Meeting of the U.S. Equal Employment Opportunity Commission
Proposed Final Rule: Age Discrimination in Employment Act - Retiree Health Benefits
April 22, 2004
Good morning, Madam Chair, Madam Vice Chair, and Commissioners. My name is Dianna Johnston. I am the Assistant Legal Counsel for Title VII and the ADEA and am here to explain the background and circumstances leading to the proposed rule that is before you today.
In January 2000, in Erie County Retirees Ass'n v. County of Erie, the Commission filed an amicus brief on appeal from a district court ruling in that the ADEA did not cover retirees. The Commission's brief took the position that (1) retirees are covered by the ADEA and (2) basing retirees' eligibility for health care benefits on their Medicare eligibility was an age-based distinction and was unlawful unless one of the ADEA's defenses applied. In August 2000, the Third Circuit agreed with the Commission on both points and remanded the case to determine whether the County could make out the ADEA's equal benefit/equal cost defense.
During the last half of 2000, the Commission issued its Compliance Manual chapter on employee benefits, which adopted the Erie County rule and explained how to apply it. In addition, in response to information that many public school districts in the Midwest were violating the ADEA with regard to retirement incentives and retiree health benefits, the Commission filed several directed charges against those school districts and unions. The Commission's actions were widely criticized, particularly by affected teachers, unions, school boards, and Congressional representatives of the affected districts. They argued that public school districts lacked the revenue to provide retiree health benefits indefinitely and that the effect of the Commission's action would be to force them to entirely eliminate retiree health benefits or provide a lower level of coverage to retirees under age 65 that excluded prescription drugs. In short, the critics contended that the Commission's policy would not protect or improve benefits for persons who were eligible for Medicare but, instead, would cause a reduction in health benefits that would prevent employees who wanted to retire before age 65 from being able to do so.
In May 2001, the General Accounting Office (GAO) issued a report on retiree health benefits finding that many employers were eliminating those benefits for a number of reasons, primarily involving their considerable cost. However, the report also suggested that the Erie County ruling might be providing an additional incentive for employers to eliminate retiree health benefits.
RECISION AND STUDY
As a result of the information from stakeholders and in the GAO report suggesting that the Erie County rule was having unintended consequences, the Commission reexamined its position on the Erie County issue. In August 2001, the Commission voted unanimously to rescind its prior policy and study the relationship between the ADEA and retiree health benefits.
For the next several months, Commission staff met with a wide range of stakeholders including employers, employee representatives, labor unions, human resource consultants, benefit consultants, actuaries and state and local government representatives. All agreed that most employer-provided retiree health benefit plans could not meet the Erie County rule, and most predicted that employers would respond to Erie County by eliminating or lessening existing coverage for retirees not yet eligible for Medicare, rather than improving health coverage for Medicare eligible retirees.
Indeed, that is what happened in the Erie County case. When that case was resolved in March 2002, the net effect of the changes the county made to its retiree health benefits was that older retirees received no better benefits and younger retirees were required to pay more for health benefits that offered fewer choices.
Of course, the Erie County decision is not the sole or even the primary reason for the declining availability of retiree health benefits. Cost, changing demographics, and changed accounting rules have led to the diminution of such benefits. However, the evidence before us indicated that the Erie County rule was exacerbating the rate of the decline.
Commission staff explored alternative solutions to the problem. However, every alternative that we identified either required employers to engage in such complex calculations that they would still have an incentive to eliminate the benefit entirely, or involved reinterpreting the ADEA in a way that diluted its protections in areas other than retiree health and/or would not survive judicial scrutiny. Ultimately, the Commission concluded that an exemption was the most effective way to eliminate the ADEA as a reason for further eroding the availability of retiree health benefits.
As you know, the Commission has unusually broad exemption authority under the ADEA. Section 9 of the Act provides that "EEOC may . . . establish such reasonable exemptions to and from any or all provisions of this chapter as it may find necessary and proper in the public interest." The language is much broader than most statutory exemptions. Typically, when exemption authority is granted, it is more circumscribed. For example, the Real Estate Settlement Procedures Act (RESPA) provides authority to the Secretary of HUD "to grant such reasonable exemptions for classes of transactions, as may be necessary to achieve the purposes of the Act." Similarly, the Secretary of Agriculture has authority to grant "reasonable exemptions" from organic food certification limitations in 7 U.S.C. . 6506, but only if the farm from which the produce originated is subject to a federal or state mandated "emergency pest control program." The EEOC was granted much greater leeway in the ADEA exemption.
