Age Discrimination in Employment Act; Retiree Health Benefits, 72938-72945 [E7-24867]

Agencies

• Equal Employment Opportunity Commission

[Federal Register Volume 72, Number 246 (Wednesday, December 26, 2007)]
[Rules and Regulations]
[Pages 72938-72945]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-24867]


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EQUAL EMPLOYMENT OPPORTUNITY COMMISSION

29 CFR Parts 1625 and 1627

RIN 3046-AA72


Age Discrimination in Employment Act; Retiree Health Benefits

AGENCY: U.S. Equal Employment Opportunity Commission

ACTION: Final rule.

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SUMMARY: The Equal Employment Opportunity Commission is publishing this 
final rule so that employers may create, adopt, and maintain a wide 
range of retiree health plan designs, such as Medicare bridge plans and 
Medicare wrap-around plans, without violating the Age Discrimination in 
Employment Act of 1967 (ADEA). To address concerns that the ADEA may be 
construed to create an incentive for employers to eliminate or reduce 
retiree health benefits, EEOC is creating a narrow exemption from the 
prohibitions of the ADEA for the practice of coordinating employer-
sponsored retiree health benefits with eligibility for Medicare or a 
comparable State health benefits program.\1\ The rule does not 
otherwise affect an employer's ability to offer health or other 
employment benefits to retirees, consistent with the law.
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    \1\ The EEOC recognizes that eligibility for Medicare and 
comparable state health benefits is not necessarily limited to 
retirees. As explained below, this rule only concerns application of 
the Age Discrimination in Employment Act to employer-sponsored 
retiree health benefits for individuals who also happen to be 
eligible to participate in Medicare or a comparable state health 
benefit. Individuals who are eligible for and/or receive Medicare or 
comparable state health benefits, but who are not retired, are not 
affected by this rule.

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DATES: Effective December 26, 2007.

FOR FURTHER INFORMATION CONTACT: Raymond Peeler, Senior Attorney 
Advisor, at (202) 663-4537 (voice) or Dianna B. Johnston, Assistant 
Legal Counsel, at (202) 663-4637 (voice) or (202) 663-7026 (TTY) (These 
are not toll free numbers). This final rule is also available in the 
following formats: large print, braille, audio tape, and electronic 
file on computer disk. Requests for this document in an alternative 
format should be made to the Publications Information Center at 1-800-
669-3362.

SUPPLEMENTARY INFORMATION: Employer-sponsored retiree health benefits 
provide a much-needed source of health coverage for older Americans at 
a time when their health care needs are greatest. Without employer-
sponsored retiree health benefits, many retirees are forced to go 
without health benefits between the time they retire and the time they 
become eligible for Medicare. Older retirees also rely on employer-
sponsored retiree health benefits to cover medical costs that are not 
covered by Medicare.
    Employers are not legally obligated to provide retiree health 
benefits, and many do not. Moreover, over the past several years, the 
number of employers who offer such benefits has begun to decline. 
According to an independent study by the United States General 
Accounting Office (GAO), about one-third of large employers and less 
than 10% of small employers offered their retirees health benefits in 
2000, compared to about 70% of employers in the 1980s.\2\ Of those 
employers that do offer coverage, many ``have reduced the terms of 
coverage by tightening eligibility requirements, increasing the share 
of premiums retirees pay for health benefits, or increasing copayments 
and deductibles--thus contributing to a gradual erosion of benefits.'' 
\3\
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    \2\ U.S. GENERAL ACCOUNTING OFFICE, ``Retiree Health Benefits: 
Employer-Sponsored Benefits May Be Vulnerable to Further Erosion,'' 
GAO Doc. No. GAO-01-374 (May 2001).
    \3\ Id., at 6.
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    Rising health care costs, larger numbers of workers nearing 
retirement age, and mandated changes in the way employers must account 
for the long-term costs of providing retiree health coverage have been 
substantial factors contributing to the erosion of this valuable 
employment benefit. However, the Equal Employment Opportunity 
Commission (Commission or EEOC) believes that concern about the 
potential application of the Age Discrimination in Employment Act of 
1967, 29 U.S.C. 621 et seq. (ADEA or Act) to employer-sponsored retiree 
health benefits also has adversely affected the availability of this 
benefit. A wide range of stakeholders, including labor organizations, 
benefits consultants, state and local governments, and private 
employers, agree that ADEA concerns have created an additional 
incentive to reduce or eliminate employer-sponsored retiree health 
benefits.

