Continuing Uncertainty Under ADEA for School Corporations Offering Early
Retirement Incentives and Retiree Medical Benefits: A Legal Update

The Age Discrimination in Employment Act of 1967 (ADEA) has been an uncertain hurdle for school corporations in designing early retirement incentive programs that reduce benefits on account of age in order to encourage retirement, as well as retiree benefits simply intended to provide transitional retirement benefits, such as retiree medical benefits that terminate at Medicare eligibility. School corporations frequently sponsor such programs in an attempt to cut costs, eliminate positions, create more flexibility and diversity in their teacher pool, as well as to reward long service. These programs have been plagued, however, with claims of age discrimination, and a number of schools have found themselves being sued by the EEOC or by employees and having to pay significant claims and settlements. Although Congress is currently considering legislation that could alleviate some taxation concerns school corporations face with respect to their early retirement incentive programs, there is no proposed solution to the ADEA problem. School corporations should, therefore, be aware of recent developments in the federal courts with respect to retiree medical benefits and early retirement incentive programs.

Retiree Medical Benefits

School corporations have long offered continued medical benefits, as either an early retirement incentive or as a reward for long service, to teachers and administrators who retire after meeting specified age and service conditions to provide transitional coverage until Medicare age. While many schools have in recent years reduced or eliminated their contributions toward retiree medical premiums, or have begun to fund these benefit promises through health care trusts and VEBAs, in many cases the fundamental promise of access to medical insurance until Medicare age has remained a component of these benefits. Since August 2000, when the Third Circuit Court of Appeals held that terminating or reducing retiree medical benefits at Medicare eligibility was a violation of ADEA, this common practice has been in legal limbo. A recent decision by a federal court in Pennsylvania is the latest development in this continuing saga, but by no means provides the final word on the subject.

To provide some background, in 2000 the Third Circuit Court of Appeals in Erie County Retiree’s Association v. County of Erie, held that a county’s plan with health insurance coverage for retirees, that reduced those benefits when the retirees became eligible for Medicare violated ADEA. The Court held that ADEA applied to retiree medical benefits, and that a reduction in such benefits must satisfy ADEA’s “equal benefit or equal cost” test. This means that either the value of benefits provided to older retirees must be equal to those provided to younger retirees or the cost of the benefits provided to all retirees must be equal. As a result, the Erie County decision would make it unlawful for school corporations to use Medicare eligibility as the criteria for elimination or reduction in retiree health coverage except in very limited circumstances. The United States Supreme Court declined to consider the Third Circuit’s decision, and thus, that decision became binding for the states located in the Third Circuit, which include Pennsylvania, Delaware, New Jersey, and the Virgin Islands.

The EEOC initially adopted the Third Circuit's holding as its national enforcement policy. However, it received substantial criticism of the policy and realized that since employers are not required to offer medical benefits to retirees, this rule actually dissuaded employers from offering retiree benefits at all. The EEOC thus concluded that the equal benefit or equal cost requirement was not practical when applied to retiree medical benefits. In 2003, the EEOC issued proposed rules permitting employers to coordinate retiree medical care with Medicare without being subject to the equal benefit or equal cost requirements of ADEA.

The EEOC’s rules permitting coordination of retiree medical care with Medicare were made final in 2004, but before the final rule became effective, the American Association of Retired Persons (AARP) filed a suit in Pennsylvania federal court challenging the EEOC’s authority to issue the rules under ADEA. In May 2005, the court blocked the EEOC from finalizing its proposed rules on the grounds that it was contrary to the clear intent of the ADEA. While the court acknowledged that the EEOC argued persuasively that, without the rules, employers would reduce or eliminate health benefits for all retirees, the court held that an administrative agency may not issue regulations that go against the intent of Congress. The EEOC has indicated that it will appeal this decision to the Third Circuit Court of Appeals; since this is the same court that issued the Erie County decision, observers are not optimistic that the EEOC will win a reversal on appeal.

As a result of the AARP v. EEOC decision, the EEOC is prohibited from finalizing the rule that would allow employers to reduce benefits for retirees at Medicare eligibility. Those school corporations located in the Third Circuit who are bound by the Erie County decision may wish to consider taking steps to meet the equal cost or equal benefit test. For most school corporations, however, whether or not they can continue to reduce or eliminate retiree medical benefits at Medicare age is still an uncertain proposition. The EEOC may be unlikely to take enforcement action against schools given this uncertainty, but individual employees may file lawsuits adopting the arguments set forth in Erie County. It would be prudent for all school corporations who offer retiree medical benefits to review such plans and evaluate the risks. School corporations should consider whether they can redesign their retiree medical benefit to satisfy the equal cost or equal benefit rule or another exception to ADEA, or to eliminate the age-based component.

