trial court for further determination.  The trial courtultimately found that the County’s plan was unlawful since 1) older retirees were requiredto pay a greater percentage of their overall premium than were younger retirees; and 2)younger retirees were given the option between HMO coverage or indemnity coverage,while older retirees could only elect HMO coverage.  For these reasons, the trial courtconcluded that older retirees were provided inferior benefits in violation of ADEA.A significant aspect of the Erie County case was the Third Circuit finding  thatretirees are entitled to sue under the ADEA even though they are no longer “employees.”An associated claim that retirees had been treated less favorably than active employeeswas withdrawn prior to appeal and went unaddressed by the Third Circuit opinion, butcould arise in some future controversy.   In particular, the relative legal status of the twogroups could be important if an employer were to decide, for cost-saving reasons, toeliminate all medical benefits for retirees while retaining health care coverage for currentemployees.  Emphasizing the “fair middle ground”struck by the equal cost or equalbenefit standard of the OWBPA, however, the Third Circuit was able to focus on theproblem as between the competing groups of retirees.  Note, also, that in General Dynamic Land System, Inc.  v. Cline,6 the U.S. SupremeCourt confronted  the obverse, but not unrelated,  issue of whether an employer may treatolder employees  more favorably than younger protected class employees without runningafoul of the ADEA. Prior to July 1, 1997, General Dynamics had been obligated by acollective bargaining agreement to provide full health benefits to employees who retiredafter 30 years of service. Under the terms of a new agreement, only employees who wereage 50 or older on that date were eligible for retiree health benefits.  A group ofemployees between the ages of 40 and 50 sued General Dynamics, alleging that thecompany had discriminated against them in violation of the ADEA.  The district courtdismissed the case, holding that the ADEA does not prohibit an employer fromdiscriminating against employees in the protected class (i.e. aged  40 and over) who areyounger than the favored employees.  The Sixth Circuit, however,  found that the ADEAprohibited discrimination against any individual in the protected class on the basis of age,not just the relatively older, and upheld younger workers right to sue for alleged denial ofretiree health benefits.CRS-47 See 68 Fed. Reg. 42542 - 41549 (7-14-03).In a 6 to 3 decision, the Supreme Court reversed the Sixth Circuit.  It found that the text,structure, purpose and history of the ADEA revealed that it was enacted “as a remedy forunfair preference based on relative youth,” and that it does not prohibit an employer fromfavoring an older employee over a younger one.  In the process, the Court rejected as“clearly wrong” the  EEOC regulatory position that a decision between hiring twoindividuals within the protected class has to be made on the basis of a factor other thanage.  The Court thus appears to approve of “grandfathering” older workers, by treatingthem more favorably, when reforming benefits packages for age protected employees.  Itdid not, however, consider the lawfulness of providing differential benefits thatdisadvantage relatively older workers,  as addressed in the Erie County case and theEEOC final regulations.The EEOC had filed an amicus curiae brief advocating the position adopted by theThird Circuit  in Erie County, which the agency then incorporated in its “ComplianceManual” as part of its national enforcement policy on the ADEA.  But in August 2001,after consulting various labor and employer groups, EEOC rescinded its policy regardingemployer-sponsored retiree health plans, announcing  that it would study the issue further.The EEOC study demonstrated a considerable decline in the number of employersproviding retiree health benefits in the decade preceding, due to higher health carecoverage costs, the number of employees nearing retirement age, and changes inaccounting rules for retiree health benefits.7  In addition, it found that “concern about thepotential application of the ADEA to employer-sponsored retiree health benefits isadversely affecting the continued provision of this important retirement benefit.”  Because“it is not possible to apply the equal benefit/equal cost test, or a variant of that rule, to therapidly changing landscape of retiree health case,” the study concluded, a reversal ofpolicy was  required in the “public interest” to protect retiree health coverage as avaluable benefit to older individuals.The EEOC Proposed Final Rule.The proposed  final rule amends EEOC regulations under the ADEA to exempt fromits prohibitions the alteration, reduction or elimination of employer-sponsored retireehealth benefits when retirees become eligible for Medicare or other comparable stateretiree health benefits.  