On June 4, 2007, the Federal Court of Appeals for the Third Circuit allowed the Equal Employment Opportunity Commission (EEOC) to implement its proposed regulation permitting employers to reduce or eliminate employer sponsored retiree health benefits when retirees become eligible for Medicare or for a state-sponsored retiree health program (AARP v EEOC, No. 05-4594, 6/4/07).

The court also rejected AARP’s arguments that the proposed regulation constituted unlawful agency activity and represented an “arbitrary and capricious change” in agency policy. The court expressed its concern that many retirees in both age groups depend upon employer sponsored benefits, and that the proposed regulation best served the interest of all retirees by permitting employers to provide supplemental health benefits to Medicare-eligible retirees and to those retirees who might not otherwise be able to afford health insurance coverage.

What does this mean for employers who sponsor retiree medical programs?

The ruling resolved many years of uncertainty faced by employers that maintain traditional retiree programs coordinated with Medicare. As such, special purpose programs such as Medicare HMOs and Medicare Supplement Plans would appear to be permissible offering as a result of this ruling.

Entities that sponsor retiree medical benefits must continue to evaluate how to effectively provide retiree medical benefits in a cost-effective manner. This ruling will at least make this portion of the equation easier to handle.

Even though the case clarifies the treatment for retiree medical benefits, sponsors of plans should consider how this case ultimately impacts plans that do not integrate with Medicare. For example, retiree life insurance that changes based on age (e.g. younger retirees have greater life insurance coverage compared to older retirees) may ultimately be deemed to be discriminatory.

We will monitor the AARP response on this subject and advise you if this case is ultimately appealed to the Supreme Court.

History of the case:

• Seven years ago, in the case of Erie County Retirees Ass’n v. County of Erie, 220 F.3d 193 (3d Cir. 2000) (Erie County), the Third Circuit had ruled that, because Medicare eligibility turns upon age, the Age Discrimination in Employment Act, 29 USC §§ 621-34 (ADEA) did not permit reductions or terminations of retiree health benefits upon Medicare eligibility unless the employer met the “equal benefit or equal cost” defense set forth in Section 4 of the ADEA.
• In July 2003, the EEOC issued a proposed regulation which would permit reductions or terminations to coordinate with Medicare. The AARP challenged the proposed EEOC regulation and won the initial case in AARP v. EEOC.
• In February 2005, the district court ruled in favor of AARP and issued an injunction forbidding the EEOC from implementing the controversial exemption regulation.
• Six months later, in September 2005, the district court reversed itself and ruled in favor of the EEOC. The court based the reversal on an intervening U.S. Supreme Court decision.
• On June 4th, the Third Circuit lifted the injunction and affirmed the district court’s result on completely different grounds. The appellate court first found that the ADEA clearly provides the EEOC with the authority to provide “narrow exemptions from the prohibitions of the ADEA.” The court recognized that the ADEA did not grant the EEOC unlimited authority, but determined that the EEOC had demonstrated that the exemption at issue in the case was reasonable, necessary and in the public’s best interest. The court heeded the EEOC’s concern that, without the exemption, employers would reduce all retiree health benefits to a lower level for both Medicare-eligible retirees and retirees under 65 in an effort to avoid ADEA liability.

How can Cowden Associates assist you in managing your Retiree Medical Benefit Obligations?

As companies are faced with a growing number of retirees, escalating health care costs and financial statement pressures, we often are called upon to provide various consulting services to assist in attempting to minimize or contain this issue. Our assistance in this area includes traditional valuation services and benefit consulting services. We have acted as a “quarterback” in coordinating a detailed review of options that are viable for current and future retirees. This includes evaluating potential benefit design changes, costing of alternatives, analyzing administration, review of funding, assistance with determining accounting impact and coordinating legal review.

If you would like more information about this case or would like to discuss our capabilities in more detail, please contact your Cowden representative or Elliot Dinkin at (412) 394-9330 or toll-free at 888-889-9432.