Employers Cannot (Yet) Offer Different Levels Of Benefits To Medicare Eligible Retirees

Employers are continually faced with ever-increasing healthcare costs. In an attempt to control these costs, many employers implemented retiree health benefit plans that reduced the level of benefits they provided to Medicare-eligible retirees. Labor unions responded favorably to such arrangements, recognizing that this approach was better than the alternative of discontinuing retiree health benefits altogether.

The United States Court of Appeals for the Third Circuit, in Erie County Retirees Ass'n v. County of Erie, 220 F.3d 193 (3d Cir. 2000), however, disagreed. The Erie County Court held that any arrangement which permits an employer to provide retirees 65 or older with health benefits inferior to those offered to retirees who are younger than 65 violates the ADEA. The Equal Employment Opportunity Commission ("EEOC"), recognizing that the Third Circuit's ruling would discourage employers from providing any retiree medical benefits whatsoever, or at least dramatically reduce the number of those willing to do so, subsequently proposed a regulation that created an exemption under the ADEA, attempting to legalize what the Third Circuit deemed unlawful. The EEOC argued that without this exemption, employers would follow the trend of reducing or eliminating health benefits for all retirees regardless of their age because of the increasing costs.

The proposed EEOC regulation was supported by labor unions and management alike.

The American Association of Retired Persons, ("AARP") however, did not support the proposed change and challenged the EEOC's regulation in federal court. On March 30, 2005, the United States District Court for the Eastern District of Pennsylvania, held that the EEOC's regulation violates the clear intent of Congress in passing and amending the Age Discrimination in Employment Act ("ADEA"). AARP v. EEOC, No. 05-cv-509, 2005 U.S. Dist. LEXIS 5078, (E.D. Pa. 2005). In so ruling, the Court struck down the EEOC's argument that it had the authority to promulgate the regulation it deemed "necessary and proper in the public interest."

What does this decision mean for employers? The Third Circuit's ruling in Erie County remains in effect and employers are prohibited from treating retirees differently based upon their age. The EEOC plans to appeal the Court's decision in AARP because the ADEA specifically authorizes the EEOC to approve exemptions to the law in certain rare instances, like this one, in which application of the law is contrary to the public interest. Employers must wait and see what, if anything, the Courts do with the EEOC's proposed exemption. In the meantime, employers should review their retiree health benefit plans to determine whether their arrangements fall within the confines of Erie County.