[[Page 72939]]

    In August 2000, the United States Court of Appeals for the Third 
Circuit became the first federal court of appeals to examine the 
relationship between the ADEA and employer-provided retiree health 
benefits. The Third Circuit held that an employer violated the ADEA if 
it reduced or eliminated retiree health benefits when retirees became 
eligible for Medicare, unless the employer could show either that the 
benefits available to Medicare-eligible retirees were equivalent to the 
benefits provided to retirees not yet eligible for Medicare or that it 
was expending the same costs for both groups of retirees.\4\ The 
Commission subsequently adopted this ruling as its national enforcement 
policy.\5\ Before the Third Circuit's decision, many employers had 
relied on legislative history to the Older Workers Benefit Protection 
Act of 1990, Public Law No. 101-433, 104 Stat. 978 (1990) (OWBPA), that 
states that the practice of eliminating, reducing, or altering 
employer-sponsored retiree health benefits with Medicare eligibility is 
lawful under the ADEA.\6\
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    \4\ Erie County Retirees Ass'n v. County of Erie, 220 F.3d 193 
(3d Cir. 2000). The Commission submitted an amicus curiae brief in 
Erie County, asserting, based on the plain language of the ADEA, 
that (1) retirees are covered by the ADEA and (2) employer reliance 
on Medicare eligibility in making distinctions in employee benefits 
violated the ADEA, unless the employer satisfied one of the Act's 
specified defenses or exemptions.
    \5\ In its October 2000 Compliance Manual Chapter on ``Employee 
Benefits,'' the Commission explicitly adopted the position taken by 
the Third Circuit in Erie County as its national enforcement policy. 
When the Commission announced in August 2001 that it wished to 
further study the relationship between the ADEA and employer-
sponsored retiree health plans, the Commission unanimously voted to 
rescind those portions of its Compliance Manual that discussed the 
Erie County decision.
    \6\ Final Substitute: Statement of Managers, 136 Cong. Rec. 
S25353 (Sept. 24, 1990); 136 Cong. Rec. H27062 (Oct. 2, 1990). In 
addition, the Conference Report for the recently enacted Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003, Pub. 
L. No. 108-173, 117 Stat. 2066 (2003) also provides that ``the 
conferees reviewed the ADEA and its legislative history and believe 
the legislative history clearly articulates the intent of Congress 
that employers should not be prevented from providing voluntary 
benefits to retirees only until they become eligible to participate 
in the Medicare program.'' H.R. Conf. Rep. No. 108-391, at 365 
(2003).
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    After the Commission implemented the Third Circuit's rule, labor 
organizations, benefits experts, state and municipal governments, and 
employers informed us that our actions were further eroding employer-
sponsored retiree health benefits by creating an additional incentive 
for employers to reduce, or eliminate altogether, health benefits for 
retirees. Under the Commission policy in effect prior to August 2001 
(see nn. 2 & 3), employers that chose to provide retiree health 
benefits had to prove either (1) that the benefits available to 
Medicare-eligible retirees were the same as the benefits provided to 
retirees not yet eligible for Medicare or (2) that they were expending 
the same costs for both groups of retirees. Making such a showing 
requires complex comparisons of multiple objective and subjective 
variables, including types of plans, levels and types of coverage, 
deductibles, geographical areas covered, and level of provider choice 
offered by each plan. Employers could avoid the problem by simply 
eliminating retiree health benefits entirely, since no law requires 
that employers provide retiree health benefits. Alternatively, 
