The law of unintended consequences is alive and well. The unanticipated effects of well-intentioned federal legislation later turned on its head by judicial interpretation are exemplified by the current state of the law (at least in the Third Circuit) governing employer-provided retiree medical plans. A series of recent court decisions examining a federal law aimed at protecting older workers may result in the elimination of retiree medical benefit plans as we know them.

Providing retiree medical benefits remains a voluntary choice for American employers. No law compels an employer to provide these benefits. However, once this choice has been made, the laws regulating employer-provided retiree medical benefits become complicated. Whether an employer can change its retiree medical benefit offering, or terminate it, is a question that now consumes large portions of the time and energy of many lawyers and judges. Just 31 years ago, life was simpler—there were no federal laws regulating retiree medical benefits, and the cost of providing these benefits was very reasonable. Things changed. On the legal side, Congress, reacting to a series of employer abuses that wiped out the pension benefits of thousands of workers, enacted the Employee Retirement Income Security Act ("ERISA"). Its primary purpose was "to prescribe a uniform set of requirements for employers in the voluntary delivery of such benefits." Statement of Sen. Javitz, 120 Congressional Record S29, 942. Congress did not stop its regulation of employee benefit plans with the passage of ERISA. Additional federal laws were added to the mix, including COBRA, HIPAA, and others that directly affect the operation and design of employer-provided medical benefits. On the cost side, casual readers of any business publication know that medical costs now eat up significant portions of many employers’ budgets.

For at least 30 years, employment discrimination laws like the Age Discrimination in Employment Act of 1967 ("ADEA") were viewed as not directly regulating retiree medical benefits. 29 U.S.C. § 621, et seq. The ADEA was not thought to regulate employee benefits because it did not address employee benefits. In 1989, the Supreme Court confirmed this view when it ruled that the ADEA did not prohibit discrimination in employee benefits. Public Employees Retirement System of Ohio v. Betts, 492 U.S. 158, 109 S. Ct. 256 (1989). In response to the Supreme Court’s decision, Congress passed the Older Workers Benefit Protection Act of 1990 ("OWBPA"), which amended the ADEA to include employee benefits. 29 U.S.C. § 621, 623, 626, 629, 630. When the ADEA was amended by OWBPA, most employee benefit lawyers continued to believe that the OWBPA did not affect employer-provided retiree medical benefits because the legislative history indicated that the practice of eliminating, reducing, or altering retiree medical benefits with Medicare eligibility was to remain lawful. Final substitute: Statement of Managers, 136 Cong. Rec. S25353 (09/24/90); 136 Cong. Rec. H27062 (10/02/90). This conclusion has been brought into question based on recent legal developments.

The confusion about the applicability of the ADEA to retiree medical benefits stems from the fact that the ADEA states that its purpose is to protect the wages, hours, and working conditions of older workers. According to the ADEA, any worker who is age 40 or older is subject to its protection. 29 U.S.C. § 631(a)(2000). The OWBPA amendments to the ADEA prohibit employers from providing fewer or less valuable employee benefits to older workers because of age.

In 1997, Erie County, Pennsylvania decided to try to control its rapidly rising medical plan costs by changing the benefits it offered under its retiree medical plan. Erie County’s retiree medical plan prior to 1997 provided non-Medicare-eligible retirees and Medicare-eligible retirees with the same health benefits. The new plan divided the benefits available to these groups. It placed Medicare-eligible retirees in an HMO plan that coordinated its benefit payments with Medicare and placed the younger retirees in a hybrid point of service plan. The benefits received by the pre-Medicare retirees were better than the combined benefits provided by Medicare and the HMO to the post-Medicare retirees. In 1999, six Medicare-eligible retirees sued, claiming that Erie County’s actions violated the ADEA by providing them with inferior medical benefits because of their age.

