Benefits Can Now Be Cut at 65 for Retiree Plans – Does This Ruling Hinder or Help Retirees?

The Equal Employment Opportunity Commission (EEOC) announced in late December that employers can reduce or eliminate health benefits for retirees when they turn 65 and become eligible for Medicare.

The policy, set forth in a new regulation, allows employers to establish two classes of retirees, with more comprehensive benefits for those younger than 65 and more limited benefits- or none at all – for those older with Medicare. This differs from the past policy which required that the health insurance benefits received by Medicare-eligible retirees be the same, or cost the employer the same, as the health insurance benefits received by younger retirees.

Some advocates, such as AARP, claim this ruling is in direct conflict with the Age and Discrimination in Employment Act of 1967 as it creates an explicit exemption from age-discrimination laws for employers that scale back benefits of retirees 65 and over. Other advocates such as the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), the American Federation of Teachers, and the National Education Association, however, claim that this exemption will actually help preserve health benefits for more retirees, especially those who are younger than 65 without Medicare, many of whom may be at a growing risk of having no coverage. With the new ruling, companies that may have otherwise cut retiree benefits altogether, may now keep more comprehensive health care benefits for younger retirees and offer less or no benefits to retirees eligible for Medicare.

In general, employers are not required by federal law to provide health benefits to retired workers. And with the rising cost of health insurance, an increasing number of employers have reduced or dropped retiree coverage altogether. In 2007, for example, one-third of large employers provided retiree health benefits down from 66 percent in 1988, according to a survey by the Kaiser Family Foundation and the Health Research & Education Trust. The survey also indicated that 5% of employers with fewer than 200 employees offered retiree health benefits in 2007.

According to a recent news article, many companies that continue to offer coverage to retirees are reducing benefits or requiring them to pay more out-of-pocket costs. In fact, premiums for employer-sponsored health insurance rose an average of 6.1 percent this year and have increased 78 percent since 2001, according to surveys by the Kaiser Family Foundation.

People who retire early and do not have employer-sponsored coverage often need to purchase coverage until they become eligible for Medicare, but individual policies for people in their 60s can be hugely expensive, with premiums topping $900 a month for family coverage, according to a recent USA Today article. In addition, people with health conditions might not be able to find coverage at any price. Therefore, while this new ruling may decrease retiree coverage for those with Medicare, it may also help ensure coverage for younger retirees who are at greater risk for having no coverage. According to AARP, about 16% of individuals age 50 to 64 are uninsured.

AARP has argued that this policy creates an exemption from age-discrimination laws, but the United States Court of Appeals for the Third Circuit in Philadelphia responded by writing that it had the authority to establish “such reasonable exemptions” as it might find “necessary and proper in the public interest.”

In sum, under the new rule, employers may, if they choose, provide retiree health benefits “only to those retirees who are not yet eligible for Medicare.” Likewise, the rule says, retiree health benefits can be “altered, reduced or eliminated” when a retiree becomes eligible for Medicare.

Further, employers will be able to reduce or eliminate health benefits provided to the spouse or dependents who are 65 or over of a retired worker regardless of whether benefits for the retiree are changed.

In addition to this EEOC ruling, the Government Accountability Office (GAO) recently published a report (GAO-08-317) on the growing fiscal challenges that will begin to emerge for state and local governments in the next 10 years. GAO projections suggest that public employee and retiree health coverage programs, Medicaid and other state health programs will start throwing
state and local budgets out of balance in about 15 years. This GAO report combined with the
recent EEOC ruling may point to serious problems for retirees of public employers in the very near future, as well as lay the groundwork for justifying changes that public entities must make.

For more information on the EEOC ruling in particular, view the EEOC’s press release online and/or the final rule posted in the Federal Register.

Karen Joy Fletcher

Our blogger Karen Joy Fletcher is CHA’s Communications Director. With a Masters in Public Health from UC Berkeley, she is the online “public face” of the organization, provides technical expertise, writing and research on Medicare and other health care issues. She is responsible for digital content creation, management of CHA’s editorial calendar, and managing all aspects of CHA’s social media presence. She loves being a “communicator” and enjoys networking and collaborating with the passionate people and agencies in the health advocacy field. See her current articles.