Early Retirement Incentive Programs

Early retirement incentive programs are not prohibited by ADEA – in fact, since 1990 ADEA has contained a safe harbor which exempts from ADEA voluntary early retirement incentive plans that are consistent with ADEA’s goal of protecting against arbitrary age discrimination. However, the EEOC has taken the position that (with limited statutory exceptions) where the amount or availability of early retirement benefits is tied specifically to age such that benefits decrease or terminate as an employee gets older, the program is age discriminatory under ADEA. The EEOC has stated that it believes this type of program coerces premature termination of employment based on age and, therefore, violates ADEA’s purpose of promoting the employment of older workers.

The EEOC’s position became more aggressive after the enactment of the Higher Education Act in 1998, which clarified that early retirement incentive programs that reduce benefits based on age are not discriminatory under ADEA as applicable to higher education institutions. In 1999, the Seventh Circuit Court of Appeals in Solon v. Gary Community School Corporation handed the EEOC a victory in holding that an early retirement incentive program that provided benefits for employees with 15 years of service who retired between the age of 58 and 61, but reduced the number of years for which a retiree would receive benefits the longer he or she delayed retirement (e.g. four years if the employee retired at age 58, three years if the employee retired at age 59, etc.) violated ADEA. Following the Solon decision, the EEOC began to warn schools to end similar programs, and began audits of school districts in a number of states, including Indiana.

Most recently, the EEOC has audited and requested information on early retirement incentive programs from over two-thirds of the school districts in Minnesota and Wisconsin. These investigations culminated in the fall of 2004 when the EEOC brought a lawsuit against ten Minnesota school districts alleging that the early retirement incentive programs in the school districts’ collective bargaining agreements violated ADEA. The EEOC’s action was apparently a surprise to these schools, both because the EEOC had previously indicated that it would not pursue charges if the schools changed their programs to comply going forward and because many of the schools' programs were modeled after a State of Minnesota early retirement incentive program for teachers which had been upheld as legal under ADEA by the Eighth Circuit Court of Appeals. In the lawsuits against the Minnesota school districts, the EEOC sought to stop the allegedly illegal programs, as well as payment to every affected employee of the amount that would have been paid but for the age penalty, plus interest.

In January 2005, one of these Minnesota schools, Lindstrom, entered into a settlement with the EEOC under which it agreed to pay ten former teachers over $110,000 in back-pay and interest. The Lindstrom School District sponsored an early retirement incentive program based on years of service and unused sick days for teachers retiring on or after age 55. Benefits were reduced 5% for each year after age 55 that the teachers worked, were reduced 50% at age 65, and ceased after 65.

Most recently, the EEOC filed a motion asking the Minnesota District Court to find that the program sponsored by another of the school districts, the Pine River School District, violates ADEA. Pine River School District’s early retirement incentive program provided a lump sum payment (calculated based on years of service and unused leave) to a full-time teacher who retired after attaining at least age 52 with 15 years of service. Teachers retiring between 52 and 58 received 100% of the benefit, but teachers retiring after 58 received a percentage of the benefit that decreased in relation to the age that they retired. A teacher retiring on or after age 66 would not receive any benefit.

In July 2005, the District Court issued a decision agreeing with the EEOC and found that Pine River School District’s early retirement incentive program violated the ADEA because benefits were reduced entirely based on age. The Court noted that the case was indistinguishable from its 2004 Overlie v. Owatonna Independent School District No. 761 decision, which involved an early retirement incentive program where a teacher retiring at age 55 received 100% of the benefit and any teacher retiring after age 55 received a decreasing percentage of the benefit each year after 55 that the teacher retired. As in Overlie, the court determined that the early retirement incentive program had an intentionally discriminatory character, and that lack of improper motive was irrelevant. The District Court also dismissed Pine River School District’s third party suit against its education association, which alleged that the School District was entitled to indemnification or contribution because the association negotiated the collective bargaining agreements which contained the early retirement program. As in Overlie, the court held that ADEA did not create a right of contribution.

The EEOC's enforcement activity in Minnesota and Wisconsin and this recent victory should serve as a warning to all school corporations who sponsor early retirement incentive programs. Schools should review their programs carefully and understand the risks and the scope of their exposure, and, if the risk is unacceptable, consider modifying their programs to satisfy ADEA or an exception to ADEA.

If you have questions about your school corporation's early retirement incentive programs or retiree medical benefits, please call or e-mail your contact in the Employee Benefits Group at Ice Miller. If you do not have a contact at Ice Miller, please contact Mary Beth Braitman, James D. Kemper or Tara Schulstad Sciscoe or visit us at www.icemiller.com to view a complete listing of our attorneys.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.