The authority cited in the preamble is § 9 of the ADEA whichpermits EEOC to “establish such reasonable exemptions to and from any or all provisionof [the act] as it may find necessary and proper in the public interest.”  EEOC notes thatemployers are not legally obligated to provide any retiree health benefits and argues thatthe safe harbor provisions of the OWBPA have become unworkable given the broaddiversity of employer health plan options currently available  Consequently, theexemption is deemed  “necessary and proper” as an incentive to employers not toeliminate all retiree health benefits, or to reduce the benefits of younger retirees to equalthose provided to their Medicare-eligible counterparts. The proposed final regulations also include an appendix with questions and answersthat provide the following specific guidance.CRS-58 Slip opinion No. 05-CV-509 (E.D. Pa. 3-30-05), available at http://www.american benefitscouncil.org/documents/aarp_v_eeoc_decision.pdf.! The exemption does not mean that the ADEA does not apply to retirees,or that all forms of retiree health coverage are exempted.  Only thespecific practice of coordinating retiree health benefits with Medicare ora comparable state health plan is exempted from ADEA.! Employers may offer “Medicare carve out plans” under which Medicareis primary and the employer plan secondary for retirees, but not activeemployees.! The exemption also applies to dependent and/or spousal health benefitsincluded as part of retirees’ benefits, although these may be altered,reduced or eliminated even when the retirees’ are not.! Medicare eligibility (or eligibility under a similar state health plan) or theage of such eligibility may not be used as a basis for any other act,practice, or decision regarding retirees.! The exemption does not apply to active employees over the age ofMedicare (or state health plan) eligibility.The proposed final rule has been the focus of an interagency review process sincelate April, 2004, and will become effective only if approved by the Office of Managementand Budget in accordance with Executive Order 12866 and published in the FederalRegister.  Meanwhile, implementation of the proposed final rule was delayed by a federaldistrict court in Philadelphia which held, on March 30, 2005, that the rule directlyconflicted with the Third Circuit decision in the Erie County case. In AARP v. EEOC,8Judge Brody issued a permanent injunction against enforcing the rule, finding that it “iscontrary to congressional intent and the plain language of the Age Discrimination inEmployment Act.” The EEOC, according to Judge Brody, has the power to issue rules, regulations and exemptions within . . . explicit or implicitgaps that Congress left in the ADEA.  In the case of the challenged exemption,however, the Third Circuit held that Congress did not allow for ambiguity with regardto the applicability of the ADEA to retiree health benefits. In other words, the court found that the EEOC was interpreting too broadly its powers tocreate exemptions to the ADEA.In an EEOC press release, the Chair of the Commission responded to Judge Brody’sorder, in part, as follows:The federal District Court in Philadelphia issued an order today that will delay theeffective date of the EEOC rule that is designed to protect retirees’ health benefits.I note that the Court characterized as ‘persuasive’ the EEOC’s argument that, withoutthis exemption, employers will reduce or eliminate health benefits for all retirees.However, the Court found that the EEOC did not have the authority to issue such arule under the Age Discrimination in Employment Act.CRS-69 Press Release,”EEOC Seeks To Appeal Court Order on Retiree Health Benefits Rule,” March30, 2005, available at http://www.eeoc.gov/press/3-30-05.html.The EEOC plans to ask the Justice Department to appeal the District Court’s decisionto the Third Circuit Court of Appeals.  The agency remains confident on both policyand legal bases in its authority to implement the rule.  We are also confident that theCourt of Appeals will correct the District Court’s misunderstanding of the EEOC’sauthority under the ADEA and allow the rule to go into effect.9Conclusion.In the final analysis, therefore,  implementation of EEOC’s retiree health benefitsrule  depends on a judicial determination of the scope of the rarely invoked, congressionaldelegation of  ADEA exemption authority  to the EEOC.  The Third Circuit, andultimately the U.S. Supreme Court, may  be called upon to decide that issue, and untilthen, administrative implementation of the proposed final rule appears to be suspendedindefinitely.

