EEOC allows Employers to Coordinate Retiree Plans with Medicare

January 2, 2008

The EEOC issued final regulations that create a specific exemption from the Age discrimination laws (ADEA) allowing employers to coordinate (meaning alter, reduce or eliminate) health benefits for retirees who become eligible for Medicare. The EEOC regulations describe the exemption as follows:

Some employee benefit plans provide health benefits for retired participants that are altered, reduced or eliminated when the participant is eligible for Medicare health benefits or for health benefits under a comparable State health benefit plan, whether or not the participant actually enrolls in the other benefit program. Pursuant to the authority contained in section 9 of the Act and in accordance with the procedures provided therein and in Sec. 1625.30(b) of this part, it is hereby found necessary and proper in the public interest to exempt from all prohibitions of the Act such coordination of retiree health benefits with Medicare or a comparable State health benefit plan.

According to the NY Times, 10 million retirees rely on employer-sponsored health plans as their primary source of coverage or as a supplement to Medicare. With the rising cost of healthcare, many employers were considering the elimination of retiree benefits. The motivation for employers to eliminate retiree health coverage was greatly increased following a ruling by the Third Circuit Court of Appeals in 2000. In its decision in Erie County Retirees Association v. County of Erie, the Court held that the ADEA required that health benefits offered to Medicare-eligible retirees must be the same, or have the same cost to the employer, as benefits offered to employees under age 65. The ruling prohibited an employer from taking into account Medicare coverage in providing health benefits to retirees. Employers scrambled to justify plan designs that almost universally coordinated with Medicare.

In 2004, the EEOC issued proposed regulations that created an exemption in response to the Erie County decision. The American Association of Retired Persons (AARP) filed suit and won an injunction barring the EEOC from implementing the exemption. On appeal, the same Third Circuit Court of Appeals that decided Erie County ruled that the EEOC had properly issued the exemption under its authority in the ADEA. AARP has sought an appeal to the US Supreme Court.

The EEOC exemption gives employers an important cost control option in designing retiree health benefit programs. Barring an unexpected ruling by the U.S. Supreme Court, the uncertainty created in this area should subside.