A federal appeals court decision upholding the ability of employers to reduce health benefits to retirees when they become eligible for Medicare likely puts an end to a long-running legal battle that threatened to accelerate the plans’ decline.

In a unanimous ruling last week, a three-judge panel of the 3rd U.S. Circuit Court of Appeals in Philadelphia said the Equal Employment Opportunity Commission has the authority to implement a rule that would exempt retiree health plans from the Age Discrimination in Employment Act when those plans reduce benefits for retired workers after they become eligible for Medicare.

The rule was first proposed by the EEOC in 2003 as a way to counteract a decision by the 3rd Circuit three years earlier that found the plans were subject to the ADEA. That decision exposed employers with retiree health care plan designs that cut benefits when retirees reach age 65 to age discrimination suits.

The practical effect of the EEOC rule would allow employers to continue providing a two-tier system of retiree health care coverage, with younger retirees receiving richer benefits than Medicare-eligible retirees. The rule, though, was never implemented because of a legal challenge by the AARP.

Writing for the appeals court panel, Judge Jane Restani said Section 9 of the ADEA “clearly and unambiguously” gives the EEOC the authority to issue ADEA exemptions so long as those exemptions are reasonable and “necessary and proper in the public interest.”

The EEOC met those tests in this case, Restani wrote, saying that if employers had to continue providing the same level of benefits to older retirees as to younger retirees, employers would reduce health care benefits to all retirees.

By contrast, providing an ADEA exemption “will likely benefit all retirees” with the “proper purpose of encouraging employers to provide the greatest possible health benefits for all retirees,” Restani wrote.

Benefit experts are hailing the decision as a victory for both employers and retirees. For employers, the ruling gives them certainty that they will have legal protection over the design of the plans.

The decision also is a victory for retirees, experts say. If employers had to equalize benefits for the two groups of retirees, the inevitable result would have been a reduction in benefits to younger retirees because it would have been prohibitively expensive to upgrade benefits of Medicare-eligible retirees to the level provided to younger retirees.

“The only real-world option would have been to reduce benefits,” said Andy Anderson, of counsel at Morgan, Lewis & Bockius in Chicago.

And some employers may have gone further and eliminated retiree health care plans, whose numbers have dwindled over the past decade because of escalating costs.

If the court had not upheld the EEOC’s proposed rule, “it could have been the nail in the coffin” for many plans, said Douglas L. Greenfield, a member of the law firm Bredhoff & Kaiser in Washington.

“It certainly would have dealt a body blow to plans,” said J.D. Piro, an attorney with Hewitt Associates in Norwalk, Connecticut.

While the ruling may have prevented the demise of retiree health care plans, no one expects a resurgence of the plans because employers still have concerns about costs.

At best, the number of plans may stay somewhat stable, said Cara Jareb, director of retiree medical consulting at Watson Wyatt Worldwide in Arlington, Virginia.

The ruling likely means the controversy over the design of retiree health care plans is over. If AARP decides to appeal the ruling, it is unlikely that the Supreme Court would agree to review the appeals court decision, experts say.

“There is no split in the circuits and the ruling does not raise issues of great national importance,” said Neil Grossman, an attorney with Mercer Human Resource Consulting in New York.

“The issue is, does the EEOC have the right to issue this kind of regulation? That’s not the kind of case the Supreme Court is likely to take up,” Piro said.

Laurie McCann, a senior attorney with AARP in Washington, said the ruling is disappointing and that the organization is seriously considering appealing.

The controversy began nearly seven years ago, when the 3rd Circuit ruled that retiree health care plans were subject to the ADEA. As a result, employers could have faced age discrimination charges for providing a lower level of health care benefits to older retirees than to younger retirees.

The ruling was a bombshell to employers, who had long thought that the ADEA did not apply to retiree plans. The possibility of litigation over what had been long-standing retiree health care plan designs suddenly became real.

Employers’ fears heightened when the EEOC said it would incorporate the Erie County ruling—so named for the county in Pennsylvania that was sued by its Medicare-eligible retirees—in its compliance manual.

Employers and labor organizations began to lobby the EEOC to reverse course, warning that with health care plan costs roughly 2½ times higher for younger retirees than for Medicare-eligible retirees, the result of mandating benefit equality for the two groups would be a reduction of benefits provided to younger retirees, or the elimination of the benefits.

Over time, the EEOC found such arguments convincing. First, it announced that it would no longer enforce the Erie County ruling. Later, it proposed exempting retiree health care plans from the ADEA.

But AARP sued to block the EEOC from finalizing the exemption. Initially, U.S. District Judge Anita Brody sided with AARP, saying that implementation of the rule would permit retiree health care designs that the 3rd Circuit in 2000 said violated the ADEA.

But Brody later reversed her ruling in the wake of a 2005 Supreme Court decision in an unrelated case that said federal courts generally must defer to regulatory agencies’ interpretation of law, so long as the statute on which there is a point of contention is ambiguous and that the agency’s interpretation of it is reasonable. Judge Brody said that was the case with the EEOC’s exemption rule.

AARP appealed Brody’s ruling, setting the stage for the latest ruling by the 3rd Circuit.

A spokesman for the EEOC said the agency is reviewing the decision and determining what steps it will next take.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.