Final Equal Employment Opportunity Commission Rules on Retiree Health Plans and the Age Discrimination in Employment Act

Congressional Research Service ˜ The Library of CongressCRS Report for CongressReceived through the CRS WebOrder Code RS21845Updated November 23, 2004Final Equal Employment OpportunityCommission Rules on Retiree Health Plansand the Age Discrimination in Employment ActCharles V. DaleLegislative AttorneyAmerican Law DivisionSummaryUnder the Age Discrimination in Employment Act (ADEA), the EqualEmployment Opportunity Commission (EEOC) has authority to issue reasonableexemptions the Commission finds “necessary and proper in the public interest.” 29U.S.C. § 628.  Recently, the EEOC approved a narrowly-drawn exemption, forcirculation to other federal agencies, to permit the practice of coordinating employer-provided retiree health coverage with eligibility for Medicare.  The proposed final rulestates that it is not a violation of the ADEA to alter, reduce or eliminate health benefitsfor retirees when the participant becomes eligible for Medicare or comparable statehealth benefits.  An Appendix to the final rule makes clear that the exemption is alsointended to apply to dependent and/or spousal health benefits that are included as partof the health benefits provided to retirees.  However, dependent and/or spousal benefitsneed not be identical to benefits provided to retirees, and may be altered, reduced, oreliminated, regardless of how corresponding benefits for retirees are treated.  No otheraspect of ADEA coverage, or other employee benefits, are affected.  The ADEAexemption is intended to apply to existing and newly-created employer-provided retireehealth plans from the date of publication of a final rule in the Federal Register.Meanwhile, employers within states covered by the Third Circuit – which includesPennsylvania, New Jersey, Delaware and the Virgin Islands – remain subject tostandards set forth in Erie County Retirees Ass’n v. County of Erie, which held that theADEA requires employers to assure that pre- and post- Medicare eligible retirees receivehealth benefits of equal type and value.   The proposed final rule is pending completionof an interagency review process required by law and will be effective only upon finalpublication in the Federal Register.Employers have frequently sought to trim the high cost of providing  group healthcoverage for their workers by reducing retiree benefits or narrowing the group of retireeseligible for coverage. One commonly used formula is to differentiate in health planbenefits between retirees eligible for Medicare and younger retirees.  But in Erie CountyCRS-21 220 F.3d 193 (3d Cir. 2000).2 See EEOC, Age Discrimination in Employment Act; Retiree Health Benefits (Final Rule),published at [http://www.eeoc.gov/policy/regs/retiree_benefits.html]3 29 U.S.C. § 623.4 See Older Workers Benefit Protection Act of 1990, P.L. 101-433, 104 Stat.9780(1990)(OWBPA), Final Substitute: Statement of Managers, 136 Cong. Rec. S25353 (Sept.24, 1990).  In addition, the Conference Report for the recently enacted Medicare PrescriptionDrug Improvement and Modernization Act of 2003, P.L. 108-173, 117 Stat. 2066)(2003), alsoprovides that “the conferees reviewed the ADEA and its legislative history and believe thelegislative history clearly articulates the intent of Congress that employers should not beprevented from providing voluntary benefits to retirees only until they become eligible toparticipate in the Medicare program.”  H.R. Conf. Rep. No. 108-391, at 365 (2003).5  Section 4(f)(2) of the ADEA provides that it is not unlawful for an employer to observe theterms of any bona fide retirement plan that is not a subterfuge to evade the purposes of the act.Under ADEA regulations, a “safe harbor” was created  for employers who provide equal benefitsto older and younger workers, or who incur equal costs on behalf of each.  The OWBPA codifiedthis “equal benefit or equal cost” standard. 29 U.S.C. § 623(f)(2)(B)(i).Retirees Ass’n v. County of Erie,1 a federal appeals court ruled that the AgeDiscrimination in Employment Act (ADEA) applies to retirees and prohibits the practiceof coordinating retiree health benefits with Medicare eligibility, an “explicitly” age-relatedfactor.  In October 2000, the Equal Employment Opportunity Commission (EEOC)adopted the court’s reasoning as the agency’s national enforcement policy, but laterrescinded its position to further review the issue.  Following two years of study, on April22, 2004, the  Commission proposed a “final rule,” for circulation to other federalagencies, that would allow employer-sponsored retiree health plans to reduce or eliminatebenefits for Medicare-retirees without violating the ADEA.2Background.The ADEA prohibits discrimination against workers over 40 years of age incompensation or with respect to employment “terms, conditions, or privileges.”3  Theact’s legislative history contained a Statement of Managers, which suggested that thepractice of coordinating retiree health plans with Medicare was not prohibited.4  In ErieCounty Retirees, however, the Third Circuit disregarded that evidence of congressionalintent when it ruled that providing inferior benefits to Medicare-eligible retirees thanyounger retired workers may be illegal age discrimination.  It remanded the case for atrial court determination of  whether the plan was saved by the equal-benefit or equal-costsafe harbor provisions of the Older Workers Benefit Protection Act (OWBPA).5    In that case, a group of retirees who were over the age of 65 sued the Countyclaiming that their retiree health program was inferior to the program offered to youngerretirees. Designed to supplement Medicare benefits, older retirees were offered an HMOplan that coordinated all  health care services  through a primary care physician.  Thecounty  provided former employees who were not Medicare-eligible with a “hybrid pointof service program ” that combined the features of an  HMO with a traditional indemnityplan.  The district court granted partial summary judgment for the county, holding that theADEA was not intended to apply to retirees such as plaintiffs, who based  their agediscrimination claim on disparities in health coverage arising from Medicare eligibility.CRS-36 124 S.Ct 1236 (2004).In its reversal, the Third Circuit found that age discrimination had occurred since themedical benefits for older retirees were based solely on their eligibility for Medicare, and“Medicare eligibility follow[s] ineluctably upon attaining age 65.”  