AARP v. EEOC and the Future
of Employer-Sponsored Retiree Health Plans

A Federal district court in Pennsylvania recently sided with the AARP (formerly, the American Association of Retired Persons) in its challenge to a final Equal Opportunity Employment Commission (EEOC) rule governing an employer’s ability to provide retiree health benefits. The case, AARP v. EEOC, involves the requirements of the Age Discrimination in Employment Act (ADEA). At issue is the extent to which the EEOC is free to suspend certain ADEA requirements where it determines that strict enforcement is likely to result in a net reduction in benefits to a protected class of older workers.

This client advisory explains the background of a dispute that pits against one another a government agency and a private senior advocacy group--both with similar constituencies and goals. Where they differ is on the question of whether the EEOC has the power under the ADEA to exempt certain retiree medical plan designs from the ADEA, or whether only Congress can do so. The EEOC rule in issue would allow employers to suspend or substantially reduce retiree health benefits to Medicare-eligible retirees.

Although no law requires employers to provide retiree health benefits, many do as a way to attract and retain good employees. Among employers who voluntarily extend group health insurance coverage to retirees, many take into account a retiree’s Medicare eligibility when designing their retiree health plans. For pre-age 65 retirees, the employer’s retiree group health plan typically provides comprehensive coverage until the retiree is eligible to enroll in Medicare. Once a retiree is Medicare-eligible, some employer plans will “wrap around” or supplement Medicare coverage. Other employers simply drop retiree medical coverage altogether since the retiree has access to coverage under Medicare.

For years, sponsors of retiree health plans that coordinate with Medicare (including private sector companies, unions, tax-exempt employers, and state and local governments) were unconcerned with the effect of the ADEA on plan design. They and their advisors took comfort in the legislative history of the Older Workers Benefits Protection Act (OWBPA). The OWBPA extended the ADEA’s reach to expressly include certain employee benefits. The impact of the OWBPA on retiree health benefits was debated at length, and its Congressional sponsors took pains in the legislative record to ensure that retiree health benefits could continue to freely coordinate with Medicare without running afoul of the ADEA.1

Enacted into law in 1967, the ADEA allowed plan sponsors to maintain any bona fide employee benefit plan that was not a subterfuge to evade the purposes of the act. It was the U.S. Department of Labor that was originally charged with issuing guidance. In 1978, it adopted a rule under which a plan that coordinated with Medicare was not a subterfuge if (i) the cost incurred by the employer for health benefits for retirees age 65 and older is equal to the cost incurred for benefits provided to retirees under age 65, or (ii) the total benefits (including those provided by Medicare) received by retirees age 65 and older are equal to the benefits received by retirees under age 65. This rule is referred to as the “equal cost/equal benefit rule.” Responsibility for administering the ADEA was transferred to the EEOC shortly thereafter. Only after protracted litigation did the EEOC adopt a final rule that included the equal cost/equal benefit rule. But in a 1989 case, Public Employees Retirement System of Ohio v. Betts, the Supreme Court invalidated the rule. Congress responded by enacting the OWBPA, which, among other things revived and codified the equal cost/equal benefit rule.

A case decided in 2000, Erie County Retirees Ass’n v. County of Erie, came as something of a shock to plan sponsors. In that case, the Court of Appeals for the Third Circuit held that an employer that coordinates its retiree health benefits with Medicare violates the ADEA if the employer provides lesser benefits to older Medicare-eligible retirees than to younger retirees. While the Court took note of the OWBPA legislative history, it could not square the legislative history with the terms of the statute as finally enacted by Congress.

The facts of the Erie County case are important to an understanding of how the court arrived at its decision. Erie County provided its under age-65 retirees with more generous coverage than their age 65 and over counterparts. The court held that the ADEA’s prohibition against age discrimination applied to the practice of reducing retiree health benefits when retirees become eligible for Medicare. Therefore, any such benefit reduction would have to satisfy the equal cost/equal benefit rule.

The retirees’ victory in Erie County turned out to be short-lived. Faced with the prospect of either increasing benefits for retirees age 65 and older or reducing benefits for the pre age-65 retirees, the employer chose the latter. It is the employer’s response that illustrates Erie County’s dilemma: when faced with a costly mandate, employers are likely to limit or drop retiree health coverage.

The EEOC originally embraced the decision in Erie County and adopted it as its official position. But in the face of substantial criticism, it relented. As a result of an EEOC enforcement effort, many employers cut back coverage. The EEOC concluded that it was in the best interests of both employers and employees to allow employers to coordinate with Medicare without being subject to the equal cost/equal benefit rule. In 2004, the EEOC issued a final rule exempting from the ADEA the practice of coordinating employer-provided retiree health coverage with eligibility for Medicare or a comparable state-sponsored health benefits program. The AARP thereupon sued to enjoin the enforcement of the rule.

AARP v. EEOC came before the court on cross motions for summary judgment. This means that were no disputed facts. All that the court was called upon to do was to interpret applicable law. The question posed to the court concerned the validity of the EEOC final rule. If the EEOC’s view was correct, then it has the power to issue a rule allowing employers to reduce or eliminate retiree health benefits when a retiree becomes eligible for Medicare without violating the ADEA. If the AARP’s view was correct, then the EEOC’s rule is contrary to the ADEA and cannot be enforced.

