Guest Article

(From the March 31, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Supreme Court Ends AARP Challenge to EEOC's ADEA Exemption for Retiree Medical Benefits

It has been a long time coming, but the U.S. Supreme Court finally has brought to an end the longrunning legal and political saga involving the ability of employers to coordinate their retiree medical plans with Medicare eligibility. Without elaboration or explanation, the Court on March 24, 2008 announced it would not review the AARP's challenge to an Age Discrimination in Employment Act (ADEA) exemption for such arrangements promulgated by the Equal Employment Opportunity Commission (EEOC). The EEOC's ADEA exemption took effect on December 26, 2007.

Summary of the EEOC's Final Exemption

The ADEA exemption applies to retiree medical benefits 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." According to the preamble to the final regulation, "A comparable state health benefits program refers to plans that were created to provide primary health benefits for state and local government employees who were not covered by Medicare and that, like Medicare, base eligibility on age."

The exemption is narrow. For example, it does not provide ADEA relief for employers that attempt to coordinate any other employment-related benefits with Medicare eligibility. Additionally, it does not apply to health benefits for active employees. These employees are protected by the Medicare Secondary Payer Act, which specifically prohibits employers from providing different health benefits to active employees who are Medicare eligible.

History of the Controversy

The EEOC initially proposed the exemption in 2003 in response to the Third Circuit Court of Appeals' decision in Erie County Retiree Association v. County of Erie, 220 F.3d 193 (3d Cir. 2000). In Erie County, the Third Circuit ruled ADEA § 4 prohibits employers from reducing or terminating retiree medical benefits at Medicare eligibility. There is an "equal benefit or equal cost" defense to violations of this rule, but it usually is of little help in these situations. The employer is providing fewer (and usually less expensive) benefits to Medicare-eligible retirees by design because they have access to Medicare.

The Third Circuit Court of Appeals' decision was consistent with the EEOC's interpretation of the ADEA, and the EEOC subsequently initiated a series of related enforcement actions. However, the EEOC then announced it was formally reconsidering its position due to concerns that employers might react simply by eliminating retiree medical benefits for all retirees. This process culminated in the summer of 2003, with EEOC's proposed ADEA exemption for "altering, reducing or eliminating employer-sponsored retiree health benefits when retirees become eligible for Medicare or a Statesponsored retiree health benefits program." The EEOC issued the proposed exemption pursuant to ADEA § 9, which specifically gives EEOC authority to issue "reasonable" exemptions that are "necessary and proper in the public interest."

The AARP sued to stop EEOC from issuing the proposed exemption in final form. The AARP asserted the EEOC did not have the authority to issue the exemption, and that the exemption would be against the public interest because it would clear the way for employers that currently provide equal benefits to all retirees to reduce benefits for Medicare-eligible retirees.

The EEOC, backed by an unusual alliance of business groups and labor unions, countered that the exemption is "reasonable" and "in the public interest" because it prevents employers from having to reduce retiree medical benefits for pre-Medicare eligible retirees, or eliminate retiree medical benefits for all retirees, in order to comply with the ADEA.

A federal district court initially sided with the AARP, and permanently enjoined EEOC from implementing the proposed exemption. However, a subsequent Supreme Court decision in an unrelated case prompted the district court to reconsider and ultimately rule EEOC does have the authority to issue the exemption.

The AARP appealed, but a three-judge panel of the Third Circuit Court of Appeals upheld the district court's decision. When the full Third Circuit denied the AARP's request for rehearing, the district court lifted its injunction. That cleared the way for EEOC to issue the final exemption, which it did on December 26, 2007. However, until now the fate of the exemption was in question as the Supreme Court debated whether to hear AARP's final appeal.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.