employers could reduce the coverage they provided to those retirees who 
were not yet eligible for Medicare, leaving these retirees with fewer 
benefits. Unions, in particular, argued that the Commission's prior 
policy made it increasingly difficult to negotiate for the future 
provision of employer-sponsored retiree health benefits. The prior 
policy also had a particularly harsh impact on public school employees, 
who often retire early and rely on employer-provided retiree health 
benefits until they become eligible for Medicare.
    These comments prompted the Commission to study the relationship 
between the ADEA and employer-sponsored retiree health benefits. On 
July 14, 2003, EEOC published a Notice of Proposed Rulemaking (NPRM) in 
the Federal Register to address these concerns.\7\ In its NPRM, the 
Commission proposed to create a narrow exemption from the prohibitions 
of the ADEA for the practice of coordinating retiree health benefits 
with eligibility for Medicare or a comparable State health benefits 
program. The Commission now responds to public comments submitted in 
response to its NPRM and issues a final rule, adopting the NPRM 
exemption as modified.
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    \7\ The preamble to the Commission's NPRM provides detailed 
information about the Commission's study, including a comprehensive 
analysis of why the Commission believes that concern about the 
application of the ADEA to retiree health benefits is contributing 
to the erosion of this important benefit. See 68 FR 41542-41549 
(July 14, 2003), available at https://edocket.access.gpo.gov/2003/03-
17738.htm.
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    The final rule permits employers and labor organizations to offer 
retirees a wide range of health plan designs that incorporate Medicare 
or comparable State health benefit programs without violating the ADEA. 
For example, in order to ensure that all retirees have access to some 
health care coverage, the ADEA will not prohibit employers and unions 
from providing retiree health coverage only to those retirees who are 
not yet eligible for Medicare. They also may supplement a retiree's 
Medicare coverage without having to demonstrate that the coverage is 
identical to that of non-Medicare eligible retirees. Thus, for example, 
employers providing prescription drug benefits to Medicare-eligible 
retirees under the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003, Pub. L. No. 108-173, 117 Stat. 2066 (2003), 
need not be concerned about whether the drug benefits provided to 
Medicare-eligible retirees differ from those provided to retirees not 
yet eligible for Medicare.
    The final rule concerns only the ADEA. It does not affect any non-
ADEA obligation that employers may have to provide health benefits 
under Medicare or any other law. For example, this rule does not affect 
employers' obligation to use Medicare as a secondary payer, when 
required by Medicare law.
    In promulgating this rule, the Commission recognizes that the 
issues surrounding health care coverage, especially for retirees, are 
complex and that retiree health benefits are highly valued by older 
Americans. Although employers are under no legal obligation to offer 
retiree health benefits, some employers choose to do so and thereby 
provide retired workers with access to affordable health coverage at a 
time when private health insurance coverage might be otherwise cost 
prohibitive. Because the Commission has determined that its prior 
policy created an incentive for employers to reduce or eliminate 
retiree health benefits, the agency has concluded the public interest 
is best served by an ADEA policy that permits employers greater 
flexibility to offer these valuable benefits. The final rule is not 
intended to encourage employers to eliminate any retiree health 
benefits they may currently provide.