Reviewing the ADEA, the Third Circuit concluded that an age-based disparity inretiree health benefits is only lawful if the program falls within a “safe harbor” establishedby  the “equal benefit/equal cost” standard.  Both the legislative history of OWBPA andthe “plain language” of the safe harbor provision indicated Congress’ intent that thesection apply when an employer reduces health benefits on the basis of Medicareeligibility.  In other words, the County of Erie could only prevail if it established that thebenefits offered to Medicare-eligible retirees were equal to those provided to youngerretirees or that its costs for providing benefits to the two groups were equal.  The ThirdCircuit remanded the case back to the trial court for further determination.  The trial courtultimately found that the County’s plan was unlawful since 1) older retirees were requiredto pay a greater percentage of their overall premium than were younger retirees; and 2)younger retirees were given the option between HMO coverage or indemnity coverage,while older retirees could only elect HMO coverage.  For these reasons, the trial courtconcluded that older retirees were provided inferior benefits in violation of ADEA.A significant aspect of the Erie County case was the Third Circuit finding  thatretirees are entitled to sue under the ADEA even though they are no longer “employees.”An associated claim that retirees had been treated less favorably than active employeeswas withdrawn prior to appeal and went unaddressed by the Third Circuit opinion, butcould arise in some future controversy.   In particular, the relative legal status of the twogroups could be important if an employer were to decide, for cost-saving reasons, toeliminate all medical benefits for retirees while retaining health care coverage for currentemployees.  Emphasizing the “fair middle ground”struck by the equal cost or equalbenefit standard of the OWBPA, however, the Third Circuit was able to focus on theproblem as between the competing groups of retirees.  Note, also, that in General Dynamic Land System, Inc.  v. Cline,6 the U.S. SupremeCourt confronted  the obverse, but not unrelated,  issue of whether an employer may treatolder employees  more favorably than younger protected class employees without runningafoul of the ADEA. Prior to July 1, 1997, General Dynamics had been obligated by acollective bargaining agreement to provide full health benefits to employees who retiredafter 30 years of service. Under the terms of a new agreement, only employees who wereage 50 or older on that date were eligible for retiree health benefits.  A group ofemployees between the ages of 40 and 50 sued General Dynamics, alleging that thecompany had discriminated against them in violation of the ADEA.  The district courtdismissed the case, holding that the ADEA does not prohibit an employer fromdiscriminating against employees in the protected class (i.e. aged  40 and over) who areyounger than the favored employees.  The Sixth Circuit, however,  found that the ADEAprohibited discrimination against any individual in the protected class on the basis of age,not just the relatively older, and upheld younger workers right to sue for alleged denial ofretiree health benefits.CRS-47 See 68 Fed. Reg. 42542 - 41549 (7-14-03).In a 6 to 3 decision, the Supreme Court reversed the Sixth Circuit.  It found that the text,structure, purpose and history of the ADEA revealed that it was enacted “as a remedy forunfair preference based on relative youth,” and that it does not prohibit an employer fromfavoring an older employee over a younger one.  In the process, the Court rejected as“clearly wrong” the  EEOC regulatory position that a decision between hiring twoindividuals within the protected class has to be made on the basis of a factor other thanage.  The Court thus appears to approve of “grandfathering” older workers, by treatingthem more favorably, when reforming benefits packages for age protected employees.  Itdid not, however, consider the lawfulness of providing differential benefits thatdisadvantage relatively older workers,  as addressed in the Erie County case and theEEOC final regulations.The EEOC had filed an amicus curiae brief advocating the position adopted by theThird Circuit  in Erie County, which the agency then incorporated in its “ComplianceManual” as part of its national enforcement policy on the ADEA.  But in August 2001,after consulting various labor and employer groups, EEOC rescinded its policy regardingemployer-sponsored retiree health plans, announcing  that it would study the issue further.The EEOC study demonstrated a considerable decline in the number of employersproviding retiree health benefits in the decade preceding, due to higher health carecoverage costs, the number of employees nearing retirement age, and changes inaccounting rules for retiree health benefits.7  In addition, it found that “concern about thepotential application of the ADEA to employer-sponsored retiree health benefits isadversely affecting the continued provision of this important retirement benefit.”  Because“it is not possible to apply the equal benefit/equal cost test, or a variant of that rule, to therapidly changing landscape of retiree health case,” the study concluded, a reversal ofpolicy was  required in the “public interest” to protect retiree health coverage as avaluable benefit to older individuals.The EEOC Final Rule.The proposed  final rule amends EEOC regulations under the ADEA to exempt fromits prohibitions the alteration, reduction or elimination of employer-sponsored retireehealth benefits when retirees become eligible for Medicare or other comparable stateretiree health benefits.  The authority cited in the preamble is § 9 of the ADEA whichpermits EEOC to “establish such reasonable exemptions to and from any or all provisionof [the act] as it may find necessary and proper in the public interest.”  