X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
A recent rule change promulgated by the Equal Employment Opportunity Commission, [FOOTNOTE 1]offers needed relief to employers who provide retiree health benefit plans that are coordinated with a retiree’s eligibility for Medicare or a comparable state health benefits program. The new regulations, announced on April 22, 2004, will permit employers to create, maintain, adopt, or amend a wider range of retiree health benefit plans without violating the Age Discrimination in Employment Act of 1967. [FOOTNOTE 2] Employer-sponsored retiree benefit plans such as Medicare bridge plans, Medicare wrap-around, or Medicare carve-out plans are examples of the kind of plans that are affected. Typically, these plans offer health insurance benefits to retirees who are not yet old enough to qualify for Medicare coverage but then offer scaled-back benefits once the retirees are old enough for Medicare, generally upon reaching age 65. Under the old rules, compliance with the provisions of the Employment Act required employer-sponsored retiree benefit plans to satisfy the “equal benefit or equal cost” standard when providing health insurance benefits to retirees not yet eligible for Medicare, and to retirees who are eligible for Medicare. Demonstrating compliance with the equal benefit or equal cost standard often requires complex and costly actuarial calculations involving multiple subjective and objective variables. Partly because of the increased costs of compliance and the risk of liability from non-compliance, many employers [FOOTNOTE 3]have terminated existing plans or simply chosen not to sponsor them in the first place. [FOOTNOTE 4]Employers are not legally required to offer retiree health benefit plans, and many do not. The new rules reflect the EEOC’s recognition that the former rules created a further disincentive for employers in providing additional, and, often much needed, health insurance coverage to retirees. BACKGROUND The announcement comes at a welcome time as many companies are in the process of reviewing their benefit plans in light of recent changes in Medicare legislation. The new regulations, which become effective on the day of publication in the Federal Register (we understand they are expected to be published before the end of the summer), will take the form of amendments to 29 CFR parts 1625 and 1627. This article reviews the background of the pertinent law and highlights the key features and possible pitfalls in implementing the new rules. Originally, the Age Discrimination in Employment Act provided that it was not a violation of the Act to follow the terms of a benefit plan so long as the particular benefit plan was not deemed a “subterfuge to evade the purposes” of the law. [FOOTNOTE 5]Up until 1989, the prevailing approach in determining whether or not a benefit plan was a “subterfuge” was to apply the equal benefit or equal cost standard promulgated by the EEOC 29 CFR �1625.10. This standard compelled employers to provide either equal benefits to older workers and younger workers alike, or incur equal costs if older workers were offered lesser benefits. If the benefit plan in question met the standard, it was not deemed a subterfuge and, hence, not in violation of the Act. The equal benefit or equal cost approach prevailed until Public Employees Retirement System of Ohio v. Betts, 492 US 158 (1989), when the U.S. Supreme Court took a very different approach and rejected the equal benefit or equal cost principle. Instead, the Court interpreted the Age Discrimination in Employment Act as providing a safe harbor “so long as a benefit plan is not a method of discriminating in other, non-fringe-benefit aspects of the employment relationship.” Betts, 492 US at 177. Moreover, the Court put the burden of proof on the employee to show that an age-based discriminatory plan violating the Act was intentionally created for “the purpose of discriminating in a non-fringe-benefit aspect of the employment relation.” Id.at 181. The Bettsholding provided a much more expansive safe harbor for employers in providing benefit plans with disparate treatment based on differences in age. Within a year of the holding, Congress overruled Bettsby passing the Older Workers Benefit Protection Act in 1990, which amended various provisions of the Age Discrimination in Employment Act [FOOTNOTE 6]by codifying the equal benefit or equal cost standard and also shifting the burden of proof back to employers to demonstrate compliance. In passing the Older Workers Benefit Protection Act, Congress did not expressly refer to “retirees,” using the terms “older worker,” and “younger worker,” instead. [FOOTNOTE 7]This language left the door open for Erie County Retirees Ass’n v. County of Erie, Pennsylvania, 220 F3d 193 (3d Cir 2000), the case that directly precipitated the recent rule change. 