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Retiree Health Benefits Subject to Age Discrimination

It appears that an obscure federal court case (Erie County Retirees Assoc. v. Erie County) may indirectly result in many retirees losing their health insurance coverage.
A. The Case
More specifically, in August, 2000, the federal Court of Appeals that covers Pennsylvania, New Jersey, Delaware and the Virgin Islands, decided that health benefits for retirees who are 65 or over are subject to the federal Age Discrimination in Employment Act (ADEA). That means that, if an employer provides health benefits to retirees who are 65 or over, those retirees must have the same benefits as active employees or younger retirees, unless the employer can justify a difference under the "equal cost/equal benefit" rule.
The Court of Appeals sent the matter back to the trial court, and in April of this year, the trial court applied the "equal cost/equal benefit" rule to Erie County's health plan.
In determining whether a plan for over-65 retirees meets the "equal cost/equal benefit" rule, the benefits provided by Medicare, plus the benefits provided by the employer, taken together, may be compared to the benefits provided to active employees or younger retirees. If the combination of benefits is equal to the benefits provided to active employees or younger retirees, the over-65 retiree benefits do not violate the ADEA. Alternatively, if the benefits are not equal, but the employer's cost is equal, the over-65 retiree benefits do not violate the ADEA.
Since the County could not show that the over-65 retirees received benefits equal to those of the active employees or younger retirees, and could not show that it incurred equal cost for the over-65 retirees, the trial court found that the County had violated the ADEA. Although the court has not yet fashioned a remedy for the retirees, that remedy could include payments to the retirees for past deficiencies, as well as improved future benefits.
B. Caveats
It is important to note that Erie County is binding only in Pennsylvania, New Jersey, Delaware and the Virgin Islands, but its reasoning could be adopted by other courts.
It is also important to note that status as a retiree, by itself, does not necessarily raise concerns about age discrimination, if retiree status is tied to a criterion that is analytically distinct from age, such as years of service. Therefore, a health plan that provides different benefits for retirees than for active employees is not necessarily subject to challenge under the ADEA. In this situation, however, the County based its benefit design not merely on retiree status, but on eligibility for Medicare, which is a direct proxy for age.
C. Bottom Line
The bottom line of all of the above is that the Erie County decision will likely make it more expensive for employers to provide health insurance to retirees. It, therefore, discourages employers from providing such benefits to retirees in the first place, and encourages employers to stop providing such benefits, if the employers have the right to cease doing so, which is often the case.
Recognizing this effect, the federal Equal Employment Opportunity Commission voted on August 17, 2001, not to enforce the Erie County decision. However, absent action by Congress, to avoid attacks by individual employees, employers will still be advised to restrict retiree health coverage based on the reasoning of Erie County.

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Date

09.22.01

Type

Publications

Authors

Rosen, Barry F.

Teams

Health Care