EEOC notes thatemployers are not legally obligated to provide any retiree health benefits and argues thatthe safe harbor provisions of the OWBPA have become unworkable given the broaddiversity of employer health plan options currently available  Consequently, theexemption is deemed  “necessary and proper” as an incentive to employers not toeliminate all retiree health benefits, or to reduce the benefits of younger retirees to equalthose provided to their Medicare-eligible counterparts. The final regulations also include an appendix with questions and answers thatprovide the following specific guidance.CRS-58 See, e.g., “ADEA Exemption Rule Long Overdue,” Business Insurance, Sept 6, 2004.9 351 F. 3d 183 (5th Cir. 2003), cert. granted No. 03-1160 (March 29, 2004).10 Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984)(courts mustdefer to a federal agency’s construction of a statute that it administers unless the legislature hasevidenced a contrary intent).! The exemption does not mean that the ADEA does not apply to retirees,or that all forms of retiree health coverage are exempted.  Only thespecific practice of coordinating retiree health benefits with Medicare ora comparable state health plan is exempted from ADEA.! Employers may offer “Medicare carve out plans” under which Medicareis primary and the employer plan secondary for retirees, but not activeemployees.! The exemption also applies to dependent and/or spousal health benefitsincluded as part of retirees’ benefits, although these may be altered,reduced or eliminated even when the retirees’ are not.! Medicare eligibility (or eligibility under a similar state health plan) or theage of such eligibility may not be used as a basis for any other act,practice, or decision regarding retirees.! The exemption does not apply to active employees over the age ofMedicare (or state health plan) eligibility.The proposed final rule has reportedly been the focus of an interagency reviewprocess since late April, 2004, and will become effective only if approved by the Officeof Management and Budget in accordance with Executive Order 12866 and published inthe Federal Register.  Several informed observers have speculated as to possible reasonsfor delay in the final approval process, ranging from the need for careful agencyconsideration of the matter to declared opposition to the rule by the American Associationof Retired Persons and other retiree groups.8 Another factor could be an expected rulingthis term by the U.S. Supreme Court in Smith v. City of Jackson,9 which could havepotential implications for the issue.  Smith poses the question of whether the ADEAprohibits employment policies or practices which, although facially neutral with respectto age, have an unintended  “disparate impact” on older workers.  Federal appeals courtsare conflicted, and with the aging demographics of the U.S. workforce, the question is oneof central importance to employers.  Whether the Administration is likewise awaitingguidance from the Court is unknown, but no final action has yet been taken on theproposed final rule.Conclusion.While only rarely invoked, congressional delegation  of  ADEA exemption authorityto the EEOC would probably confer binding legal force on the retiree health benefit ruleand require great deference by the courts under the Chevron doctrine.10  But employerswithin the Third Circuit – Pennsylvania, New Jersey, Delaware, and the Virgin IslandsCRS-6– continue to operate under the shadow of the Erie County decision pending finalizationof the EEOC position that altering or eliminating benefits of Medicare-eligible retireesis permissible.  As noted, language inserted into the legislative record of the newMedicare prescription drug law indicates the current Congress’ intent that employersshould not be prevented from providing voluntary benefits only until they become eligiblefor Medicare.  However, until such time as the ADEA is actually amended, or theSupreme Court speaks to the issue, the possibility of future litigation remains.

This report discusses Final Equal Employment Opportunity Commission rules on Retiree Health Plans and the Age Discrimination in Employment Act

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Federal Publications Key Workplace Documents 
April 2005 
Final Equal Employment Opportunity Commission Rules on 
Retiree Health Plans and the Age Discrimination in Employment 
Act 
Charles V. Dale 
Congressional Research Service 
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Final Equal Employment Opportunity Commission Rules on Retiree Health Plans 
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Congressional Research Service ˜ The Library of Congress
CRS Report for Congress
Received through the CRS Web
Order Code RS21845
Updated April 13, 2005
Final Equal Employment Opportunity
Commission Rules on Retiree Health Plans
and the Age Discrimination
 in Employment Act
Charles V. Dale
Legislative Attorney
American Law Division
Summary
Under the Age Discrimination in Employment Act (ADEA), the Equal
Employment Opportunity Commission (EEOC) has authority to issue reasonable
exemptions the Commission finds “necessary and proper in the public interest.” 29
U.S.C. § 628.  Recently, the EEOC approved a narrowly-drawn exemption, for
circulation to other federal agencies, to permit the practice of coordinating employer-
provided retiree health coverage with eligibility for Medicare.  The proposed final rule
states that it is not a violation of the ADEA to alter, reduce or eliminate health benefits
for retirees when the participant becomes eligible for Medicare or comparable state
health benefits.  An Appendix to the final rule makes clear that the exemption is also
intended to apply to dependent and/or spousal health benefits that are included as part
of the health benefits provided to retirees.  However, dependent and/or spousal benefits
need not be identical to benefits provided to retirees, and may be altered, reduced, or
eliminated, regardless of how corresponding benefits for retirees are treated.  No other
aspect of ADEA coverage, or other employee benefits, are affected.  The ADEA
exemption is intended to apply to existing and newly-created employer-provided retiree
health plans from the date of publication of a final rule in the Federal Register.  The
proposed final rule had completed an interagency review process required by law when,
on March 30, 2005, the federal district court in Philadelphia issued a permanent
injunction blocking its implementation.  The EEOC plans to ask the Justice Department
to appeal the order of District Judge Brody in AARP v. EEOC to the Third Circuit Court
of Appeals.  Meanwhile, the EEOC proposed final rule has not been put into effect.