The federal district court in Erie County initially ruled in favor of Erie County, finding that retiree medical plans are not regulated by the ADEA. 91 F. Supp. 2d 860 (W.D. Pa. 1999). However, the Third Circuit reversed. Erie County Retirees Ass’n v. County of Erie, 220 F.3d 193 (3rd Cir. 2000). In parsing the words of the ADEA statute, the Court found that its basic provision, Section 4(a), prohibits age discrimination "against any individual" with respect to the terms, conditions, or privileges of employment. With that, the Circuit Court concluded it was constrained to apply the words of the statute. Id. at 213. Thus, the Circuit Court held that: 1) the ADEA applies to retirees and to retiree medical plans, and 2) that Erie County’s retiree medical plan violated the ADEA, unless Erie County could meet either the equal benefit or the equal cost safe harbor tests under the ADEA. Id. at 213-14. The Court stated that Erie County could take into account the benefits provided by Medicare for purposes of applying the equal benefit safe harbor. The case was then sent back to the District Court for resolution. On rehearing, the District Court found that Erie County’s retiree medical plan did not meet the equal benefit or the equal cost safe harbor. 140 F. Supp. 2d 466, 477 (W.D. Pa. 2001). Generally, the safe harbor requires a plan either to incur equal or greater costs in providing benefits to older workers, or to provide equal or greater benefits to older workers, when comparing either the costs or benefits to those provided for younger workers. Erie County eventually decided to reduce benefits for all retirees to comply with the ADEA.

In October of 2000, the Equal Employment Opportunity Commission ("EEOC") issued an enforcement policy adopting the Third Circuit’s 2000 ruling. However, a firestorm of criticism ensued from employers, employees, and labor groups concerned that the EEOC’s new policy would have the effect of reducing health coverage for retirees who were not yet eligible for Medicare or result in the elimination of retiree medical benefits. In response to these comments, the EEOC rescinded its policy in August 2001 and announced that it was forming a task force to study the issue. In July 2003, as a result of the task force’s recommendations, the EEOC proposed to create an exception to the ADEA that would permit employers to provide employer-provided retiree medical benefits only to pre-Medicare eligible retirees and leave Medicare eligible retirees with only coverage under Medicare. In April 2004, the EEOC approved the proposed rule. However, on February 4, 2005, the AARP challenged the proposed EEOC rule in the federal court. On March 30, 2005, a federal judge in Pennsylvania ruled that she was bound by the Third Circuit’s prior ruling in Erie County. The EEOC was ordered not to exempt employers from the provisions of the ADEA that make it unlawful to provide lesser benefits to retirees who are Medicare eligible. 2005 WL 723991 (E.D. Pa. 2005). The decision, if not overturned on appeal, will no doubt accelerate the disappearance or diminution of employer-provided retiree medical insurance. Like Erie County, many employers may choose to reduce benefits for all retirees to the lowest common denominator, rather than increase benefits for all.

So here we are, six years after the original Erie County District Court decision, back to the turmoil surrounding the uncertain effect (or non-effect) of the ADEA on retiree medical benefit plans. Employers with retirees in Pennsylvania, New Jersey, and Delaware (the states in the Third Circuit), who may have thought that the EEOC’s exemptive rule had given them a workable approach, are again nervously awaiting an appellate decision that may invalidate their plan designs. Employers elsewhere watch with great interest, knowing that if the District Court’s recent decision is upheld, other courts will likely be asked to decide whether the ADEA applies to retiree medical benefits, and if so whether the EEOC’s exemptive rule is valid.

In the meantime, what should employers do? Consider taking the following steps:

  1. Carefully review any retiree medical plans to determine if there is potential exposure;

  2. Consult with counsel to review the retiree medical plan and better assess their legal position;

  3. Evaluate whether or not it makes sense to immediately address the Erie County issue versus awaiting further court or legislative developments; and

  4. If implementing a new retiree medical plan, consider designing the new plan to comply with the most recent Erie County decision. Achieving compliance with existing retiree medical plans with Erie County involves either improving the terms of coverage for Medicare eligible participants, reducing the terms of coverage for pre-Medicare eligible participants, or a combination of the two.

Please note, however, that this cautionary tale does not end here. For employers that decide to reduce benefits, the threshold question of the right to do so arises. Ample space in numerous law journals has been devoted to that topic, but employers need to understand what they can and cannot do, and how to do what they can do. Getting it wrong can have its own unintended consequences.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.