EEOC Final Rule will Allow Coordination of Retiree Medical Plans with Medicare Eligibility

In late April, the EEOC approved an amendment of its regulations to state that benefits under a retiree health plan can be reduced or eliminated when the retiree becomes eligible for Medicare or comparable state-sponsored health programs without violating the Age Discrimination in Employment Act (ADEA). Thus, the EEOC's regulations will now explicitly permit such common employer practices as only allowing retirees to continue on the employer's medical plan until age 65, or reducing benefits under the employer's plan when the retiree reaches age 65. Such changes are permitted by the new regulation without regard to whether the retiree actually enrolls in Medicare upon becoming eligible for it.

The new EEOC rule will not become final until it is approved by the Office of Management and Budget and published in the Federal Register, which is expected to occur relatively soon. For background on this issue, see our July, 2002 Benefits Alert.

The origin of the controversy that led to the new regulation was the Third Circuit's decision several years ago in Erie County Retirees Association v. County of Erie. The Court held in that case that an employer would violate the ADEA if it reduced or eliminated retiree health benefits when retirees became eligible for Medicare, unless the employer could show that the benefits available to Medicare-eligible retirees were equivalent to the benefits provided to retirees not yet eligible for Medicare, or that it was expending the same costs for both groups of retirees. Following this decision, employer groups and others warned that the consequence of the ruling would likely be that employers would cut back or eliminate their retiree health programs altogether, rather than extending full retiree benefits to persons eligible for Medicare.

The EEOC reacted to these concerns first by unanimously rescinding an old EEOC enforcement policy that took the same position as the Third Circuit, and then by proposing the new regulations. The new regulations have received public support from unions, teacher's organizations, and state and local governments, as well as from employers. The principal opposition has come from AARP, which threatened litigation to challenge the regulation. However, the new regulation is an exercise of the EEOC's exemption granting authority under the ADEA, rather than an interpretation of the law. It therefore appears that it will likely be difficult for plaintiffs to challenge the rule successfully in court.

To our knowledge, few employers actually changed their retiree medical plans in response to the Erie County decision. Most decided to wait and see how the courts and the EEOC would ultimately resolve the issue. Thus, the new regulations will not likely produce a need to amend most plans. It is important to note, however, that the EEOC has only created a narrow exemption that allows retiree medical plans to be coordinated with Medicare without violating the ADEA. The new rule does not otherwise affect an employer's ability to offer health coverage or other benefits to retirees.