Third Circuit Affirms Retirement Incentive Exclusion from Age Discrimination Statute

In a recent decision, a panel of the United States Court of Appeals for the Third Circuit upheld a proposed EEOC rule which exempts certain retirement benefit incentives from application of the Age Discrimination in Employment Act (“ADEA”).  This is very good news for School Districts seeking to negotiate contracts or incentives which offer health care to retirees until they reach Medicare eligibility. 

By way of background, it was a common practice for public employers to structure certain retirement incentives in a way which would provide health care benefits to retirees until they became eligible for Medicare.  However, in a 2000 case involving the Erie County Retirees’ Association, the Third Circuit found that these types of incentives violate the ADEA because an incentive providing health benefits until Medicare eligibility provides fewer benefits to older individuals who are closer to reaching the threshold.  Under this interpretation, unless the employer agreed to provide “equal benefit or equal cost” to all employees electing a retirement package, regardless of their age, an incentive tied to Medicare eligibility would violate the ADEA.  As a result, school districts were forced to move away from providing retirement benefits to the date of Medicare eligibility, and instead were forced to adopt other, less desirable criteria, such as providing incentives that provide each retiree a set number of years of health insurance, regardless of need. 

The EEOC, in response to the decision, proposed a regulation which would exempt from the ADEA “the practice of altering, reducing or eliminating employer-sponsored retiree health benefits when retirees become eligible for Medicare or a state-sponsored retiree health benefits program.”  The proposed regulation was an attempt to overrule the decision in the Erie County case and restore as lawful retirement incentives which provide benefits to Medicare eligibility. 

The AARP filed an action similar to the Erie County case and in response the District Court declared the EEOC’s rule violative of the ADEA and entered a permanent injunction against the implementation of the proposed rule.  Following the injunction, the U.S. Supreme Court decided an unrelated case and held that a prior rule-making act of an agency can supersede an earlier judicial interpretation of a statute unless the prior judicial interpretation left no room for further rule-making on the part of the agency.  In short, this permitted the EEOC to make a rule reversing the Erie County decision.    

With this precedent in hand, the District Court reversed its earlier decision, revoked its permanent injunction, and granted summary judgment in favor of the EEOC upholding the validity of the new rule, and the Third Circuit affirmed.  The Courts determined that the EEOC was within its authority to determine whether the ADEA should apply to employer-sponsored benefit plans.  Under the terms of the ADEA, the EEOC is able to grant limited exemptions from the Act’s prohibitions, and the Courts found that the proposed rule qualified.  Further, the Courts noted that because employers are not required to provide retiree health benefits, incentives based on the date of Medicare eligibility were extended with an intent of broadening coverage available to individuals, and that they did not violate the spirit of the ADEA.  The Courts held that the proposed rule was narrowly drawn to meet the goals of the ADEA, that it served the public interest, that is was not arbitrary or capricious, and upheld it as a proper exercise of the EEOC’s rule-making power.

There is still the possibility that the AARP may seek to appeal to the U.S. Supreme Court to have the decision overturned.  We will update you in future editions of this newsletter concerning whether an appeal is accepted for review.

In the meantime, assuming the decision stands, school districts will be able to negotiate or implement and retirement incentives in the same fashion as they did prior to the Erie County case in 2000.  That is to say, it will be permissible for employers to agree to provide retirees medical benefits until the date of Medicare eligibility despite the fact that this may provide unequal benefits among potential retirees.  School districts will be getting back a valuable bargaining chip.

Back to Newsletters