Employers have frequently sought to trim the high cost of providing  group health
coverage for their workers by reducing retiree benefits or narrowing the group of retirees
eligible for coverage. One commonly used formula is to differentiate in health plan
benefits between retirees eligible for Medicare and younger retirees.  But in Erie County
CRS-2
1
 220 F.3d 193 (3d Cir. 2000).
2
 See EEOC, Age Discrimination in Employment Act; Retiree Health Benefits (Final Rule),
published at [http://www.eeoc.gov/policy/regs/retiree_benefits.html]
3
 29 U.S.C. § 623.
4
 See Older Workers Benefit Protection Act of 1990, P.L. 101-433, 104 Stat.
9780(1990)(OWBPA), Final Substitute: Statement of Managers, 136 Cong. Rec. S25353 (Sept.
24, 1990).  In addition, the Conference Report for the recently enacted Medicare Prescription
Drug Improvement and Modernization Act of 2003, P.L. 108-173, 117 Stat. 2066)(2003), also
provides that “the conferees reviewed the ADEA and its legislative history and believe the
legislative history clearly articulates the intent of Congress that employers should not be
prevented from providing voluntary benefits to retirees only until they become eligible to
participate in the Medicare program.”  H.R. Conf. Rep. No. 108-391, at 365 (2003).
5
  Section 4(f)(2) of the ADEA provides that it is not unlawful for an employer to observe the
terms of any bona fide retirement plan that is not a subterfuge to evade the purposes of the act.
Under ADEA regulations, a “safe harbor” was created  for employers who provide equal benefits
to older and younger workers, or who incur equal costs on behalf of each.  The OWBPA codified
this “equal benefit or equal cost” standard. 29 U.S.C. § 623(f)(2)(B)(i).
Retirees Ass’n v. County of Erie,1 a federal appeals court ruled that the Age
Discrimination in Employment Act (ADEA) applies to retirees and prohibits the practice
of coordinating retiree health benefits with Medicare eligibility, an “explicitly” age-related
factor.  In October 2000, the Equal Employment Opportunity Commission (EEOC)
adopted the court’s reasoning as the agency’s national enforcement policy, but later
rescinded its position to further review the issue.  Following two years of study, on April
22, 2004, the  Commission proposed a “final rule,” for circulation to other federal
agencies, that would allow employer-sponsored retiree health plans to reduce or eliminate
benefits for Medicare-retirees without violating the ADEA.2
Background.
The ADEA prohibits discrimination against workers over 40 years of age in
compensation or with respect to employment “terms, conditions, or privileges.”3  The
act’s legislative history contained a Statement of Managers, which suggested that the
practice of coordinating retiree health plans with Medicare was not prohibited.4  In Erie
County Retirees, however, the Third Circuit disregarded that evidence of congressional
intent when it ruled that providing inferior benefits to Medicare-eligible retirees than
younger retired workers may be illegal age discrimination.  It remanded the case for a
trial court determination of  whether the plan was saved by the equal-benefit or equal-cost
safe harbor provisions of the Older Workers Benefit Protection Act (OWBPA).5   
 In that case, a group of retirees who were over the age of 65 sued the County
claiming that their retiree health program was inferior to the program offered to younger
retirees. Designed to supplement Medicare benefits, older retirees were offered an HMO
plan that coordinated all  health care services  through a primary care physician.  The
county  provided former employees who were not Medicare-eligible with a “hybrid point
of service program “ that combined the features of an  HMO with a traditional indemnity
plan.  The district court granted partial summary judgment for the county, holding that the
ADEA was not intended to apply to retirees such as plaintiffs, who based  their age
discrimination claim on disparities in health coverage arising from Medicare eligibility.
