New EEOC Rule on Retiree Health Benefits
January 1, 2008
by Employment & Labor Law / Employee Benefits Group
Stinson Morrison Hecker LLP
Copyright © 2008
Employers may create, adopt, and maintain a wide range of retiree health plan designs – such as Medicare bridge plans and Medicare wrap-around (or "carve-out") plans – that alter, reduce or eliminate benefits when the participant is eligible for Medicare (or a comparable State health benefit plan), whether or not the participant actually enrolls in Medicare (or the other benefit program), without violating the Age Discrimination in Employment Act” (ADEA), under a final rule issued December 26, 2007 by the Equal Employment Opportunity Commission (EEOC).
New Rule is in Response to Court Decision – In August 2000, the U.S. Court of Appeals for the Third Circuit had held that an employer violated the ADEA if it reduced or eliminated retiree health benefits when retirees became eligible for Medicare, unless the employer could show that the benefits available to Medicare-eligible retirees were equivalent to the benefits provided to retirees not yet eligible for Medicare, or that it was expending the same costs to both groups of retirees. Making such a showing often required complex comparisons of multiple objective and subjective variables.
Court’s Decision Eroded Retiree Benefits – Employers, however, could avoid the issue created by the Third Circuit’s decision by simply eliminating retiree health benefits entirely or alternatively by reducing the coverage they provided to those retirees who were not yet eligible for Medicare. As a result, the EEOC studied the issue and responded with a new rule designed to slow the further erosion of retiree health benefits.
New Rule Allows Coordination with Medicare – Under the EEOC’s new rule, employers may coordinate their retiree health benefits with Medicare (or a comparable State health benefit plan), whether those benefits are provided for in an existing or newly created employee benefit plan, and regardless of whether the individual participant actually receives benefits under Medicare (or a comparable State health benefit plan).
- No Obligation to Provide Retiree Health Benefits – The new rule does not require employers to provide retiree health benefits.
- Dependent and Spousal Benefits – The EEOC’s new rule applies to dependent and/or spousal health benefits that are included as part of the health benefits provided for retired participants. “However, dependent and/or spousal benefits need not be identical to the health benefits provided for retired participants. Consequently, dependent and/or spousal benefits may be altered, reduced or eliminated pursuant to the exemption whether or not the health benefits provided for retired participants are similarly altered, reduced or eliminated.”
- Does Not Apply to Non-Health Benefits – The EEOC’s new rule applies only to retiree health benefits and not other non-health retiree benefits (such as life insurance or disability programs).
Rule Applies Only to Retirees, Not to Current Employees – The EEOC’s new rule “applies only to retiree health benefits, not to health benefits that are provided to current employees.” Under Medicare, “an employer must offer to current employees who are at or over the age of Medicare eligibility the same health benefits, under the same conditions, that it offers to any current employee under the age of Medicare eligibility.”
Bottom Line – Rising health care costs, larger numbers of workers nearing retirement age, and mandated changes in the way employers must account for the long-term costs of providing retiree health coverage have been substantial factors in contributing to the erosion of retiree health care benefits. The EEOC’s new rule is intended to stem the steady decline of retiree health care as an employee benefit.
Stinson Morrison Hecker LLP is one of the country's largest law firms with more than 360 attorneys in more than 45-industry-focused areas. If you would like more information regarding this summary, please contact one of our Employment & Labor Law and Employee Benefits attorneys.
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