Employers Should Take Care in Designing Early Retirement Incentive Programs

It is not uncommon for employers to offer early retirement incentive programs encouraging eligible employees to retire sooner than they otherwise might. A recent decision by the Eighth Circuit Court of Appeals serves as a useful reminder that such programs need to be carefully designed so that they do not violate the Age Discrimination in Employment Act (the "ADEA"). Offending programs can expose an employer to claims for substantial damages and attorneys' fees.

In Jankovitz v. Des Moines Independent Community School District, 421 F.3d 649 (8th Cir. 2005), a school district's early retirement incentive program paid cash to teachers who retired after age 55 and prior to age 65. The plaintiff filed a lawsuit alleging that the program violated the ADEA because it denied benefits to retirees 65 and older. The school district argued that its program fell within a safe harbor that permits "a voluntary early retirement incentive plan consistent with the relevant purpose or purposes of [the ADEA]." In rejecting that argument, the Eighth Circuit held that the school district's early retirement plan fell outside the safe harbor, because one of the principal goals of the ADEA was to prohibit arbitrary age-based distinctions such as the school district's age 65 cutoff. The ADEA generally does not permit employers to deny benefits based on assumptions about the age at which an older employee "should" retire.

Does Jankovitz mean all early retirement incentive programs are illegal? No, far from it. It is possible to design such programs in ways that do not violate the ADEA, such as by conditioning benefits on years of service, by eliminating maximum age caps, or by taking advantage of one of the other safe harbors available under the ADEA (e.g., the safe harbor that permits an employer to offer subsidized early retirement benefits under a defined benefit pension plan). The message from Jankovitz is that any early retirement incentive that uses age as a criterion needs to be examined with care to assure that it is consistent with the ADEA (and with similar state antidiscrimination laws in the case of benefits not subject to ERISA), and that maximum age limits on eligibility for benefits will be particularly suspect.