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AARP Lawsuit Delays Final EEOC Ruling on Retiree Health Plans

February 16, 2005

Employers are going to have to wait a while longer—perhaps a very long while—for the resolution of a longstanding legal threat to the way they administer retiree health care plans.

Earlier this month, the Equal Employment Opportunity Commission agreed not to publish for 60 days a final rule that would exempt retiree health care plans from the Age Discrimination in Employment Act. The move was in response to a lawsuit brought by AARP.

U.S. District Judge Anita Brody will hear oral arguments next month on the legality of the rule, which the EEOC had been expected to send to the Federal Register this month. The rule would have gone into effect upon publication.

The AARP litigation means that the resolution of a pivotal legal question will remain unanswered for quite some time: Can employers with retiree health care plans be sued for age discrimination if they don't offer the same level of coverage or spend the same amount on health care benefits for Medicare-eligible retirees as they do for other retirees? "It means continued uncertainty," says John Piro, an attorney with Hewitt Associates in Norwalk, Connecticut.

"This issue has been around a long time, and it now looks like it will continue to be around even longer," adds Henry Saveth, an attorney with Mercer Human Resource Consulting in New York.

The issue emerged 4-1/2 years ago, when the 3rd U.S. Circuit Court of Appeals ruled that retiree health care plans are subject to the Age Discrimination in Employment Act. To prevent a charge of age discrimination under ADEA rules, employers either would have to spend the same amount of money on health care for Medicare-eligible retirees as they do for younger retirees or offer the same coverage to the two groups.

The practical effect of that ruling in the so-called Erie County case was huge. Virtually all plans would be in violation, because employers typically provide richer benefits to younger retirees than to older retirees who are eligible for Medicare benefits.

While the ruling was a bombshell, its impact was short-lived. Within a year of the ruling, the EEOC, which enforces age discrimination law, said it would no longer enforce the ruling.

Last year, the EEOC proposed a final rule that would exempt retiree health care plans from the ADEA, an action that would allow employers with retiree health care plans to continue to offer different levels of benefits to the two groups.

Publication of the final rule had been expected to put an end to the controversy. But AARP, fearful that employers would cut coverage to Medicare-eligible retirees, filed suit to block the proposed EEOC rule.

In its complaint, AARP says the EEOC lacks the legal authority to grant an exemption to the ADEA.

"Congress has not delegated to the EEOC any rule-making authority in the substantive field of health care policy, nor does the EEOC possess any expertise to weigh factors relevant to the challenged exemption, or to accurately predict the consequences of the exemption itself," the complaint says.

If the final EEOC rule is published, AARP members "will suffer irreparable harm" because employers throughout the country will reduce or eliminate health care to older retirees, the AARP complaint adds.

But others say that if AARP prevails, it is retirees who will be hurt. At a time of rising costs, employers will reduce the coverage provided to younger retirees or eliminate coverage for the two groups rather than upgrade coverage for Medicare-eligible retirees, benefit consultants say.

"If anything, you will see cutbacks for younger retirees or the elimination of coverage. Employers aren't going to do anything" that would increase their retiree health care obligations, says Cara Jareb, director of retiree medical consulting for Watson Wyatt Worldwide in Washington, D.C.

—Jerry Geisel, Business Insurance