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Do Your Benefit Plans Violate the ADEA?

by Stephen Stine

We aren’t getting any younger, and neither are your employees. As a result, employers are increasingly having to confront age-related issues that may lead to legal liability. These issues arise not only in the context of hiring and firing decisions but also in the design of benefit plans. To ensure your benefit plans don’t contain any provisions that may run afoul of age discrimination laws, now is a good time to review some of the basic protections that older workers enjoy.

Who is protected?
The federal Age Discrimination in Employment Act (ADEA) was passed by Congress over 40 years ago “to promote employment of older persons based on their ability rather than age; to prohibit arbitrary age discrimination in employment; [and] to help employers and workers find ways of meeting problems arising from the impact of age on employment.” Bear in mind that the statute prohibits discrimination against not only the “gray hairs” in your workforce but also against any employee over age 40.

Importantly, the ADEA prohibits unlawful discrimination in hiring, discharge, and promotion. It also prohibits discrimination in employee benefit plans, such as health care coverage and pensions. If you aren’t careful, the effect of the ADEA on employee retirement medical benefits and pensions can create complications and pitfalls for your business. To help ensure your plans pass ADEA muster, review their provisions and requirements with the following principles in mind.

Bona fide benefit plans
The ADEA allows you to establish “bona fide” employee benefit plans. “Bona fide” is defined as a system or plan not used to evade the purposes of the Act. Thus, if your employee benefit plan requires mandatory retirement because of age, it runs counter to the purposes of the ADEA and isn’t “bona fide.”

That doesn’t mean you can’t encourage employees to retire through the use of financial incentives in your plan. Under the ADEA, your employee benefit plan may include a voluntary early retirement plan as an incentive and still be “bona fide.”

Equal benefit, cost
One thorny issue concerns the ADEA’s “equal benefit or equal cost” rule, which requires equal treatment and parity in the amounts you spend on benefits for both younger and older workers. Fortunately, the Act includes “safe harbors” that exempt your benefit plan from legal challenge if the plan incurs equal or greater costs in providing benefits to older workers. There’s also a safe harbor if your plan provides equal or greater benefits to older workers when compared to the benefits or costs of benefits provided to younger workers.

Legality of lower benefits after age 65
Faced with rising medical costs and the increased life span of workers, many employers have sought to cut costs. One way to do that is to provide health benefits to retirees under age 65 and then reduce or eliminate the benefits when they become eligible for Medicare. But does a differentiation between retirees over 65 and those under 65 violate the equal-cost rule?

Initially, some courts said the differentiation constituted illegal age discrimination and outlawed the practice. The result was so costly for plans that some employers threatened to eliminate retiree health benefits altogether. To avoid that unintended outcome, the Equal Employment Opportunity Commission (EEOC) issued a rule that creates a regulatory exception to the ADEA and allows you to offer better medical benefits to retirees under 65 and then reduce or eliminate those benefits after the retiree becomes eligible for Medicare. In so doing, the EEOC made it clear that you can differentiate between the benefits of pre- and post-Medicare-eligible retirees without running afoul of the ADEA.

Factors other than age
One of the long-standing statutory defenses available to an employer subject to an ADEA claim is to prove that “the differentiation is based on reasonable factors other than age.” But what are reasonable factors? The U.S. Supreme Court has indicated that “reasonable factors” include cost factors that are highly correlated with age, such as pensions or high salaries. As long as your decisions aren’t “actually motivated” by age, correlation with age, on its own, does not create legal liability.

In applying its analysis, the Supreme Court recently held that Kentucky’s disability retirement plan, which imputed additional years of service (and accordingly higher benefits) only to employees who became disabled before reaching the retirement eligibility age of 55, did not violate the ADEA. That was the case even though older workers who were disabled after turning 55 received lower disability benefits. The Court reasoned that Kentucky’s system wasn’t “actually motivated” by bias against older workers but was instead organized around the “analytically distinct” concept of “pension status.”

No reverse age discrimination
As we already noted, the ADEA covers employees over age 40 and prohibits discrimination on the basis of age. Does that mean if you treat a 60-year-old employee better than a 41-year-old employee, the younger worker can sue for age discrimination since both employees are covered by the ADEA? The Supreme Court says no. In 2004, the Court made it clear that comparatively younger employees who are covered under the ADEA have no right to the same employee benefits an employer may choose to provide older workers who likewise are covered by the statute.

In that case, General Dynamics renegotiated a collective bargaining agreement that previously allowed employees with 30 years of seniority to retire with full retirement benefits. The new agreement allowed full retirement benefits to be awarded only to employees who were at least 50 years of age.

Employees who were in their 40s filed suit, arguing that they had lost their right to immediate retirement benefits based solely on their age. Although that was true, the Supreme Court held that the preference for older workers wasn’t illegal. The Court found that the ADEA doesn’t prohibit employers from favoring relatively older workers over their younger colleagues who are at least 40 years old. The Court succinctly concluded: “The enemy of 40 is 30, not 50.” General Dynamics Land Systems, Inc. v. Cline.

Bottom line
The Supreme Court has recognized that age is different from other protected categories (e.g., race) under federal antidiscrimination law because there are a number of legitimate factors that correlate with a person’s age as he grows older. Thus, the mere fact that an employee benefit plan makes age-based distinctions doesn’t necessarily mean it violates the ADEA.

Knowing the difference between legitimate (and legal) age-based distinctions and those that are unlawful requires an understanding not only of the purpose behind Congress’ passage of the ADEA but also of the most up-to-date court and agency interpretations of the statute. If you have questions about whether your company’s employee benefit plan may contain unlawful age-based distinctions, you should consult with an attorney who is well versed in employment law to ensure that your plan is “bona fide.”