The Erie Case
Earlier this year, the Court of Appeals for the Third Circuit held in Erie County Retirees Association v. Erie County that the Age Discrimination in Employment Act (ADEA) applies when an employer offers its Medicare-eligible retirees health insurance coverage that is inferior to coverage offered to retired employees who are not eligible for Medicare. In Erie, the Court discounted portions of the legislative history, which indicated that Congress viewed ADEA as inapplicable to retirees except in the context of benefits that are structured in a discriminatory manner prior to retirement. Instead, the Court held that nothing in the statutory framework of ADEA indicates that Congress intended to exempt retirees from ADEA. The Court also held that because Medicare eligibility is a proxy for age, and Medicare-eligible retirees in Erie were offered lesser benefits compared to retirees who were not eligible for Medicare, a claim of age discrimination under ADEA had been established. The Court then remanded the case to the district court to determine whether the plan in effect for Medicare-eligible retirees of Erie County satisfied the equal benefit/equal cost exception to ADEA.
The EEOC Benefits Compliance Manual
On October 6, 2000, the Equal Employment Opportunity Commission (EEOC) issued a new compliance manual on the application of various federal anti-discrimination statutes, including ADEA, to employee benefit plans. The manual is significant because it sets forth the EEOC's interpretation of ADEA and favorably cites the Erie decision. In its discussion of the case, the EEOC manual states that an employer may avoid liability for age discrimination on the basis of Medicare eligibility by showing either that (i) taking Medicare availability into account for those 65 and over, the total benefits available to older retirees are no less favorable than those the employer offers to younger retirees; or (ii) the employer expends an equal cost for benefits for older and younger retirees and the reductions in benefits for older retirees are actuarially justified. This equal benefits/equal cost safe harbor is often difficult to meet for retiree medical plans that either eliminate or reduce coverage for Medicare-eligible retirees because the cost outlay for this group is often lower. All retiree medical plans are potentially impacted by this guidance, not just those plans that reduce benefits for retirees who are eligible for Medicare, but also those that completely eliminate coverage for Medicare-eligible retirees as well.
Significance of Recent Developments for Employers
Most employers should await further developments before initiating plan changes. First, it is important to note that while Erie is currently the law in the Third Circuit, which governs employers in Delaware, Pennsylvania and New Jersey, it does not control what other courts will do in other jurisdictions. This is particularly important because the Third Circuit Court of Appeals has taken a number of pro-employee positions with which other courts disagree. To date, no other circuit court has taken a position on this issue. It is quite possible that if another circuit court was presented with the issue in Erie, it may be decided differently¾ thereby creating a conflict in the circuits.
Second, by issuing the benefits compliance manual and filing an amicus brief in the Erie case, the EEOC has indicated that it is keenly interested in discriminatory retiree medical benefit programs and may pursue this issue on audit. If challenged by the EEOC, an employer would either have to demonstrate that its retiree medical benefit program complied with ADEA or challenge the authority of the EEOC to interpret ADEA in the manner set forth in the manual. In this regard, employers should take note that the EEOC's compliance manual does not carry the force of law, and there is ample authority that courts do not treat such guidance as binding but merely indicative of the EEOC's statutory interpretation.
Third, even for employers in the Third Circuit, a cautious approach is suggested before making plan changes. Importantly, the retiree medical plan at issue in Erie was not subject to the Employee Retirement Income Security Act (ERISA). Arguably, there is a tension between the holding in Erie and an employer's ability under ERISA to amend and/or terminate its retiree medical plan at any time, provided such authority has been properly reserved in the plan document. The next case may be the one to decide how the ADEA and ERISA should relate in this issue.
Finally, it is possible that Erie County may petition the Supreme Court to hear the Erie case, even though a decision on remand has not yet been made by the district court. A petition for a hearing would most likely be filed with the Supreme Court sometime in December of 2000. If the Supreme Court declines to hear the Erie case, or if Erie County does not file a petition for Supreme Court review, the issue may be ripe for legislative action, as was the case when Congress overruled the Supreme Court's decision in Public Employees' Retirement System of Ohio v. Betts by enacting the Older Worker's Benefit Protection Act amendments to ADEA.