Employers offering retiree health care benefits coordinated with Medicare now have a welcome exemption from the Age Discrimination in Employment Act.

Medicare coordinated retiree health care plans have been revived as a viable plan design under the Age Discrimination in Employment Act (ADEA). In AARP v. EEOC, No. 05-4594 (3d Cir. 2007), a unanimous panel of the U.S. Court of Appeals for the Third Circuit upheld an Equal Employment Opportunity Commission (EEOC) proposed regulation that establishes an ADEA exemption permitting employers to coordinate retiree health care benefits with Medicare.

The EEOC’s proposed regulation was issued in 2003, in response to another decision of the Third Circuit on retiree health care issues in Erie County Retirees Ass’n v. County of Erie, 202 F.3d 193 (3d Cir. 2000). In Erie County, the Third Circuit determined that the ADEA prohibited the practice of reducing the level of retiree health care coverage under an employer-sponsored retiree health care plan with respect to retirees who obtain Medicare eligibility vis-à-vis retirees who are not Medicare-eligible. Prior to Erie County, coordinating retiree health care coverage with Medicare was a common plan design intended to control the cost of providing this voluntary coverage to retirees. The combination of the Erie County decision and the rapid increase in health care costs for retirees sent a chill throughout the business community, prompting many employers to cut back significantly or discontinue their retiree health care plans.

Before the EEOC could finalize the proposed regulation in 2004, the AARP obtained an injunction preventing the EEOC from publishing the regulation or taking any other action to effectuate the regulation. In 2005, the U.S. District Court for the Eastern District of Pennsylvania granted summary judgment to the EEOC and determined that the regulation did not violate the ADEA. On appeal, the Third Circuit upheld the district court’s decision, and lifted the injunction obtained by the AARP, which blocked implementation of the EEOC’s regulation.

The Third Circuit reasoned that the EEOC’s proposed regulation was a proper exercise of its authority, as over time it will likely benefit all retirees. In addition, the court found that the EEOC’s regulation was narrowly tailored to address the practice of coordinating employer-sponsored retiree health care benefits with Medicare eligibility and, as such, was "consistent with the purposes and intent of the ADEA." The court cited the legal reality that employers are not required to provide retiree health care benefits in the first instance and generally may reduce or terminate retiree health care benefits altogether once they are provided. The court also acknowledged that, in the wake of the Erie County decision and overall rising health care costs, employers were in practice reducing retiree health care benefits or eliminating such benefits altogether. Based on these practical realities, the Third Circuit decided that the EEOC’s regulation was a permissible agency action because it is in the public interest and will likely help preserve employer-sponsored retiree health care benefits.

Final implementation of the EEOC regulation should move forward now that the injunction has been lifted. Once implemented, the final regulation will afford employers offering retiree health care benefits that are coordinated with Medicare a welcome exemption from the ADEA. That said, it is yet to be determined whether the AARP will seek to continue its fight against implementation of the regulation and seek review by the Supreme Court of the United States.