3RD CIRCUIT RULING In Erie County Retirees Ass’n, Medicare-eligible retirees brought a class action against the County of Erie, Pennsylvania alleging the County violated the Age Discrimination in Employment Act by providing older retirees with inferior health insurance coverage as compared to County retirees who were younger and not yet eligible for Medicare. Further, the plaintiffs alleged the County incurred less expense in providing benefits to older retirees than to younger retirees. [FOOTNOTE 8]The County contended the disparate treatment was not age-based but justified by cost considerations as well as limitations offered by its health plan vendor. Despite finding a prima facie case of age-based discrimination in the contested plans, the district court below granted the County summary judgment after it concluded, sua sponte, that the language of the Act, with its explicit use of the terms older and younger workers and the absence of the term “retiree,” showed Congress’s intent to limit the scope of the Age Discrimination in Employment Act to active employees, and not to retirees. See Erie County Retirees Ass’n v. County of Erie, 91 FSupp 2d 860, 868-80 (WD Pa 1999). In effect, the district court viewed retirees, as a class, as falling outside the provisions of the Act. On appeal, the 3rd U.S. Circuit Court of Appeals reversed and remanded, finding no distinction in the Act between retirees and active employees with respect to the benefit plans. The appellate court held the County’s benefit plans violated the Act unless it could, on remand, demonstrate satisfaction of the equal benefit or equal cost standard. Erie County Retirees Ass’n, 220 F3d at 217. Before the 3rd Circuit’s ruling, many employers had assumed that coordinating retiree health benefit plans with Medicare eligibility was lawful under the Act. This, of course, all changed after Erie County Retirees Ass’n, when the EEOC adopted the ruling in its national enforcement policy. Shortly after implementing the ruling, the EEOC began receiving feedback from private and public sector organizations, as well as organized labor, that the policy was encouraging employers to reduce, or eliminate altogether, employer-sponsored retiree health benefits. In response, the EEOC revisited its policy in this area and issued a Notice of Proposed Rulemaking in July 2003, where it invited public comment and first proposed the narrow exemption from the Age Discrimination in Employment Act that is embodied in the new regulations. THE NEW REGULATIONS The substantive part of the new regulations takes the form of an amendment to Subpart C of 29 CFR �1625, adding �1625.32. Minor revisions relating to record-keeping and posting of notices will also be made to 29 CFR �1627. The new �1625.32(b) provides: Exemption. 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 … [I]t 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. The new regulation gives employers the freedom to reduce or even terminate health benefit plans when retirees become eligible for Medicare without running aground of the Age Discrimination in Employment Act. This additional flexibility permits employers, for example, to provide health insurance benefits solely to those retirees not yet old enough to be Medicare-eligible, or to provide supplemental coverage to retirees not yet Medicare-eligible without the need to satisfy the equal cost or equal benefit standard with respect to retirees who are Medicare-eligible. The new rules also allow employers to take advantage of the tax-free subsidy for certain employer-provided retiree health benefits created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, without the need to compare whether the prescription drug benefits they provide to their Medicare-eligible retirees are identical to those offered to younger Medicare-ineligible retirees. NARROW SCOPE While the new regulations are undoubtedly more flexible than the current regime, the scope of the new regulations shall be narrowly construed. The recent changes shall apply only to retiree health insurance plans that are coordinated with Medicare or a comparable state health benefits program. The new rules do not apply to other health benefit programs, such as Medicaid; nor do the new rules affect any other provisions of the Age Discrimination in Employment Act that affect retirees in any other area not concerned expressly with retiree health benefits. The EEOC’s intent to limit the scope of the new regulations is evident in the plain language of the amendments to 29 CFR �1625. �1625.32(c) provides: Scope of Exemption. This exemption shall be narrowly construed. No other aspects of ADEA [Age Discrimination in Employment Act] coverage or employment benefits other than those specified in paragraph (b) of this section are affected by the exemption. Thus, for example, the exemption does not apply to the use of eligibility for Medicare or a comparable State health