The Equal Employment Opportunity Commission has released comprehensive new guidelines addressing the legality of benefit differentials under several federal anti-discrimination laws. The guidelines apply to health and life insurance, long- and short-term disability benefits, severance, pension and early retirement incentives.
In this first segment of our two-part series explaining the new guidance, we look at the EEOC rules on providing different benefits based on the recipient’s age. Next month we’ll examine the rules dealing with benefit differentials based on disability and pregnancy.
Age Discrimination Exceptions
In general, under the federal Age Discrimination in Employment Act—which protects workers age 40 and older—an employer cannot take a worker’s age into consideration in providing fringe benefits. However, as we explain below, you can provide lesser benefits to older workers in some circumstances.
Equal Cost Or Equal Benefits
The EEOC requires that you either provide equal benefits to older and younger workers or spend an equal amount to purchase benefits, even if the benefits aren’t equivalent. Under this so-called “equal cost/equal benefits” rule, benefits are considered equal only if older and younger workers receive the same benefits in all respects, including payment options and types and amounts of benefits.
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Providing benefits that aren’t equivalent is legal only if you meet all of these conditions:
- The benefit gets more expensive as people age, as with life insurance, health insurance and long-term disability coverage.
- The benefit is part of a written employee benefit plan mandating a lower benefit level as employees age.
- You spend the same amount to purchase the benefit for each employee, regardless of age.
- You reduce older workers’ benefits only as much as necessary to equalize the cost of the benefit for each worker.
Benefits Package
If you offer a benefits package, you can decrease one element more than would be justified by the age-based cost increase, as long as you spend a corresponding amount to maintain or increase other benefits.
For example, suppose you offer employees both long-term disability benefits and life insurance, and the price is the same for each. If age-based cost increases would justify a 10% reduction in each benefit for workers age 55 through 59, you could instead trim their life insurance coverage by 20% and maintain the disability benefit without reduction.
You can only offset benefits that become more expensive to provide with advancing age. For example, you can’t balance the higher cost of life insurance by reductions in paid vacation or service retirement benefits. And there are special limitations on offsetting increases in the cost of health coverage against other benefits you offer.
Employee-Funded Benefits
If employees contribute to the cost of their benefits, you can pass on cost increases to older workers. For example, suppose enrollment in your health plan is mandatory and the premium goes up by 10% when an employee turns 60. You can require the worker to pay the added premium, but you may not fire the employee if they refuse. Instead, you must give the worker the option to withdraw from the plan or reduce their coverage to maintain the same premium cost. Note, too, that older employees can’t be required to pay a greater percentage of the premium cost than younger employees.
Special Medicare-Related Rules
The EEOC guidelines state that you can’t take the availability of Medicare into account in determining benefits for active employees age 65 and older. But it’s not illegal to take Medicare into consideration when evaluating whether retirees over age 65 are receiving the same total health benefits as younger retirees.
Long-Term Disability Guidelines
You can set the following age-based time limits on long-term disability benefits: 1) for disabilities that occur before or at age 60, benefits can cease at age 65; and 2) for disabilities that occur after age 60, benefits can end five years after the disability starts. If your schedule differs from these guidelines, you’ll have to justify any age-based limits under the equal cost rule.
Early Retirement Incentives
It’s legal to offer early retirement incentives so long as they’re voluntary. You can set a minimum age or minimum years of service, offer the incentive for a limited period of time, and/or make it available only to a particular subset of employees, such as managers or employees in a specific department.
For More Information
To clarify your legal obligations concerning benefits discrimination, call the EEOC at (202) 663-4691.