July 18, 2007

The Third Circuit Court of Appeals has issued a much anticipated opinion that supports the ability of employers to reduce or eliminate the health benefits payable to retirees who qualify for Medicare. In AARP v. EEOC, the court ruled that the Equal Employment Opportunity Commission may lawfully issue an exemption to the Age Discrimination in Employment Act that allows retiree health benefit plans to coordinate with Medicare or comparable state-sponsored health benefit programs.

The road leading to this decision began with the Third Circuit’s decision in Erie County Retirees Ass’n v. County of Erie. In that case, the court ruled that a retiree health benefits plan impermissibly discriminates against older workers under the ADEA unless the benefits it provides to Medicare-eligible retirees meet the EEOC’s equal benefits or equal cost test. Under that test, the benefits provided to Medicare-eligible retirees (or the cost borne by the employer in providing those benefits) must be on par with the benefits (or related employer cost) for retirees who have not yet qualified for Medicare.

The EEOC initially supported the ruling in Erie, but soon faced an outcry from both employers and unions who recognized the difficulties that their plans would have in meeting the equal benefits/equal cost test. After a lengthy reexamination, the EEOC determined that enforcement of this requirement would not result in an increase in benefits for retirees who are eligible for Medicare, but would, conversely, cause a decrease or termination in coverage for many pre-Medicare retirees, as employers seek cost-effective ways of providing nondiscriminatory benefits in an environment of spiraling medical inflation.

As a result of its investigation, the EEOC proposed to issue an exemption from the ADEA. The exemption allowed retiree health plans to alter, reduce or eliminate benefits for participants who are eligible for Medicare without violating the ADEA. However, before the EEOC finalized the regulation, the AARP brought suit seeking an injunction against the issuance of a final rule.

Ultimately, the trial court ruled that the EEOC could exempt retiree health plans from ADEA requirements with respect to the coordination of benefits with Medicare, but the court maintained an injunction against the EEOC that prevented it from issuing a final exemption, pending appeal.

The Third Circuit Court of Appeals has now affirmed the trial court’s decision and lifted the injunction. The Third Circuit observed that the ADEA grants the EEOC express authority to issue reasonable exemptions from ADEA requirements when it finds the exemption to be “necessary and proper in the public interest.” The EEOC’s process in formulating the exemption was central to the court’s ruling. Specifically, the court found that the EEOC’s exemption was based on specific and reasonable findings and the EEOC crafted the exemption narrowly to prevent an overall loss in retiree health coverage that would have been adverse to the public interest.

Comments. The Erie decision has cast a lingering shadow over retiree health plans for almost seven years. Although the AARP decision does not overturn Erie, it offers relief from the most direct and controversial of Erie’s consequences. With the lifting of the injunction, the EEOC may now finalize the exemption that allows employers to coordinate retiree health coverage with Medicare. Employers who have made plan design changes to conform with Erie or who have held off making changes because of Erie’s constraints may soon have the legal authority to act. The controversy may not yet be over. It remains to be seen whether the AARP will seek review by the United States Supreme Court.