CRS-3
6
 124 S.Ct 1236 (2004).
In its reversal, the Third Circuit found that age discrimination had occurred since the
medical benefits for older retirees were based solely on their eligibility for Medicare, and
“Medicare eligibility follow[s] ineluctably upon attaining age 65.”  
Reviewing the ADEA, the Third Circuit concluded that an age-based disparity in
retiree health benefits is only lawful if the program falls within a “safe harbor” established
by  the “equal benefit/equal cost” standard.  Both the legislative history of OWBPA and
the “plain language” of the safe harbor provision indicated Congress’ intent that the
section apply when an employer reduces health benefits on the basis of Medicare
eligibility.  In other words, the County of Erie could only prevail if it established that the
benefits offered to Medicare-eligible retirees were equal to those provided to younger
retirees or that its costs for providing benefits to the two groups were equal.  The Third
Circuit remanded the case back to the trial court for further determination.  The trial court
ultimately found that the County’s plan was unlawful since 1) older retirees were required
to pay a greater percentage of their overall premium than were younger retirees; and 2)
younger retirees were given the option between HMO coverage or indemnity coverage,
while older retirees could only elect HMO coverage.  For these reasons, the trial court
concluded that older retirees were provided inferior benefits in violation of ADEA.
A significant aspect of the Erie County case was the Third Circuit finding  that
retirees are entitled to sue under the ADEA even though they are no longer “employees.”
An associated claim that retirees had been treated less favorably than active employees
was withdrawn prior to appeal and went unaddressed by the Third Circuit opinion, but
could arise in some future controversy.   In particular, the relative legal status of the two
groups could be important if an employer were to decide, for cost-saving reasons, to
eliminate all medical benefits for retirees while retaining health care coverage for current
employees.  Emphasizing the “fair middle ground”struck by the equal cost or equal
benefit standard of the OWBPA, however, the Third Circuit was able to focus on the
problem as between the competing groups of retirees. 
 Note, also, that in General Dynamic Land System, Inc.  v. Cline,6 the U.S. Supreme
Court confronted  the obverse, but not unrelated,  issue of whether an employer may treat
older employees  more favorably than younger protected class employees without running
afoul of the ADEA. Prior to July 1, 1997, General Dynamics had been obligated by a
collective bargaining agreement to provide full health benefits to employees who retired
after 30 years of service. Under the terms of a new agreement, only employees who were
age 50 or older on that date were eligible for retiree health benefits.  A group of
employees between the ages of 40 and 50 sued General Dynamics, alleging that the
company had discriminated against them in violation of the ADEA.  The district court
dismissed the case, holding that the ADEA does not prohibit an employer from
discriminating against employees in the protected class (i.e. aged  40 and over) who are
younger than the favored employees.  The Sixth Circuit, however,  found that the ADEA
prohibited discrimination against any individual in the protected class on the basis of age,
not just the relatively older, and upheld younger workers right to sue for alleged denial of
retiree health benefits.
CRS-4
7
 See 68 Fed. Reg. 42542 - 41549 (7-14-03).
In a 6 to 3 decision, the Supreme Court reversed the Sixth Circuit.  It found that the text,
structure, purpose and history of the ADEA revealed that it was enacted “as a remedy for
unfair preference based on relative youth,” and that it does not prohibit an employer from
favoring an older employee over a younger one.  In the process, the Court rejected as
“clearly wrong” the  EEOC regulatory position that a decision between hiring two
individuals within the protected class has to be made on the basis of a factor other than
age.  The Court thus appears to approve of “grandfathering” older workers, by treating
them more favorably, when reforming benefits packages for age protected employees.  It
did not, however, consider the lawfulness of providing differential benefits that
disadvantage relatively older workers,  as addressed in the Erie County case and the
EEOC final regulations.
The EEOC had filed an amicus curiae brief advocating the position adopted by the
Third Circuit  in Erie County, which the agency then incorporated in its “Compliance
Manual” as part of its national enforcement policy on the ADEA.  But in August 2001,
after consulting various labor and employer groups, EEOC rescinded its policy regarding
employer-sponsored retiree health plans, announcing  that it would study the issue further.
The EEOC study demonstrated a considerable decline in the number of employers
providing retiree health benefits in the decade preceding, due to higher health care
coverage costs, the number of employees nearing retirement age, and changes in
accounting rules for retiree health benefits.7  In addition, it found that “concern about the
potential application of the ADEA to employer-sponsored retiree health benefits is
adversely affecting the continued provision of this important retirement benefit.”  Because
“it is not possible to apply the equal benefit/equal cost test, or a variant of that rule, to the
rapidly changing landscape of retiree health case,” the study concluded, a reversal of
policy was  required in the “public interest” to protect retiree health coverage as a
valuable benefit to older individuals.