What is at stake for employers with retiree health plans can be best illustrated by an example: An employer wanting to adopt a retiree health plan may want to cover only pre-age 65 retirees on the theory that these individuals do not have access to Medicare. Under the EEOC rule that is the subject of the AARP’s lawsuit, this plan design is permitted. But if the EEOC’s rule is invalid, the employer could not cut off coverage at age 65. Instead the employer would need to continue providing benefits to retirees under the equal cost/equal benefit rule, which would pose the following challenges:

1. Equal Cost. Employers will generally be unable to demonstrate compliance with the equal cost prong of the equal cost/equal benefit rule. This is because the employer’s plan pays secondary to Medicare for retirees, so the cost to the employer for pre-age 65 retirees is in almost all cases substantially higher than for age 65 and older retirees.
   
2. Equal Benefit. Under this prong, the employer could take Medicare into account, but the plan that it offers to its age 65 and over retirees would, in combination with Medicare, have to provide the same benefits as the plan offered to pre-age 65 employees. A simple cutoff of benefits at age 65 would be impermissible.

At issue in AARP v. EEOC is Section 9 of the ADEA, which provides as follows:

“[T]he Equal Employment Opportunity Commission may issue such rules and regulations as it may consider necessary or appropriate for carrying out this chapter, and may establish such reasonable exemptions to and from any or all provisions of this chapter as it may find necessary and proper in the public interest.” (Emphasis added.)

The EEOC pointed to the italicized language above in support of its actions. It argued that Congress gave it the express authority to make exceptions to the ADEA. AARP saw the matter differently. In their view, the statutory purpose was so clear that no deviation was permitted. In siding with the AARP, the court cited the following three grounds for striking down the EEOC’s final rule:

1. The Third Circuit had already considered the matter (in Erie County) and determined that Congress intended for the provisions of the ADEA to apply when an employer reduces health benefits based on Medicare eligibility.
   
2. The ADEA provisions granting the EEOC the power to interpret the ADEA do not permit it to vary substantive provisions of law.
   
3. The power to grant exemptions under ADEA Section 9 is limited to those instances where Congress has left gaps in the law, which is not the case in this instance.

We find it difficult to square the court’s holding with the text of the statute. The court said that its holding was based on Erie County’s precedent, but the EEOC had not exercised its power under ADEA Section 9 to issue exemptions when Erie County was decided. ADEA Section 9 grants interpretive authority to the EEOC over the ADEA and confers on the EEOC the power to grant exemptions “to and from any and all provisions” of the ADEA. The court’s analysis seems to focus on the former and ignore the latter.

The AARP argued that the EEOC lacks the authority to rewrite the laws Congress has enacted. But Congress did confer on the EEOC the authority to issue exemptions from the law’s provisions--with some limits. ADEA Section 9 empowers the EEOC to “establish such reasonable exemptions [to the ADEA] as it may find necessary and proper in the public interest.” Therefore, an appellate court will need to determine (i) whether the exemption is reasonable, and (ii) whether the EEOC has properly ascertained that it is necessary and in the pubic interest. If the answer to either question is no, then the AARP is entitled to prevail. Otherwise, the rule should take effect.

For plan sponsors that maintain (or plan to adopt) retiree health arrangements that coordinate with Medicare, not much has changed. Those in the Third Circuit remain bound by Erie County, which imposes on them the equal cost/equal benefit requirement. All other plan sponsors have more latitude, but it’s not clear how much. While the EEOC is not likely to object, private plaintiffs may complain and perhaps prevail. The EEOC’s appeal is to the Third Circuit Court of Appeals--the same court that handed down Erie County. It’s anyone’s guess how they will see the matter. It is a safe bet, however, that if the Third Circuit sides with the AARP, the matter will end up in the Supreme Court.

1The Statement of Managers for the final substitute of the bill that became the OWBPA included the following passage: “Many employer-sponsored retiree medical plans provide medical coverage for retirees only until the retiree becomes eligible for Medicare. In many of these cases, where coverage is provided to retirees only until they attain Medicare eligibility, the value of the employer-provided retiree medical benefits exceeds the value of the retiree's Medicare benefits. Other employers provide medical coverage to retirees at a relatively high level until the retirees become eligible for Medicare and at a lower level thereafter. In many of these cases, the value of the medical benefits that the retiree receives before becoming eligible for Medicare exceeds the total value of the retiree's Medicare benefits and the medical benefits that the employer provides after the retiree attains Medicare eligibility. These practices are not prohibited by this substitute. Similarly, nothing in this substitute should be construed as authorizing a claim on behalf of a retiree on the basis that the actuarial value of employer-provided health benefits available to that retiree not yet eligible for Medicare is less than the actuarial value of the same benefits available to a younger retiree.” (Emphasis added).

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If you need assistance with the issues addressed in this Advisory, please contact Alden Bianchi, Peter Marathas, Tom Greene, or Charles Grace at 617.542.6000, or visit us on the web at www.mintz.com. We would be delighted to work with you.

Copyright © 2005 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

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