The broad language of the ADEA exemption shows that Congress recognized that there would be rare instances in which the ADEA's prohibition against age discrimination would be contrary to the public interest. Accordingly, it vested the enforcement agency with authority to correct such problems. The Department of Labor, which originally had enforcement authority over the ADEA, exempted from the Act certain programs designed to provide employment for youth. Such an exemption is clearly contrary to the letter of the Act's prohibitions but was deemed to be in the public interest.Moreover, the preamble explains that the rule is consistent with the purposes of the ADEA. One of the Act's stated purposes is to "find ways of meeting problems arising from the impact of age on employment." Given the continuing decline in the availability of employer-provided retiree health benefits and the additional disincentive to provide such benefits created by the Erie County rule, this proposal reasonably addresses problems confronting older Americans.
Based on the staff study, the Commission determined that it needed to act proactively rather than to wait until thousands or hundreds of thousands of retirees had lost their health benefits because of the Erie County rule. The Commission concluded that it was necessary and proper in the public interest to exempt from the ADEA the practice of coordinating retiree health benefits with Medicare or a comparable State-sponsored health benefit plan. Accordingly, in July 2003, the Commission exercised its exemption authority and published a Notice of Proposed Rulemaking. The proposed rule provided that the ADEA would not be violated when employers and labor organizations offer retirees health plan designs that incorporate Medicare or comparable State health benefit programs.
In other words, the proposed exemption permitted the existing practices of 1) providing Medicare bridge plans to early retirees without providing similar benefits to those retirees who were eligible for Medicare or 2) supplementing a retiree's Medicare coverage whether or not the coverage is identical to that of non-Medicare eligible retirees. The NPRM did not require or encourage employers to reduce or eliminate any existing retiree health coverage.
During the comment period the Commission received 44 substantive comments from organizations, including 27 that supported the proposal and 17 that opposed it.
Many of the organizational comments offered in support of the exemption provided information that confirmed the Commission's suspicion that application of the Erie County rule was further eroding retiree health benefits. For example:
The most extensive organizational comments opposing the proposed rule came from the AARP. AARP's comments fell into four general categories: 1) the rule was contrary to the language, legislative history and purposes of the ADEA and does not meet the EEOC's primary mission of protecting or expanding the rights of older workers; 2) EEOC does not have the authority to enact the proposed rule; 3) the proposal is an "arbitrary, capricious and unjustified exercise of EEOC's authority to issue regulations" primarily because the rule is a departure from the Commission's prior view on this issue; and 4) the proposed rule is inconsistent with the Administration's and Congress' emphasis on improving health benefits for retirees.
AARP argues that the ADEA allows employers to coordinate retiree health benefits with Medicare eligibility only if an employer can satisfy the equal cost/equal benefit test set forth in the statute. AARP also believes that EEOC's study of the relationship between the ADEA and employer's retiree health care practices was inadequate and flawed and thus fails to meet the "public interest" standard for creating an exemption from the ADEA. AARP challenges EEOC's conclusion that it is impracticable for employers to accurately value retiree health benefits in order to satisfy the equal cost/equal benefit test. Finally, AARP contends that the literature cited in the preamble to the proposal disproves the EEOC's contention that the Erie County ruling is causing employers to reduce or eliminate retiree health coverage since many of those studies show that employer-provided retiree health coverage was declining before the Third Circuit's decision was rendered in 2000.
It is also important to note that the Commission received approximately 30,000 comments from individual citizens, and 700 signatures on petitions opposing the proposal. In addition, AARP provided a list of 12,700 names of individuals said to oppose the proposal. The vast majority of the 30,000 individual comments were form letters.
After reviewing all of the public comments, the Office of Legal Counsel staff found that the rule's supporters provided evidence that the Erie County rule was having the unintended consequence of diminishing retiree health benefits for pre-Medicare eligible retirees and that it was not improving benefits for Medicare eligible retirees. In contrast, the rule's opponents provided no evidence to the contrary. Thus the staff concluded that, on balance, the evidence supported the proposed exemption.
Accordingly, the Office of Legal Counsel recommended that the Commission finalize the proposed rule with only minor clarifications. Like the proposed rule, the final rule provides an exemption from the ADEA for the practice of coordinating employer-sponsored retiree health benefits with eligibility for Medicare.
The final rule includes minor clarifications on the NPRM:
The Office of Legal Counsel recommends that the Commission approve this draft the Final Rule or coordination with sister agencies and the Office of Management and Budget.
This page was last modified on April 27, 2004.
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