The EEOC Proposed Final Rule.
The proposed  final rule amends EEOC regulations under the ADEA to exempt from
its prohibitions the alteration, reduction or elimination of employer-sponsored retiree
health benefits when retirees become eligible for Medicare or other comparable state
retiree health benefits.  The authority cited in the preamble is § 9 of the ADEA which
permits EEOC to “establish such reasonable exemptions to and from any or all provision
of [the act] as it may find necessary and proper in the public interest.”  EEOC notes that
employers are not legally obligated to provide any retiree health benefits and argues that
the safe harbor provisions of the OWBPA have become unworkable given the broad
diversity of employer health plan options currently available  Consequently, the
exemption is deemed  “necessary and proper” as an incentive to employers not to
eliminate all retiree health benefits, or to reduce the benefits of younger retirees to equal
those provided to their Medicare-eligible counterparts. 
The proposed final regulations also include an appendix with questions and answers
that provide the following specific guidance.
CRS-5
8
 Slip opinion No. 05-CV-509 (E.D. Pa. 3-30-05), available at http://www.american benefits
council.org/documents/aarp_v_eeoc_decision.pdf.
! The exemption does not mean that the ADEA does not apply to retirees,
or that all forms of retiree health coverage are exempted.  Only the
specific practice of coordinating retiree health benefits with Medicare or
a comparable state health plan is exempted from ADEA.
! Employers may offer “Medicare carve out plans” under which Medicare
is primary and the employer plan secondary for retirees, but not active
employees.
! The exemption also applies to dependent and/or spousal health benefits
included as part of retirees’ benefits, although these may be altered,
reduced or eliminated even when the retirees’ are not.
! Medicare eligibility (or eligibility under a similar state health plan) or the
age of such eligibility may not be used as a basis for any other act,
practice, or decision regarding retirees.
! The exemption does not apply to active employees over the age of
Medicare (or state health plan) eligibility.
The proposed final rule has been the focus of an interagency review process since
late April, 2004, and will become effective only if approved by the Office of Management
and Budget in accordance with Executive Order 12866 and published in the Federal
Register.  Meanwhile, implementation of the proposed final rule was delayed by a federal
district court in Philadelphia which held, on March 30, 2005, that the rule directly
conflicted with the Third Circuit decision in the Erie County case. In AARP v. EEOC,8
Judge Brody issued a permanent injunction against enforcing the rule, finding that it “is
contrary to congressional intent and the plain language of the Age Discrimination in
Employment Act.” The EEOC, according to Judge Brody, 
has the power to issue rules, regulations and exemptions within . . . explicit or implicit
gaps that Congress left in the ADEA.  In the case of the challenged exemption,
however, the Third Circuit held that Congress did not allow for ambiguity with regard
to the applicability of the ADEA to retiree health benefits. 
In other words, the court found that the EEOC was interpreting too broadly its powers to
create exemptions to the ADEA.
In an EEOC press release, the Chair of the Commission responded to Judge Brody’s
order, in part, as follows:
The federal District Court in Philadelphia issued an order today that will delay the
effective date of the EEOC rule that is designed to protect retirees’ health benefits.
I note that the Court characterized as ‘persuasive’ the EEOC’s argument that, without
this exemption, employers will reduce or eliminate health benefits for all retirees.
However, the Court found that the EEOC did not have the authority to issue such a
rule under the Age Discrimination in Employment Act.
CRS-6
9
 Press Release,”EEOC Seeks To Appeal Court Order on Retiree Health Benefits Rule,” March
30, 2005, available at http://www.eeoc.gov/press/3-30-05.html.
The EEOC plans to ask the Justice Department to appeal the District Court’s decision
to the Third Circuit Court of Appeals.  The agency remains confident on both policy
and legal bases in its authority to implement the rule.  We are also confident that the
Court of Appeals will correct the District Court’s misunderstanding of the EEOC’s
authority under the ADEA and allow the rule to go into effect.9
Conclusion.
In the final analysis, therefore,  implementation of EEOC’s retiree health benefits
rule  depends on a judicial determination of the scope of the rarely invoked, congressional
delegation of  ADEA exemption authority  to the EEOC.  The Third Circuit, and
ultimately the U.S. Supreme Court, may  be called upon to decide that issue, and until
then, administrative implementation of the proposed final rule appears to be suspended
indefinitely.


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Final Equal Employment Opportunity Commission Rules on Retiree Health Plans and the Age Discrimination in Employment Act

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