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EEOC Issues Final Rule Permitting Coordination of Retiree Health Plans with Medicare

In a move welcomed by many employers and labor unions, the Equal Employment Opportunity Commission (EEOC), the federal agency responsible for administering the Age Discrimination in Employment Act ("ADEA"), issued a final rule, effective December 26, 2007, that exempts from ADEA protection the common employer practice of coordinating retiree health benefits with eligibility for Medicare (see 29 CFR § 1625.32). Under the new rule, employers are free to reduce or eliminate retiree health benefits when retirees become eligible for Medicare (or a comparable state-sponsored health benefit), without any ADEA liability.

Unintended Consequence of the ADEA. The ADEA prohibits discrimination against employees age 40 or older in hiring and firing, in compensation, and in the terms, conditions and privileges of employment. Because Medicare eligibility is based on age, some have argued to the EEOC and the courts (sometimes successfully) that reducing or eliminating retiree health benefits based on Medicare eligibility results in age discrimination under the ADEA. A wide range of stakeholders, including labor unions and public and private employers, expressed concern to the EEOC that such ADEA considerations creates an additional incentive for employers to reduce or eliminate retiree health benefits. As a result of this concern, the EEOC concluded the public interest is best served by exempting the employer practice of coordinating retiree health benefits with Medicare from ADEA protection.

Narrow Exemption. The retiree health plan exemption from the ADEA is very narrow. In an Appendix to the new rule, the EEOC specifically states that the exemption does not mean that the ADEA no longer applies to retirees or to current employees age 65 or older (see Appendix to § 1625.32, Q&A-2, Q&A-7). The exemption applies only to coordinating retiree health benefits (including spousal and dependent coverage) with Medicare or a comparable state health benefit program (see Appendix to § 1625.32, Q&A-4, Q&A-5).

Supreme Court Petition Pending. Employers never had much concern about the applicability of the ADEA to coordinating retiree health benefits with Medicare until a 2000 decision by the U.S. Court of Appeals in Philadelphia (Erie County Retirees Association v. County of Erie) surprisingly held that the ADEA requires employers to assure that pre- and post-Medicare eligible retirees receive health benefits of equal type and value. In response to the turmoil created by this unexpected Third Circuit appeals court decision, the EEOC in 2004 approved the ADEA exemption for retiree health benefits for the first time. However, the EEOC was enjoined from issuing a final rule pending litigation by the American Association of Retired Persons based, in part, on the argument that the EEOC did not have authority to issue the exemption. The injunction barring the final rule was lifted after the EEOC prevailed with the district court and the Third Circuit, both courts finding that the EEOC was authorized to issue the regulation. The AARP's challenge continued, but the Third Circuit denied the AARP's request to rehear the case en banc, and the Supreme Court denied the AARP's request to stay the Third Circuit ruling. However, the AARP's petition for the Supreme Court to review the case, filed on November 20, 2007, is still pending.

Related Links
EEOC Final Rule and Appendix [88 KB] Q & A About EEOC's Retiree Health Rule [50 KB]