After protracted litigation, the Third U.S. Circuit Court of Appeals has finally upheld regulations issued by the Equal Employment Opportunity Commission (“EEOC”) allowing employers to reduce, change, or even eliminate retiree health coverage when retirees become eligible for Medicare. Unless this decision is reversed by the U.S. Supreme Court (which seems unlikely), employers who coordinate, terminate, or charge different premiums for retiree health coverage upon a retiree’s Medicare eligibility should be able to retain such practices without fear of violating the Age Discrimination in Employment Act (“ADEA”).
This decision, in AARP v. EEOC, actually traces its roots to a decision issued by the same court in 2000. In that decision, Erie County Retirees Association v. County of Erie, the Third Circuit held that the ADEA requires plan sponsors to ensure that pre- and post-Medicare eligible retirees receive health benefits of equal type and value. The Erie County court first held that “retirees” are protected by the ADEA even though the employment relationship has ended. It then concluded that Medicare eligibility is a direct “proxy for age” and is thus an “age-based distinction” under the ADEA. Thus, a health plan presumptively violated the ADEA when it made benefit distinctions based upon a retiree’s eligibility for Medicare.
In response to the Erie County decision, the EEOC proposed regulations that would exempt from the prohibitions of the ADEA provisions in employer health plans coordinating retiree health coverage with Medicare benefits. The regulations were prompted by the EEOC’s concern that some employers would simply terminate all retiree health coverage rather than provide the same level of coverage to both younger and older retirees. The AARP subsequently challenged the proposed regulations in court. The trial court ruled that the EEOC’s proposed regulations were invalid, issuing an injunction barring the EEOC from publishing or otherwise implementing those regulations.
In upholding the EEOC’s authority to issue the regulations, the Third Circuit held that the ADEA clearly authorizes the EEOC to grant exemptions under the statute, so long as the exemptions are “reasonable” and “necessary and proper in the public interest.” The court held that the proposed regulations exempting Medicare coordination from the prohibitions of the ADEA were a reasonable, necessary and proper exercise of the EEOC’s authority, because over time the regulations would likely benefit all retirees. The ruling also lifted the lower court’s injunction, freeing the EEOC to finalize its regulations.
This decision is good news for employers offering retiree health coverage that is modified or eliminated upon a retiree’s eligibility for Medicare. While the decision is law in only the Third Circuit, the court’s decision and the issuance of the final EEOC regulations are likely to make any future ADEA challenges to Medicare coordination considerably more difficult.