The U.S. Equal Employment Opportunity Commission

EEOC Office of Legal Counsel staff members wrote the following informal discussion letter in response to an inquiry from a member of the public. This letter is intended to provide an informal discussion of the noted issue and does not constitute an official opinion of the Commission.


ADEA: Benefits

April 26, 2001

Dear :

This is in response to your March 7, 2001 request for a formal opinion letter relating to retiree health benefits offered by cities in . Issuance of a formal opinion letter by the Equal Employment Opportunity Commission (EEOC or Commission) is discretionary. See 29 C.F.R. § 1626.17(b). Because the application of most employment policies and practices is fact-specific, the Commission typically will not assess the legality of a particular employment practice outside the context of a formal charge of discrimination. Although we cannot provide you with a formal opinion, we can offer the following informal guidance.

You stated in your letter that [your state] law requires local governmental units to offer their retirees the option to participate indefinitely in local government sponsored medical and dental insurance plans. Under the law, retirees must pay the full cost of their insurance premiums, unless otherwise required by an applicable collective bargaining agreement. Further, the law requires that local government health plans "pool" retirees under the age of 65 together with active employees for purposes of establishing benefits and premiums.

You raise two questions: (1) whether a retiree health plan that treats pre-65 retirees and post-65 retirees differently for the purpose of establishing premiums and benefits is lawful when plan participants are solely responsible for paying the cost of insurance, and (2) whether it is lawful for a city to provide a flat dollar contribution to each employee or retiree regardless of age for the purchase of benefits from a "cafeteria" benefit plan that imposes age-rated premiums.

As you know, EEOC is responsible for enforcing the Age Discrimination in Employment Act of 1967, 29 U.S.C. §621 et seq. (ADEA). In general, the ADEA prohibits an employer from reducing or eliminating employee benefits because of age, except to the extent that the actual amount of payment made or cost incurred on behalf of an older worker is no less than that made or incurred on behalf of a younger worker. This is known as the equal benefit/equal cost principle. That principle also applies in the context of retiree health benefits. Erie County Retirees Assn. v. County of Erie, Pennsylvania, 220 F.3d 193 (3d Cir. 2000), cert. denied, 121 S.Ct. 1247 (2001).

Differentiating Between Pre and Post Age 65 Retirees

You asked whether a city's retiree health plan can differentiate between pre-age-65 retirees and post-age-65 retirees where the participants pay the entire health insurance premium. Any employer that offers health insurance benefits to retirees must do so in a non age-discriminatory manner; the fact that the employees shoulder the cost of premiums in no way alter's an employer's responsibility in this regard.

The ADEA does permit employers to base health insurance premiums on age; but only to the extent that the difference is attributable to age related cost considerations. Congress included the cost defense because it recognized that the cost of some benefits -- such as life, disability, and health insurance - increases with age. Employers may use age brackets of up to five years for the purpose of making these calculations. See 29 C.F.R. § 1625.10(d)(3). While an employer may implement cost comparisons of less than five years, larger age brackets are not permitted. Because a cost comparison of all persons under age 65 with all persons over that age constitutes an age bracket that is much greater than five years, a reduction in benefits based on any such comparison would be impermissible.

Providing a flat dollar amount to all retirees where the premiums are age related

The equal benefit/equal cost principle also governs the question of whether an employer may lawfully provide a flat dollar contribution to each employee or retiree regardless of age for the purchase of benefits from a "cafeteria" plan that employs age based premiums. Employers may provide a fixed amount of money to employees for use toward the purchase of their choice of benefits from a cafeteria plan. Compliance Manual Section on Employee Benefits at n. 19. The employer must be able to demonstrate, though, that any age-related premium increase is actuarially justified. Again, employers may use age brackets of up to five years for purposes of making those calculations.

In addition, Commission regulations permit benefit packages, including cafeteria plans, to include health insurance benefits and to take into account age-based cost increases. The regulation on benefit packaging does not permit health insurance benefits in a benefit package to be reduced on account of age more than would be permissible if the health insurance benefit were the only benefit. 29 C.F.R. § 1625.10(f)(2). That provision contains a numerical example that explains the principle of reducing one benefit while raising another. The regulation envisions a situation in which the employer is providing the benefit and deciding how much of each benefit to provide to the employee. That example does not precisely apply to a cafeteria plan in which the employee chooses which benefits to purchase. However, the general principle embodied in the regulation does apply; an employer must be able to justify the cost of the health care benefit and may not, for example, justify raising the cost of the health insurance benefit by lowering the cost of life insurance.

We hope the above information is helpful to you. This letter does not constitute a formal opinion letter of EEOC under 29 C.F.R. § 1626.18.

Sincerely,

Dianna B. Johnston
Assistant Legal Counsel


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