Third Circuit clears rule allowing lesser benefits for older retirees.

When the Equal Employment Opportunity Commission (EEOC) tried to adopt a rule that would let employer health plans give greater benefits to younger retirees than older ones, AARP (the erstwhile American Association of Retired Persons) took the commission to court. Its argument that the proposed rule violated the Age Discrimination in Employment Act (ADEA) kept the rule from being implemented for four years.

In June, the Third Circuit found that the proposed rule is a legitimate exemption from the ADEA and can go forward. (Am. Assn. of Retired Persons v. Equal Empl. Opportunity Commn., 2007 WL 1584385 (3d Cir. June 4, 2007).)

In July 2003, the EEOC proposed the rule allowing employers to reduce the health benefits they paid to retirees who are 65 or older and thus eligible to receive Medicare benefits, in effect giving younger workers greater health plan benefits. Although the ADEA prohibits this, [section] 9 of the act allows the EEOC to make exemptions when applying the law would be contrary to the public interest.

On proposing the rule, EEOC Commissioner Leslie Silverman told a Senate committee that the rule is not discriminatory but "provides a narrow exemption from the ADEA prohibitions for the practice of coordinating employer-sponsored retiree health benefits with eligibility for Medicare or a comparative state health plan."

In the face of rising costs, employers have been cutting back or eliminating health benefits programs for retirees. No federal law requires employers to offer these benefits.

The proposed rule would be in the best interest of employers, employees, and retirees, allowing employers to offer retiree health benefits "to the greatest extent possible," said commission Chair Carl Dominguez.

In opposing the rule, AARP said the EEOC's role is to prevent age discrimination, not to make health care policy choices that could result in employers eliminating benefits for older employees. Employer-provided benefits are usually more extensive than Medicare benefits, according to AARP, and about 12 million people receiving Medicare in the United States are currently covered by employer plans that pay at least some of the costs Medicare doesn't cover. Age discrimination protection for those benefits would be lost under the EEOC's rule, AARP claimed.

"The law is clear that if [employers] choose to provide retiree health benefits, they cannot deny them to some of their retirees based on age," said AARP attorney Laurie McCann in a statement.

In February 2005, AARP challenged the rule under the Administrative Procedure Act (APA) in the Eastern District of Pennsylvania. The court granted AARP summary judgment and blocked the rule, relying on the Third Circuit's decision in Erie County Retirees Association v. County of Erie, which had held that the ADEA prohibited employers from reducing or terminating retirees' health benefits unless the employer could meet the "equal benefit or equal cost" defense set forth in [section]4 of the act. (220 F.3d 193 (3d Cir. 2000).)

While an appeal was pending, the U.S. Supreme Court issued a decision that held that prior judicial interpretation of a statute bars subsequent agency interpretations only if the precedent "unambiguously forecloses the agency's interpretation, and therefore contains no gap for the agency to fill." (Natl. Cable & Telecomm. Assn. v. Brand X Internet Servs., 545 U.S. 967 (2005).) The EEOC moved for relief from the district court's summary judgment, citing Brand X and arguing that the proposed regulation was consistent with the ADEA.

Vacating its earlier decision and granting summary judgment for the EEOC, the district court noted that "Brand X held that the only court decision that forecloses a later, contrary interpretation of a statute by an agency is a decision that determines the only permissible reading of the statute, not merely the best of several alternatives" (emphasis in original).

Finding that "the Third Circuit's opinion in Erie County did not hold that it was the only permissible interpretation of the ADEA, the court said, "it cannot foreclose a contrary interpretation by the EEOC."

AARP appealed, arguing before the Third Circuit that the proposed rule exceeds the EEOC's authority under 9 of the ADEA. But the court found that the section grants authority unambiguously and that Congress intended to permit limited exemptions. The rule also passed the "reasonable-and-necessary to-the-public-interest" test because the EEOC proposed the rule after finding that employer-sponsored retiree health benefits were decreasing and that some employers---instead of keeping benefits the same for all retirees to avoid discriminating under the ADEA--reduced or eliminated benefits for everyone.

"The proposed regulation is within the EEOC's authority under the ADEA and valid according to the requirements of the APA," the Third Circuit found, reversing its ruling in Erie.

The court noted that the new rule isn't perfect but said it will be beneficial in the long run.

"We recognize with some dismay that the proposed exemption may allow employers to reduce health benefits to retirees over the age of 65 while maintaining greater benefits for younger retirees," the court wrote, but the EEOC has shown that a narrow exemption from ADEA in this case "is a reasonable, necessary, and proper exercise of its [section] 9 authority, as over time it will likely benefit all retirees."

--REBECCA PORTER