Third Circuit Blesses EEOC Regulation Allowing Employers to Coordinate Retiree Medical Benefits With Medicare

We have devoted several previous Benefits Alerts to the ongoing saga of whether coordinating retiree medical programs with Medicare violates the Age Discrimination in Employment Act (ADEA). A recent decision by the U.S. Court of Appeals for the Third Circuit should represent the final chapter in that saga, and the good news for employers is that the Third Circuit's decision blesses an Equal Employment Opportunity Commission (EEOC) regulation allowing such coordination.

The saga started with the Third Circuit's controversial decision in Erie County Retirees Association v. County of Erie, 220 F.3d 193 (3d Cir. 2000). In that case, an employer provided medical benefits to its retirees, but those benefits were reduced when a retiree reached age 65 and began receiving medical benefits through Medicare. That is a very common plan design. The Third Circuit held that this constituted age discrimination because the employer was providing less generous benefits to older retirees on account of their age.

While one can debate whether the Third Circuit's decision was correct, it is clear that it did not do much to benefit retirees age 65 or older. The employer in the Erie County case, for example, simply lowered the benefits provided to the retirees younger than 65, rather than raising the benefits provided to the Medicare-eligible retirees. Other employers did the same, or stopped providing retiree medical benefits entirely, since those benefits generally are not vested and generally can be modified or eliminated as the employer sees fit.

The EEOC recognized that the Erie County decision was having unintended negative effects on retirees as a whole. Using its authority to provide exemptions to the ADEA that are necessary and in the public interest, the EEOC issued a proposed regulation that would allow "the practice of altering, reducing or eliminating employer-sponsored retiree health benefits when retirees become eligible for Medicare or a State-sponsored retiree health benefits program."

The American Association of Retired Persons (AARP) challenged the EEOC's authority to issue the exemption. A federal district court in Pennsylvania initially sided with AARP and struck down the regulation as invalid. The district court then reconsidered, however, and concluded that the regulation was within the scope of the EEOC's rulemaking authority. The case went up to the Third Circuit Court of Appeals (the same circuit that had decided the original Erie County case). In a long-awaited decision, the Third Circuit recently agreed that the EEOC has authority to issue the proposed exemption.

The EEOC can now issue the regulation in final form, which ought to bring the saga to a close. While AARP could attempt an appeal to the U.S. Supreme Court, it seems unlikely that the Supreme Court would agree to hear the case.