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Guest Article

(From the January 14, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Supreme Court Examines Whether State's Retirement System Violates Age Discrimination Act

In a case being closely watched because it may potentially require the restructuring of state and local retirement plans, the U.S. Supreme Court is reviewing a 6th Circuit Court of Appeals decision which held that the state's retirement system violated the Age Discrimination in Employment Act because it provided disability benefits only to participants who had not yet reached normal retirement eligibility, and based the amount of the disability benefit on the participant's years of service imputed to normal retirement date. ____________ v. Equal Employment Opportunity Commission, U.S. S.Ct. No. 06-1037.

Potential Impact

Although this case involves a challenge to a single state's retirement system, the Supreme Court's decision could affect numerous other state and local government retirement plans. Several entities have filed amicus briefs in support of the state. If the 6th Circuit decision is upheld, it may force certain states to change the provisions of their statutes, and in some cases their state constitutions, to comply. Petitioner's counsel noted in oral argument before the Supreme Court, "All the people who run these plans, who fund these plans, who are in these plans, are all lined up on [the state's] side of the table."

Disability Benefit Features Alleged to Violate the ADEA

The state provides normal retirement benefits to public employees who are 55 years of age with 5 years of service, or who have 20 years of service. The normal retirement benefit equals 2.5 percent of the employee's final compensation times years of service. The state also provides a disability-retirement benefit to employees who become disabled before they reach their normal retirement date. The same formula applies, but the state increases the employee's years of service to what they would have been at normal retirement date. /1/ The rationale for the imputed service is to provide the employee with the years of service he or she presumably would have earned had there been no disability. The stated purpose of the disability-retirement benefit is to protect disabled employees who are not already eligible for retirement by providing a third route to retirement eligibility.

Brief Case History

A sheriff became disabled in 1995 at age 61 with 17 years of service. He was denied disability benefits because he was already eligible for a normal retirement benefit (i.e., he became eligible for normal retirement at age 55 since at that age he had by then completed 5 years of service).

The sheriff filed a claim with the Equal Employment Opportunity Commission ("EEOC") alleging age discrimination, and the EEOC filed suit after concluding that the state's retirement system ("RS") violated the Age Discrimination in Employment Act ("ADEA"). The District Court for the Western District of Kentucky held that the EEOC failed to state a prima facie violation of the ADEA. The U.S. Court of Appeals for the 6th Circuit affirmed the decision. In a rehearing en banc, however, the 6th Circuit Court of Appeals reversed its ruling. Finding that the RS was facially discriminatory on the basis of age, the court held that a prima facie violation of the ADEA had been established. The US Supreme court granted certiorari to review the decision.

Argument of the EEOC

The EEOC argued that the RS violated the ADEA because:

It discriminates on the basis of age in both the eligibility for disability retirement benefits and the calculation of those benefits. Benefits paid to older disabled workers will often be lower, and will never be higher, than the benefits paid to similarly situated younger employees.
- For example, if a 60-year old worker with 15 years of service becomes disabled, the worker is ineligible for disability benefits and the normal retirement benefit is calculated using his actual years of service. By contrast, if a 50-year old worker with the same length of service becomes disabled, his retirement benefits are not calculated on his actual 15 years of service. Rather, the RS will impute an additional 5 years of service and will calculate the benefit as though he had served for 20 years. Under this scheme, disability retirement benefits will often be greater than normal retirement benefits for employees who have the same years of service (but less than 20 years) and the same final compensation.
The state's rationale for excluding workers over age 55 from the disability retirement program (i.e., because they are already eligible for a normal retirement benefit) is a patently inadequate justification for refusing to impute additional service years to older disabled workers. /2/
Because the RS employs explicit age-based criteria that disadvantages older workers, it is facially discriminatory and violates ADEA (unless a cost-justification defense can be provided).
The discriminatory feature of the RS is that younger workers have their benefits calculated using a formula that is more generous than one used for older workers.
EEOC is entitled to deference in light of the consistency of its position with published regulations that Congress expressly incorporated by reference into the Older Workers Benefit Protection Act, and with EEOC guidance that specifically addresses imputed service in disability retirement benefits.
- Published regulations provide that the test for compliance is whether "an employer under an employee benefit plan provides the same level of benefits to older workers as to younger workers." The EEOC Compliance Manual explicitly provides that disability retirement benefits that are calculated by imputing years of service to normal retirement date violate the ADEA unless the employer can demonstrate a cost justification.

Argument of the State

The state argued that no violation of the ADEA occurred because:

The RS is not facially discriminatory. It does not discriminate against older employees because of age, but rather differentiates on the basis of eligibility for a normal retirement benefit.
Since the RS is not facially discriminatory, the EEOC's claim is one of disparate treatment under the ADEA. The EEOC can not prevail on such a claim by showing merely that some older disabled employees may not fare as well as some younger ones.
The factors that dictate an employee's eligibility for disability retirement and the amount of the benefit are described in the state's statute: (1) whether the employee is eligible for normal retirement, (2) if not eligible, how far the employee is from being eligible, and (3) how long the employee has already worked. Sometimes there will be a correlation between age and the result of that inquiry, but that is not the same as saying that the benefits are granted or denied "because of ... age."
The eligibility for disability retirement benefits is organized around eligibility for retirement, not age. It is perfectly legal to base retirement eligibility on age, and it is legal to base eligibility for disability benefits on whether an employee already has a retirement safety net. Therefore, it can not be discriminatory to allow age to play a role in determining the eligibility for disability benefits. In fact, the RS correlation between eligibility for retirement benefits and ineligibility for disability benefits is a ubiquitous feature of benefits law. Insurers sell disability policies with a set term by which coverage expires once the employee becomes eligible for normal retirement. Similarly, under the Social Security Act, once a worker becomes eligible for federal old-age benefits the worker is no longer eligible for Social Security disability benefits.
The calculation of disability retirement benefits is structured to get the employee to a normal retirement milestone in the shortest time possible. The imputed service fills the gap created by a disabling event that cuts the employee's working life short. It is incorrect to say that an employee is awarded an enhanced benefit "for no reason other than ...age." The design, by which years of service are imputed, favors the worker who needs the most time to reach normal retirement, since that is the person with the biggest need for a safety net. Sometimes the worker is younger and sometimes older. Sometimes the gap is filled most quickly by age plus service (i.e., by imputing service sufficient to satisfy the age 55 and 5 years requirement), sometimes by service alone (i.e., by imputing service to satisfy the 20 year requirement), but it is never age alone that determines the outcome.

/1/ In response to this case, the state no longer makes this disability benefit available to employees who are hired after 2004, but instead provides a disability benefit that is lower and more certain.

/2/ EEOC asserts that the RS could satisfy the ADEA by making older workers eligible for the disability retirement and imputing additional years of service on an age-neutral basis, or by calculating disability benefits for younger workers on the basis of actual years of service.

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.

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