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The law of unintended consequences is alive and well. It is best exemplified by the current state of the law (at least in the 3d U.S. Circuit Court of Appeals) governing employer-provided retiree medical benefits. A federal law originally aimed at protecting the job rights of older workers has been turned on its head. Recent court decisions interpreting this law may result in the elimination of retiree medical benefit plans as we know them. No law compels an employer to provide retiree medical benefits, but once retiree medical benefits are offered, an employer must comply with various laws. Different laws regulate whether an employer can change its retiree medical benefit offering, or whether, if business is bad, retiree benefits can be terminated. Just 31 years ago, life was simpler-there were no federal laws regulating retiree medical benefits, and the cost of providing these benefits was reasonable. Things changed. On the legal side, Congress, reacting to a series of employer abuses that wiped out the retirement benefits of thousands of workers, enacted the Employee Retirement Income Security Act (ERISA). Its primary purpose was “to prescribe a uniform set of requirements for employers in the voluntary delivery of such benefits.” 120 Cong. Rec. S29942 (1974) (Statement of Senator Jacob Javits). Additional federal laws were soon added to the mix, including the Consolidated Omnibus Budget Reconciliation Act, the Health Insurance Portability and Accountability Act and others that directly affect the operation and design of employer-provided medical benefits. As the years passed, medicine improved and so did life expectancies. Unfortunately, the mathematics of longer-living retirees and more expensive medicine has generated medical costs that are ravaging many employers’ budgets. Further complicating the law of retiree medical benefits is “employment law creep.” For 30 years, the Age Discrimination in Employment Act of 1967 (ADEA), 29 U.S.C. 621 et seq., was understood to be an employment discrimination law. It was not thought to regulate retiree medical benefits because it did not address employee benefits. In 1989, the U.S. Supreme Court ruled that the ADEA did not prohibit discrimination in employee benefits. Public Employees Retirement System of Ohio v. Betts, 492 U.S. 158 (1989). However, in response to that ruling, Congress passed the Older Workers Benefit Protection Act of 1990 (OWBPA), which amended the ADEA to include employee benefits. 29 U.S.C. 621, 623, 626, 629, 630. Most employee benefit lawyers continued to believe that life after OWBPA would not be very different. One thing seemed certain: Employer-provided retiree medical benefits would not be affected because OWBPA’s legislative history indicated that the prior employer practices of eliminating, reducing or altering retiree medical benefits would remain lawful. Final Substitute: Statement of Managers, 136 Cong. Rec. S25353 (09/24/90); 136 Cong. Rec. H27062 (10/02/90). It turns out that this analysis was wrong. As judges like to point out, lawyers are often confused by the words used in statutes. Our confusion about whether the ADEA applies to retiree medical benefits is justifiable because the ADEA states that its purpose is to protect the wages, hours and working conditions of older workers. The words “retiree” or “retiree medical benefits” are not used. Instead, according to the ADEA, any worker who is age 40 or older is subject to its protection. 29 U.S.C. 631(a) (2000). The OWBPA amendments to the ADEA prohibit employers from providing fewer or less valuable employee benefits to older workers because of age. Background to ‘Erie County’ In 1997, Erie County, Pa., tried to control its rapidly rising medical-plan costs by changing the benefits it offered under its retiree medical plan. Erie County’s retiree medical plan (prior to 1997) provided all retirees with the same health benefits regardless of their Medicare-eligibility status. The new plan divided the benefits by placing Medicare-eligible retirees in a health maintenance organization (HMO) plan that coordinated its benefit payments with Medicare, and by placing the younger retirees in a hybrid point-of-service plan. The benefits received by the non-Medicare retirees were better than the combined benefits provided by Medicare and the HMO to the Medicare-eligible retirees. In 1999, six Medicare-eligible retirees (the “Erie County Six”) sued, claiming that Erie County’s actions violated the ADEA by providing them with inferior medical benefits because of their age. The Erie County Six eventually won. A federal district judge in Erie, Pa., first ruled in favor of the county, saying retiree medical plans are not regulated by the ADEA. 91 F. Supp. 2d 860 (W.D. Pa. 1999). However, the 3d Circuit reversed. Erie County Retirees Ass’n v. County of Erie, 220 F.3d 193 (3d Cir. 2000). In parsing the words of the ADEA statute, the 3d Circuit found that its basic provision, � 4(a), prohibits age discrimination “against any individual” with respect to the terms, conditions or privileges of employment. With that, the court concluded it was constrained to apply the words of the statute. Thus, the court held that the ADEA applies to retirees and to retiree medical plans, and that Erie County’s retiree medical plan violated the ADEA, unless Erie County could meet either the equal-benefit or the equal-cost safe harbor tests under the ADEA. On remand, the district court found that Erie County’s retiree medical plan did not meet the tests. 