Supreme Court OKs Employer Use of Age as a Factor In Pension Plans

Posted on June 27, 2008 by Jamie LaPlante

In Kentucky Retirement Systems v. EEOC, No. 06-1037, 2008 WL 2445078 (U.S. June 19, 2008), the Supreme Court recently held that “where an employer adopts a pension plan that includes age as a factor” (in determining eligibility for retirement with pension benefits), and the employer subsequently “treats employees differently based on pension status,” the plan does not automatically violate the Age Discrimination in Employment Act (ADEA). Rather, the Court held that the plaintiff challenging such a policy must show that the differential treatment was “actually motivated” by age. In a 5-4 decision — with a rather strange alignment of the justices — the majority, which consisted of Justices Breyer (who authored the opinion), Stevens, Souter, and Thomas and Chief Justice Roberts, reversed the Sixth Circuit’s en banc ruling striking down the pension plan as facially discriminatory.

[This post serves as a follow up to my earlier posts on March 26, 2008 and January 2, 2008 regarding the decision in Erie County Retirees Association v. County of Erie by the Third Circuit upholding the EEOC’s rule allowing employers to coordinate retiree healthcare benefits with Medicare benefits, effectively resulting in equal total benefits between younger retirees and older Medicare-eligible retirees but unequal amounts spent on the two groups’ benefits because a portion of the Medicare-eligible retirees’ payments come from Medicare.]

Under Kentucky’s retirement system for state employees in “hazardous positions” — law enforcement, firefighters, paramedics, and correctional facility workers — an employee could become eligible for “normal retirement” in one of two ways: (1) after 20 years of service or (2) at age 55 after five years of service. The pension benefits are calculated by multiplying years of service by 2 ½% and multiplying that number by pre-retirement pay. The plan also allows for workers in hazardous positions to retire if they become disabled. Under “disability retirement,” the worker is credited with “imputed” years of service equal to the years necessary for the employee to become retirement-eligible under either method. However, no employee may receive more imputed years than the employee’s actual years of service. And no imputed years are awarded for workers who become disabled after becoming retirement-eligible.

The particular employee in this case, Charles Lickteig, was a worker who became disabled at age 61 with 18 years of service. He was retirement-eligible at age 55. Thus, when his benefits were calculated, Mr. Lickteig received no imputed additional years of service. He argued that a similarly-situated employee in his 40s with 18 years of service would have received two additional imputed years of service under the plan, and thus, the plan was discriminatory on the basis of age. The EEOC agreed and brought an age discrimination lawsuit. The District Court held that the EEOC failed to establish age discrimination. A panel of the Sixth Circuit agreed, but the Sixth Circuit, on rehearing en banc, held that the plan violated the ADEA and reversed the decision. The Supreme Court agreed to hear the case because of its widespread impact on pension plans across the country.

Focusing on its prior decision in Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993), the Supreme Court held that a dismissal based on pension status was not a dismissal because of age (in violation of the ADEA). In Hazen Paper, the Court had held that, even though years of service (and consequently pension status) typically is linked to age, the two concepts were “analytically distinct.” In Hazen Paper, in contrast to this case, pension status was solely based on years of service. The Court in Kentucky Retirement Systems expanded upon Hazen Paper holding that, even where pension status is a function of both age and years of service, discriminating on the basis of pension status does not automatically equal discrimination on the basis of age unless the difference in treatment is “actually motivated” by age to violate the ADEA.

