Benefits in the Balance

Published April 1, 2005

A federal judge began hearing arguments in February over federal rules regarding employer-provided health coverage for retirees before and after their Medicare eligibility.

The hearing before Judge Anita Brody of the U.S. District Court for the Eastern District of Pennsylvania may have implications well beyond Philadelphia.

At issue in the oral arguments ordered by Brody were benefits offered by employers for retirees up to and after their eligibility for Medicare coverage, the continued existence of these employer-provided benefits (already in sharp decline), and other topics.

AARP Injunction Blocks Change

The judge’s decision to hear arguments was prompted by an injunction won in February by AARP to prevent implementation of rules developed by the U.S. Equal Employment Opportunity Commission (EEOC) which, plaintiffs charged, would undermine “the fundamental purposes that inspired the ADEA [Age Discrimination in Employment Act].”

In defending its rules, the EEOC said the ADEA provides for a “narrow exemption” for employers to coordinate their retiree health benefits with Medicare or a similar state program.

Employer-sponsored health benefits provide a critical source of security and peace of mind for older workers, especially those who retire before they become eligible for Medicare at age 65, when their health may be at its most vulnerable and expensive. Even older retirees rely on the benefits of their former employers to meet medical costs not covered by Medicare.

Employers Hesitant to Cover

Employers are under no legal obligation to provide health benefits to retirees, and many do not do so. A May 2001 study by the U.S. General Accounting Office (GAO), the investigatory arm of Congress, found about one-third of large employers, and about 10 percent of small employers, provided such coverage in 2000. Two decades earlier, about 70 percent of all employers provided their retirees with health benefits.

GAO also discovered employers “have reduced the terms of coverage by tightening eligibility requirements, increasing the share of premiums retirees pay for health benefits, or increasing co-payments and deductibles–thus contributing to a gradual erosion of benefits.”

Rising health care costs, growing numbers of workers nearing retirement, and government-mandated changes in the methodology employers must use in calculating the future costs of their retirees’ health coverage have contributed to the erosion identified by GAO.

“Bridge” Coverage Complicated, Expensive

In August 2000, a federal appellate court first held that an employer could provide benefits to retirees as a “bridge to Medicare,” then terminate or alter those benefits when the retiree turned 65 and became eligible for Medicare coverage.

That court case was brought by a group of Erie County, Pennsylvania Medicare-eligible retirees (age 65 and older) who sued their former employer. They argued the health benefits provided to them were less than those provided to retirees under 65 (and not yet Medicare-eligible), and hence they were being subjected to discrimination as defined under ADEA.

The court found that actions by the defendant, Erie County, violated ADEA.

The employer would have to demonstrate, the court held, that the benefits offered to Medicare-eligible retirees were equivalent to those provided to retirees not yet eligible for Medicare, or that it was paying the same cost for benefits for both groups of retirees.

Two months later the EEOC adopted the court’s equivalency test.

Outcry Was Widespread

In a strikingly unusual demonstration of common purpose, the EEOC’s action prompted an outcry from benefits experts, labor unions, employers, and state and local governments, who said it would provide additional incentives to weaken retiree health coverage.

Because of the complexity in having to prove their health benefits for early retirees were the same as those available to Medicare beneficiaries, or that they were spending the same amount of money on both groups, employers tended to drop their retiree health benefits entirely or reduce coverage for those not yet 65.

In either case, critics said, younger retirees would be without health coverage until they became eligible for Medicare.

EEOC Proposed Exemption

The EEOC’s conundrum was that its continued reliance on the appellate court’s decision could lead to what it and ADEA were supposed to prevent: age discrimination in employment.

To meet concerns that circumstances could prompt ADEA to “turn” on those it was designed to protect, by serving as a legal incentive for employers to eliminate or reduce retiree health benefits, the EEOC in July 2003 proposed a narrow regulatory exemption from ADEA’s prohibitions against employer practices of coordinating retiree benefits with eligibility for Medicare or a comparable state health benefits program.

It was at this point, with a final rule scheduled for implementation in late April 2005, that AARP sought, and won, an injunction delaying the effective date of the rule–thus the February date for oral arguments before Brody.

Change Would Create Flexibility

The EEOC’s challenged rule provides employers and labor unions the option of offering retiree benefits or plans designed to incorporate Medicare or a comparable state program without violating ADEA.

As examples, the EEOC said its rule would allow employers and unions to provide retiree benefits only for those not yet eligible for Medicare; or a retiree benefit could supplement Medicare coverage if the employer shows the coverage is identical to that provided to retirees under age 65.

The final rule would permit employers to use a tax-free subsidy for employer-provided retiree benefits under the Medicare Modernization Act without having to compare whether the prescription drug benefits for Medicare-eligible retirees are identical to those offered early retirees.

EEOC’s Reforms Stymied

In a document analyzing the impact of its proposed retiree benefit rule, the EEOC said it “has determined that its prior policy created an incentive for employers to reduce or eliminate retiree health benefits, [and] has concluded the public interest is best served by an ADEA policy that permits employers greater flexibility to offer these valuable benefits.”

“The final rule,” the EEOC said, “is not intended to encourage employers to eliminate any retiree health benefits they may currently provide.”

In its request for the injunction, AARP said the rule exceeded the EEOC’s authority. “We took this action to protect our members and all retirees from losing their rights under the age discrimination laws,” said David Certner, AARP’s director of federal affairs.

“This would have put millions of retirees at great risk for losing their retiree coverage.”

Brody was scheduled to hear arguments from EEOC and AARP throughout March and is expected to rule in April.

Tom Bruderle ([email protected]) is vice president of congressional affairs for the National Association of Health Underwriters.

For more information …

More information on the EEOC’s proposed rule on retiree benefits is available online at

More information on AARP’s opposition to the rule is available online at

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