Ruling Has Impact On Retiree Plans

September 4, 2007
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GRAND RAPIDS — The U.S. Court of Appeals for the 3rd District recently ruled that employers can take Medicare payments into account when designing health benefits for retirees age 65 and over.

The new ruling stemmed from a suit the American Association of Retired Persons brought against the Equal Employment Opportunity Commission over the question of whether coordinating retiree medical programs with Medicare violated the Age Discrimination Employment Act.

Under the new federal court ruling, employers can lower the benefits provided to retirees when they reach age 65 and are eligible for Medicare benefits, which means they can now offer one health benefits package to pre-Medicare retirees and another to Medicare-eligible retirees without having to worry about age discrimination.

The court issue started in 2000 with the Third Judicial Circuit’s decision in Erie County Retirees Association v. County of Erie, where an employer provided medical benefits to his retirees and reduced the benefits when they became Medicare-entitled at age 65.

Sue Conway, a partner at Warner Norcross & Judd, said, “Fortunately, the initial ErieCounty case was not precedent in our circuit, but we were watching to see how it was going to turn out.”

The Court of Appeals for the 3rd Circuit has jurisdiction over Delaware, New Jersey and Pennsylvania. The Court of Appeals for the 6th Circuit oversees Michigan, Kentucky, Ohio and Tennessee. The 3rd Judicial Circuit held in the ErieCounty case that the act of reducing or terminating retiree benefits when people became Medicare-eligible discriminated against older retirees and violated the Age Discrimination in Employment Act. The EEOC initially agreed with the decision, Conway said, but changed its mind when it saw what happened afterward.

A lot of employers said they couldn’t afford to provide the same benefits to Medicare-eligible retirees as they did to pre-Medicare retirees, so they simply lowered the benefits to retirees under age 65 rather than raising the benefits to Medicare-eligible retirees. Other employers followed suit, and some stopped providing retiree medical benefits altogether.

Subsequently, in July 2003, EEOC published a rule that essentially exempted employers from age discrimination violations if they reduced, changed or terminated retiree health benefits once retirees began receiving Medicare. In February 2004, the AARP commenced action in the U.S. District Court for the Eastern District of Pennsylvania to prevent the agency from finalizing the regulation.   

Research conducted by the EEOC had revealed that the availability of retiree health benefits was quickly diminishing in the workplace. The court found that fact sufficient justification for the new rule.

In a report issued earlier this year, the U.S. Government Accountability Office stated: “Similar to coverage for active workers, an increasing share of retiree health benefits costs is being shifted to retirees, and many employers have terminated benefits for future retirees — a trend that experts believe will continue.” 

The waning availability of retiree health benefits is apparent all over West Michigan 

“What I’m seeing is that a lot of employers are either cutting back significantly or no longer offering retiree benefits,” Conway observed.

Maggie McPhee, director of information services for The Employers Association, said she wasn’t familiar with the new ruling, and that TEA hasn’t had any inquiries from employers regarding it. She brought up the subject at a subsequent roundtable meeting that was attended by 18 area employers. None of them had heard about the 3rd Circuit Court decision either, she said, but none of the employers at the meeting offered retiree health benefits to their employees.

“If anybody does have retirement benefits, they’re certainly phasing them out, so I wouldn’t think the ruling is that significant,” McPhee said.

The EEOC has yet to issue the regulation in final form, and it won’t officially go on the books until it’s published in the Federal Register. The case is more or less in limbo right now, said Dianna Johnston, assistant legal counsel for the EEOC Office of Legal Counsel, Detroit field office. Johnston said AARP petitioned for a rehearing, which was denied. Now AARP has indicated it’s going to petition for a writ of certiorari before the Supreme Court, asking the high court to review the decision.     

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