With the ever-increasing cost of health insurance, it has become less and less common for employers to offer coverage to employees after they retire. The employers that do offer and maintain health insurance coverage to retirees have not had the benefit of clear guidance as to whether they can reduce the level of coverage offered once retiree participants become eligible for Medicare. While some employers nevertheless proceeded in implementing Medicare carve-out plans, which coordinate benefits to supplement Medicare, they were vulnerable to allegations of age discrimination made by retiree participants.
The Equal Employment Opportunity Commission (EEOC) issued proposed regulations approximately four years ago in response to the decision of the Third Circuit Court of Appeals in Erie County Retirees Association v. County of Erie. In its decision, the Third Circuit had determined that the Age Discrimination in Employment Act (ADEA) required that health benefits offered to all retiree participants had to be the same, or cost employers the same, for all retiree participants regardless of eligibility for Medicare. For once, organized labor, employer groups and health care plan sponsors were all in agreement that complying with the ruling of the Third Circuit would force employers and unions to reduce or eliminate retiree health benefits.
In order to prevent the reduction or entire elimination of retiree health benefits offered by employers, the EEOC promulgated proposed regulations in 2004 providing an exemption to the ADEA offering protection to those employers that reduced benefits to retiree participants based on Medicare eligibility from attacks alleging age discrimination. However, the American Association of Retired Persons (AARP) filed suit in federal court attempting to stop the proposed rule from taking effect. In 2005, the federal district court granted AARP a preliminary injunction barring the EEOC from implementing the rule. On appeal, the Third Circuit ruled in June 2007 that the EEOC had the authority to issue the rule and the injunction was lifted. The EEOC's final rule became effective December 26, 2007. The exemption, which is to be narrowly construed, states as follows:
Some employee benefit plans provide health benefits for retired participants that are altered, reduced or eliminated when the participant is eligible for Medicare health benefits or for health benefits under a comparable State health benefit plan, whether or not the participant actually enrolls in the other benefit program . . . it is hereby found necessary and proper in the public interest to exempt from all prohibitions of the Act such coordination of retiree health benefits with Medicare or a comparable State health benefit plan.
It is important to note that the exemption does not apply to health benefits offered to current employees. It only applies to health benefits offered to retired employees. Pursuant to laws governing Medicare, employers must offer current employees, who are at or over the age of eligibility for Medicare, the same health benefits under the same conditions that it offers to other employees.
The EEOC's final regulation permits employers to take advantage of the wide range of available health plan designs for retirees; coordinating coverage with Medicare without violating the ADEA. Employers should re-evaluate current company retiree benefits to determine whether they can take advantage of the cost savings now available due to the EEOC's new regulation.