Overview of Public Comments

    The Commission received forty-four organizational comments in 
response to the NPRM. Twenty-seven commenters expressed support for the 
proposed exemption, including sixteen organizations that requested no 
revisions to the proposed rule. The Commission also received 
approximately 30,000 letters from individual citizens. Most of these 
individual comments were a form letter expressing concern that if the 
practice of coordinating retiree health benefits with eligibility for 
Medicare or comparable State health benefits programs is exempted from 
ADEA coverage, employers might reduce or even

[[Page 72940]]

eliminate the health benefits of Medicare-eligible retirees.

Scope of the Exemption

    Two organizational commenters questioned whether the language in 
Section 1625.32(b) clearly defined the scope of the proposed exemption. 
One of these two commenters requested that the Commission clearly state 
that, under the rule, an employer-sponsored health plan that alters, 
reduces, or eliminates health care benefits based upon the receipt of 
health benefits under Medicare or a comparable State health benefits 
program is entirely exempt from coverage under the ADEA, even if a 
challenged practice is unrelated to the plan's interaction with 
Medicare (or comparable State health benefits program). The Commission 
declines to adopt this suggestion because it is wholly inconsistent 
with the intended scope of the rule. The rule only exempts the narrow 
practice of coordinating employer-sponsored retiree health benefits 
with eligibility for Medicare or a comparable State health benefits 
program. A comparable state health benefits program refers to plans 
that were created to provide primary health benefits for state and 
local government employees who were not covered by Medicare and that, 
like Medicare, base eligibility on age.
    ADEA coverage of any other aspect of an employer-sponsored retiree 
health plan, or of any other employer act, practice, or benefit of 
employment, including employer-sponsored health plans for current 
employees, is not affected by the rule. Additionally, as discussed 
below, the Commission will apply the exemption to the practice of 
coordinating employer-sponsored retiree health benefits with 
eligibility for Medicare or a comparable State health benefits program 
regardless of whether an individual participant actually receives such 
benefits.
    Another organization argued that the phrase ``eligible for'' in 
Section 1625.32(b) was vague because it was unclear whether the rule 
requires that an individual retiree actually enroll in, rather than 
merely be eligible for, Medicare or a comparable State health benefits 
program before the exemption would apply. The effect and intent of the 
proposed rule was that the exemption would apply whether or not a 
particular retiree actually enrolls in Medicare or a comparable State 
health benefits program, as long as the retiree was eligible for such 
benefits. While we believe the phrase ``eligible for'' is plain on its 
face, we have added the phrase ``whether or not the participant 
actually enrolls in the other benefit program'' to Section 1625.32(b) 
to further clarify our intent.
    This same commenter also questioned whether ``Medicaid offsets'' 
would be covered by the exemption, but did not further explain the type 
of employer-sponsored plan contemplated. Medicaid is the joint Federal-
state program which provides primarily medical care to low-income 
Americans pursuant to Title XIX of the Social Security Act, 42 U.S.C. 
1396 et seq. Section 1396a(a)(25)(G) of that Title requires that each 
State Medicaid plan prohibit any health insurer, including an employer-
sponsored group health plan, ``from taking into account that [an] 
individual is eligible for or is provided medical assistance'' under a 
State Medicaid plan when making enrollment or benefit payment 
decisions. In light of this specific prohibition under the Medicaid 
law, the Commission declines to apply its exemption to employer-
sponsored group health plans that coordinate benefits with an 
individual's eligibility for or receipt of Medicaid.

Coverage of Non-Health Retiree Benefits

    While expressing overall support for the proposed rule, two 
organizations requested that the Commission provide a definition of the 
term ``retiree health benefits'' in Section 1625.32(a) of the rule. 
Both commenters also requested that the Commission make clear that no 
inference is intended as to how the ADEA might apply to non-health 
retiree benefits, such as life insurance or disability programs.
    Section 1625.32(c) of the rule provides that the exemption shall be 
narrowly construed. The only practice exempted by the rule is the 
coordination of employer-sponsored retiree health benefits with 
eligibility for Medicare or a comparable State health benefits program. 
No other aspects of ADEA coverage or benefits other than retiree health 
benefits are affected by the exemption. In order to further clarify the 
scope of the exemption, the Commission has added an additional 
statement to the rule explaining that the exemption only applies to 
retiree health benefits and not other non-health retiree benefits. The 
Commission also revised question and answer five in the Appendix to 
better reflect the scope of the exemption.
    In light of these revisions, the Commission concludes that adding a 
definition of retiree health benefits is unnecessary. Section 1625.32 
and the accompanying Appendix set forth the types of employer-sponsored 
health benefits that may be permissibly coordinated with eligibility 
for Medicare or a comparable State health benefits program pursuant to 
the exemption. Under Paragraph (b) of Section 1625.32, the exemption 
applies to any employee benefit plan that provides health benefits for 
retired workers that are coordinated with eligibility for Medicare or a 
comparable State health benefits program. The Appendix further makes 
clear that the exemption applies to employer-sponsored health benefits 
that are provided to a retired worker's spouse or dependents. The 
Commission does not believe that further clarification of the types of 
employer-sponsored retiree health benefits covered by the rule is 
needed.

