April 28, 2005

EEOC Rule Allowing Coordination of Retiree Health Benefits
with Medicare Permanently Enjoined

On March 30, 2005, a federal judge in the Eastern District of Pennsylvania permanently enjoined the Equal Employment Opportunity Commission ("EEOC") from issuing a rule permitting employers to reduce health benefits when a retiree becomes eligible for Medicare without violating the Age Discrimination in Employment Act ("ADEA").  AARP v. EEOC, No. 2:05-cv-00509 (E.D. Pa. March 30, 2005).  Promoting the interests of its business members, the National Chamber Litigation Center ("NCLC") joined in filing an amicus brief urging the court to allow the EEOC rule to become final.  The decision, if upheld on appeal, could result in difficult choices for employers, and many retirees could lose their employer-provided health care coverage.

The EEOC proposed the rule to counteract unintended consequences from a Third Circuit decision that altered the landscape surrounding the ADEA and retiree health benefits.  In Erie County Retirees Ass'n v. County of Erie, 220 F.3d 193 (3d Cir. 2000), to the surprise of many practitioners, the Third Circuit held that Congress intended for the ADEA's prohibitions against age discrimination to apply to the practice of reducing retiree health benefits when retirees become eligible for Medicare.  At that time, the EEOC agreed with the Erie County decision and adopted it as its national enforcement policy.  However, recognizing that the Erie County decision was discouraging employers from providing any retiree health benefits, the EEOC proposed a rule in July 2003 to exempt the coordination of retiree health benefit plans with Medicare from the prohibitions of the ADEA.  The EEOC approved the rule in April 2004 and scheduled the rule for publication in the Federal Register.  On February 4, 2005, shortly before the rule was expected to be published, the American Association of Retired Persons ("AARP") filed suit in federal court in the Eastern District of Pennsylvania - where the Erie County decision is controlling - in an effort to prevent the EEOC from publishing the rule.

On March 30, the district court ruled in favor of the AARP, permanently enjoining the EEOC "from publishing or otherwise implementing the regulation at issue."  The court found that the EEOC did not have the authority to promulgate such a rule, because the proposed rule violated congressional intent "as expressed in the plain language of the ADEA and as interpreted by the U.S. Court of Appeals for the Third Circuit."  In rejecting the EEOC's argument that it had the power to issue the rule because it was "reasonable" and "necessary and proper in the public interest," the court closely followed what it saw as the precedent established by the Third Circuit in Erie County, and congressional intent.

The district court's reliance on the Erie County decision was misplaced, however, because that decision did not address the EEOC's authority to issue an exemption.  Rather, the Erie County decision interpreted the ADEA as prohibiting the coordination of retiree health benefits with Medicare eligibility unless the equal benefit or equal cost rule is satisfied.  The EEOC did not dispute that decision in the recent district court case.  Instead, the EEOC argued that it had the authority to issue an exemption under Section 9 of the ADEA.  In Section 9, Congress expressly authorized the EEOC to "establish such reasonable exemptions to and from any or all provisions of [the ADEA] as it may find necessary and proper in the public interest."  The EEOC's decision to establish an exemption for the practice of coordinating retiree health benefits with Medicare eligibility was reasonable, and in fact necessary, to ensure that ADEA-based concerns do not cause more employers to reduce or eliminate health benefits for retirees, which would not be in the public interest.

Given the rapidly escalating costs of health care, this decision, if affirmed on appeal, leaves employers with few options other than to restructure and reduce the health benefits provided to retirees.  An employer can comply with this decision only by: (1) increasing health benefits for retirees over the age of 65; (2) reducing health benefits for retirees under the age of 65; (3) limiting the duration of health benefits to a specified number of years regardless of age; or (4) terminating health benefits for all retirees.  In light of the ever-increasing cost pressures on employers and rising healthcare costs, the EEOC properly recognized that few employers would choose to raise the benefit levels for post-65 retirees but rather would reduce or eliminate health benefits. 

The EEOC has said it plans to appeal the ruling to the Third Circuit.  NCLC will continue to monitor this case, and make you aware of any significant developments.

In a related development, Steven D. Spencer, a partner at Morgan, Lewis & Bockius in the firm's Philadelphia office whose practice focuses on advising single-employer and multi-employer benefit plans, testified on these issues today before the before the Subcommittee on Employer-Employee Relations of the Committee on Education and the Workforce of the United States House of Representatives.  Mr. Spencer testified on behalf of the United States Chamber of Commerce.

For further information, please contact Steven D. Spencer (215.963.5714) or Terra E. Castaldi (202.739.5101) at Morgan, Lewis & Bockius LLP, or Robert Costagliola (202.463.5337) of the National Chamber Litigation Center.