140 F. Supp. 2d 466, 477 (W.D. Pa. 2001). Generally, the rules require a plan either to incur equal or greater costs in providing benefits to older workers, or to provide equal or greater benefits to older workers, when comparing either the costs or benefits to those provided for younger workers. Erie County eventually decided to reduce its benefits for all retirees. The federal government first embraced but later shunned the Erie County decision. The Equal Employment Opportunity Commission (EEOC) in October 2000 issued an enforcement policy adopting the 3d Circuit’s 2000 ruling. However, a firestorm of criticism ensued. Employers, employees and labor groups came to the conclusion that instead of protecting retiree medical benefits, the 3d Circuit ruling and EEOC policy would would have the effect of reducing health coverage for retirees. In response to these comments, the EEOC rescinded its policy in August 2001 and announced that it was forming a task force to study the issue. In July 2003, as a result of the task force’s recommendations, the EEOC proposed to create a regulatory exception to the ADEA. This would permit employers to offer retiree medical benefits as before. It would be lawful to provide better benefits for non-Medicare eligible retirees and lesser benefits for older Medicare eligible retirees. In April 2004, the EEOC formally approved the proposed rule. AARP’s recent challenge On Feb. 4, 2005, the AARP (formerly the American Association of Retired Persons) challenged the proposed EEOC rule in federal court. On March 30, U.S. District Judge Anita B. Brody in Philadelphia concluded that she was bound by the 3d Circuit’s precedent in Erie County. She explained: “The Third Circuit has already decided that Congress intended for the provisions of the ADEA to apply when an employer reduces health benefits based on Medicare eligibility. An administrative agency, including the EEOC, may not issue regulations, rules or exemptions that go against the intent of Congress.” The EEOC was ordered not to exempt employers from the ADEA provisions making it unlawful to provide lesser benefits to retirees who are Medicare-eligible. 383 F. Supp. 2d 705 (E.D. Pa. March 30, 2005). The EEOC timely filed a notice of appeal on May 31. Less than a month later, the Supreme Court in National Cable and Telecommunications Association v. Brand X Internet Services, 125 S. Ct. 2688 (2005), granted federal government agencies more discretion to interpret their governing statutes than was previously thought. The following day, Brody convened a conference call to invite the Erie County parties to address the effect of the Brand X ruling on her decision. Two days later, on June 30, the EEOC moved for relief from judgment pursuant to Fed. R. Civ. P. 60(b). The 3d Circuit remanded the case on July 13 to the district court to consider the EEOC’s motion for relief. In Brand X, the Supreme Court explained: “Only a judicial precedent holding that the statute unambiguously forecloses the agency’s interpretation, and therefore contains no gap for the agency to fill, displaces a conflicting agency construction.” 125 S. Ct. at 2700. In its brief to the district court, the EEOC argued that although the 3d Circuit decided in Erie County that coordination of retiree medical benefits with Medicare eligibility constitutes age discrimination, the 3d Circuit did not consider whether 29 U.S.C. 628 allows the EEOC to issue a regulation exempting that practice. According to the EEOC, the 3d Circuit’s Erie County decision in no way impedes the district court’s consideration of the EEOC’s newly promulgated regulation and deferring to it. AARP, of course, has argued the EEOC has it exactly wrong. From its point of view, the EEOC missed the central point of the 3d Circuit’s Erie County decision. For AARP, the words of the statute are not ambiguous because it is clear from the face of the ADEA that Congress intended for the law’s prohibitions against age discrimination to apply to the practice of reducing retiree health benefits when retirees become eligible for Medicare. Because the circuit court has ruled that the language of the statute is clear, the EEOC’s contrary interpretation is foreclosed under Brand X. On Sept. 27, Brody reversed her Feb. 4 order, explaining: “ Brand X held that a court’s interpretation of a statute only bars an agency from interpreting that statute differently from the court if the court has determined the only permissible meaning of the statute. See Brand X, 125 S. Ct. at 2701. Because the Third Circuit’s Erie County decision did not determine the only permissible meaning of the relevant provisions of the ADEA, under Brand X, I am not bound by Erie County in reviewing the EEOC’s regulation.” AARP v. Equal Employment Opportunity Commission, No. 05-CV-509, 2005 WL 2373863, (E.D. Pa. Sept. 27, 2005), at 3 (emphasis in original). State of limbo So here we are, six years after the original Erie County district court decision, in limbo about the effect (or noneffect) of the ADEA on retiree medical benefits. Employers with retirees within the 3d Circuit as well as those elsewhere should exercise caution, knowing that if the district court’s recent decision is upheld, other courts will likely be asked to decide whether the ADEA applies to retiree medical benefits, and, if so, whether the EEOC’s exemptive rule is valid. Employers should carefully review any retiree medical plans to determine whether there is potential exposure; consult with counsel to review the retiree medical plan and better assess the plan’s legal position; and consider whether it makes sense to immediately amend retiree medical plans to incorporate the EEOC’s new exemptive rule or wait for further court developments. This cautionary tale does not end here. For employers that decide to reduce retiree medical benefits, the threshold question remains: “Can the plan be changed?” This one simple question has launched the careers of a thousand lawyers. Retiree medical plan sponsors need to understand what they can and what they cannot do. Getting it wrong can have its own unintended consequences. James P. Baker is a partner in the San Francisco office of Jones Day whose work emphasizes defending plan sponsors and plan fiduciaries in complex employee benefits litigation and class actions.

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