What does this decision mean for public and private employers going forward? Basically, it means that public workers in Kentucky and states with similar pension plans can continue to rely on the promise of disability retirement benefits if they become disabled. It also means that public and private employers who feared their plans were implicated by the Kentucky Retirements Systems case — a number estimated at 2,700 employers and 25 million affected workers — do not have to cut benefits, increase employer contributions, or otherwise restructure their plans to bring them into compliance with the ADEA. The decision, when coupled with the Supreme Court’s recent decision not to review the Third Circuit’s decision in Erie County Retirees Association, also suggests that, at least in the pension context, the Supreme Court seems inclined to rely more on the underlying purpose of the ADEA rather than strict compliance with the statutory text. This decision also gives employers more leeway in setting up pension plans and makes it easier for employers to allow early (age-based) retirement, in addition to traditional retirement based on years of service alone. It does not, however, mean that the ADEA can be ignored in the pension context. The Court is clear that plans and eligibility decisions based on age-based animus will be struck down.
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New EEOC Rule Makes an Exemption to Erie Decision and Allows Coordination of Healthcare Benefits for Retirees with Medicare

Posted on January 2, 2008 by Jamie LaPlante

On December 26, the EEOC announced a new rule that makes it easier for employers to help retirees maintain adequate healthcare benefits.  In particular, employers that provide retiree healthcare benefits may coordinate those benefits with Medicare benefits without engaging in age discrimination based on the difference in ages between younger non-Medicare-eligible retirees and older Medicare-eligible retirees.

In today’s employment landscape, fewer employers provide retiree benefits.  This forces many retired employees to rely solely on Medicare benefits to cover increasing healthcare costs—at best, a difficult situation.  As a result, many employers are searching for viable ways to continue to provide healthcare benefits to retirees.  The most common and cost-effective way for companies to do so is for employers to coordinate employer-provided benefits with benefits provided by Medicare.  This is accomplished by:

  1. supplementing the benefits provided by Medicare up to a specified level of coverage;
  2. offering benefits after retirement but only until the retiree becomes Medicare-eligible; or
  3. some combination of the two.

Although these approaches seem reasonable, courts questioned their legality under the Age Discrimination in Employment Act.  In Erie County Retirees Association v. County of Erie, a controversial decision issued in 2000 by the U.S. Court of Appeals for the Third Circuit, the practice of treating Medicare-eligible retirees differently than younger retirees was found to violate the ADEA.  In that case, the court held that the health insurance benefits provided to Medicare-eligible retirees and younger retirees must cost the employer the same amount.  Not surprisingly, most retiree healthcare plans violated the ADEA because employers typically spend significantly less on retiree benefits when those benefits only supplement Medicare’s coverage.  Faced with the prospect of spending more money for retiree benefits, many employers considered reducing or eliminating retiree healthcare benefits for both Medicare-eligible and younger retirees.

Perhaps recognizing the dilemma posed to employers that try to do right by their retirees, the Third Circuit recently provided an out: The court ruled that, notwithstanding the Erie decision and objections by the American Association of Retired Persons (AARP), the EEOC has the authority under the ADEA to enact regulatory exceptions to the ADEA's provisions.  Accordingly, the EEOC’s new rule provides an exemption from the ADEA for the longstanding employer practice of coordinating retiree benefits with Medicare coverage.  Employers and labor groups alike support the new rule.

AARP appealed  to the United States Supreme Court the Third Circuit's decision regarding whether the EEOC has authority to create the exception to the ADEA.  It seems unlikely that the Supreme Court will agree to hear this appeal.  If it does and decides in favor of AARP (this is unlikely), the rule's new exception to ADEA will not take effect.

The Supreme Court, however, has heard oral argument in a related case that will likely impact this area.  In Kentucky Retirement System v. EEOC, the Supreme Court considered "whether any use of age as a factor in a retirement plan is 'arbitrary' and thus renders the plan facially discriminatory in violation of the Age Discrimination in Employment Act."  The case involves disability retirement benefits and normal retirement benefits in which service years or a combination of age and service years determines eligibility for both, and thus, age is an indirect factor in determining eligibility.  The Supreme Court will decide if this plan violates the ADEA.  This may or may not impact the decision in Erie.

Bottom line for employers: The ADEA no longer poses an obstacle for employers that wish to treat retirees equitably by supplementing Medicare benefits for Medicare-eligible retirees and providing greater benefits for non-Medicare-eligible retirees.

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