benefit plan in connection with any act, practice or benefit of employment not specified in paragraph (b) of this section. Nor does it apply to the use of the age of eligibility for Medicare or a comparable State health benefit plan in connection with any act, practice or benefit of employment not specified in paragraph (b) of this section. Despite its narrow scope, the new regulations will apply to existing as well as new retiree health benefit plans. Under the new rules, employers have the green light to make amendments or changes to existing plans including those retiree benefit plans that provide health benefits for dependents and spouses. While many employers will be able to amend existing plans or create new retiree health benefit plans under the new rules, others should proceed with caution before making changes. This applies especially to those with existing plans as well as those who are subject to collective bargaining agreements. Before implementing any changes or creating new retiree health benefit packages, employers should determine whether or not their existing plans contain the necessary “reservation of rights” permitting them to make changes to existing benefit plans. Some employers may find that, despite the new freedom entailed in the new rules, they may, nevertheless, be constrained because of prior agreements that did not adequately reserve their rights to make changes to their retiree health benefit plans. Similarly, employers providing retiree health benefits pursuant to collective bargaining agreements may be prohibited from implementing any change in benefit plans without further negotiation and agreement. CONCLUSION While the new regulations may not reverse the recent trend of reduced or terminated retiree health benefits, the new rules are a welcome step in the right direction and may act to stem the tide, particularly in light of steadily increasing health care costs experienced over the past several years. Donald P. Carleen is a partner and chairs the executive compensation and employee benefits group at Fried, Frank, Harris, Shriver & Jacobson ( www.ffhsj.com ). Gordon Eng, a summer associate with the firm, assisted in the preparation of this article. If you are interested in submitting an article to law.com, please click here for our submission guidelines. ::::FOOTNOTES:::: FN1EEOC notice 6570-01P, “Age Discrimination in Employment Act; Retiree Health Benefits,” available at http://www.eeoc.gov/policy/regs/retiree_benefits/retiree_benefits.html (last modified April 26, 2004). FN2The Act prohibits covered employers from discriminating against an employee or job applicant who is at least 40 years old. 29 USC ��623, 631. FN3The Age Discrimination in Employment Act applies to all employers with at least 20 employees. 29 USC �630(b). FN4U.S. General Accounting Office, “Retiree Health Benefits: Employer-Sponsored Benefits May Be Vulnerable to Further Erosion,” GAO Doc. No. GAO-01-374 ( May 2001). FN5�4(f)(2), codified in 29 USC �623(f)(2), provided a safe harbor for employers “to observe the terms of … any bona fide employee benefit plan such as a retirement, pension, or insurance plan, which is not a subterfuge to evade the purposes of ” the Age Discrimination in Employment Act. FN6�103 of the Act deleted the “subterfuge” language in �4(f)(2) of the Age Discrimination in Employment Act and replaced it with the current provision providing for the equal benefit or equal cost standard. �103(1) of Older Workers Benefit Protection Act, codified at 29 USC �623(f)(2) also shifted the burden of proof back to the employer. FN7�4(f)(2) of the Age Discrimination in Employment Act, as amended by Older Workers Benefit Protection Act, and promulgated by the EEOC at 29 C.F.R. �1625.10 provides: “A benefit plan will be considered in compliance with the statute where the actual amount of payment made, or cost incurred, in behalf of an older worker is equal to that made or incurred in behalf of a younger worker, even though the older worker may thereby receive a lesser amount of benefits or insurance coverage.” 29 CFR �1625.10(a)(1). FN8At the time of the action, the County provided Medicare-eligible retirees health insurance benefits through a qualified health maintenance organization (HMO), which required retirees to choose from a pre-existing list of primary care physicians (PCP) within the geographical coverage area. The plan covered only services provided or specifically authorized by the PCP. Medicare-eligible retirees were also required to continue paying their Medicare premiums at their own expense. Younger retirees, not yet eligible for Medicare, were offered a hybrid plan that allowed them to choose, for any health care incident, between a traditional indemnity health insurance plan or the HMO plan offered to the older retirees. Erie County Retirees Ass’n, 220 F3d 196-98.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.