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Thinking about terminating employee health insurance benefits based on Medicare eligibility to save money? Not so fast!

October 7th, 2011  |  Pamela Wolf

A recently released EEOC informal discussion letter reminds employers that the regulatory exemption from the ADEA, which permits coordination of retiree health benefits with Medicare eligibility, does not apply to current employees. The question of whether the age-based action may be justified by spending more on another benefit for older workers turns on the employer’s ability to satisfy the ADEA’s “equal benefit or equal cost” defense. However, notwithstanding the ADEA, such actions may be precluded by Medicare rules, according to the letter.

The EEOC letter, dated August 2, 2011, notes that the EEOC’s ADEA exemption for coordination with Medicare applies only to retiree benefits, not to the benefits of current employees.

The question of whether the ADEA would otherwise permit an employer to terminate a current employee’s eligibility for group health insurance based on Medicare eligibility depends on the circumstances, the letter advises. “Since workers typically become eligible for Medicare at age 65, eliminating group health eligibility for current employees when they become Medicare-eligible is an age-based action. As such, it would violate the ADEA unless it satisfies the statute’s ‘equal benefit or equal cost’ defense,” the letter states.

Equal benefits. The defense, outlined in the Commission’s regulation at 29 CFR Sec. 1625.10, is set forth in the EEOC’s letter with respect to the equal benefits prong:

(e) Benefits provided by the Government. An employer does not violate the Act by permitting certain benefits to be provided by the Government, even though the availability of such benefits may be based on age. For example, it is not necessary for an employer to provide health benefits which are otherwise provided to certain employees by Medicare. However, the availability of benefits from the government will not justify a reduction in employer-provided benefits if the result is that, taking the employer-provided and Government-provided benefits together, an older employee is entitled to a lesser benefit of any type (including coverage for family and/or dependents) than a similarly situated younger employee. For example, the availability of certain benefits to an older employee under Medicare will not justify denying an older employee a benefit which is provided to younger employees and is not provided to the older employee by Medicare. (EEOC’s emphasis)

Equal cost. However, the letter points out, an employer that cannot satisfy the equal benefits prong may still avoid ADEA liability by satisfying the equal cost prong of the defense. “Equal cost” is usually calculated in one of two ways – on a “benefit-by-benefit” basis or a “benefit package” basis.

Under the benefit-by-benefit approach, according to the letter, an employer “most likely cannot prove that it expends an equal amount on health insurance for both younger and Medicare-covered workers where it eliminates the health benefits available to Medicare-eligible employees.”

As for the benefit package approach, the letter explains that Section 1625.10(f)(2)(iii) precludes justifying the elimination of a health benefit by spending more on “another benefit” for older workers as an alternative to the benefit-by-benefit analysis for purposes of eliminating health benefits based on age:

(iii) A benefit package approach shall not be used to justify reductions in health benefits greater than would be justified under a benefit-by-benefit approach. Such benefits appear to be of particular importance to older workers in meeting “problems arising from the impact of age” and were of particular concern to Congress. Therefore, the “benefit package” approach may not be used to reduce health insurance benefits by more than is warranted by the increase in the cost to the employer of those benefits alone. Any greater reduction would be a subterfuge to evade the purpose of the [ADEA].

Medicare rules. The Commission’s letter also questions whether terminating the benefits of Medicare-eligible current employees “would comport with Medicare rules.” The EEOC understands the Medicare program to require that employers “offer current employees who are at or over the age of Medicare eligibility the same health benefits, under the same conditions, as offered to younger current employees.” If this continues to be true, Medicare laws may prohibit employers from eliminating health coverage for Medicare-eligible current employees, irrespective of the ADEA, the letter observes.

The EEOC letter is merely informal advice pursuant to 29 CFR Sec. 1626.20(c) and may not be relied upon by an employer within the meaning of section 10 of the Portal to Portal Act of 1947, incorporated into the ADEA.