Coverage of Retirees

    Several commenters, although generally supportive of the proposed 
rule, expressed concern about the statement in the Appendix that the 
ADEA continues to apply to retirees to the same extent that it did 
prior to the issuance of the exemption. These commenters argued that 
the ADEA, as amended by OWBPA, only protects older workers, not 
retirees. It is the Commission's position, however, that all of the 
anti-discrimination statutes also protect former employees when they 
are subjected to discrimination arising from the former employment 
relationship.\8\
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    \8\ Robinson v. Shell Oil Co., 519 U.S. 337, 346 (1997) (former 
employees covered under Title VII); Passer v. American Chem. Soc'y, 
935 F.2d 322, 330 (D.C. Cir. 1991) (former employees covered under 
ADEA); Ford v. Schering-Plough Corp., 145 F.3d 601, 607 (3d Cir. 
1998) (former employees covered under ADA), cert. denied, 525 U.S. 
1093 (1999).
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Coverage of Existing Employer-Sponsored Retiree Health Benefit Plans

    Several commenters requested that EEOC clarify how the rule would 
apply to existing employer-sponsored retiree health benefit plans. 
Until the Third Circuit's ruling in Erie County, many employers 
designed coordinating retiree health benefit plans in reliance on 
statements in the legislative history to OWBPA that the practice of 
eliminating, reducing, or altering employer-sponsored retiree health 
benefits with Medicare eligibility is lawful under the ADEA. It is the 
Commission's intent to allow employers to continue the practice of 
coordinating retiree health benefits with Medicare eligibility with as 
little disruption as possible. The Commission does not believe that 
additional changes to the rule are required in order to achieve this 
result. The Appendix to the rule states that the Commission will apply 
the exemption to all retiree health benefits that coordinate with 
Medicare (or a

[[Page 72941]]

comparable State health benefits plan), whether or not those benefits 
are provided for in an existing or newly created employee benefit plan.

The Commission's Exemption Authority

    The Commission received seventeen comments from advocacy 
organizations and other groups representing retirees that did not 
support the Commission's proposal. These commenters questioned the 
Commission's authority to issue an exemption for the practice of 
coordinating employer-sponsored retiree health benefits with Medicare 
eligibility. Many of these commenters also argued that an exemption is 
inconsistent with the primary purposes of the ADEA. Three of these 
organizational commenters also asserted that the Commission did not 
sufficiently support the need for an exemption to the Act. In addition, 
the Commission received approximately 30,000 letters from individual 
citizens (the majority of which were a form letter) expressing concern 
that employers might reduce or even eliminate the health benefits of 
Medicare-eligible retirees in response to the EEOC's proposal.
    Section 9 of the ADEA provides that EEOC ``may establish such 
reasonable exemptions to and from any or all provisions of [the Act] as 
it may find necessary and proper in the public interest.'' Implicit in 
this authority is the recognition that the application of the ADEA 
could, in certain circumstances, foster unintended consequences that 
are not consistent with the purposes of the law and are not in the 
public interest. Such circumstances are rare. However, after carefully 
studying the issue and reviewing the public comments received in 
response to the NPRM, the Commission concludes that the practice of 
coordinating employer-sponsored retiree health benefits with Medicare 
eligibility presents a circumstance that warrants Commission exercise 
of its authority under Section 9.
    The Commission does not agree that EEOC lacks the authority to 
enact such a rule. Section 9 confers broad discretion on the Commission 
to issue rules and regulations interpreting the ADEA and to establish 
reasonable exemptions from any or all prohibitions of the Act.\9\ Nor 
is the Commission persuaded that the rule is inconsistent with the 
primary purposes of the ADEA. Given the continuing decline in the 
availability of employer-provided retiree health benefits, and the 
disincentive to provide such benefits created by the Third Circuit's 
ruling and the Commission's prior policy, this final rule reasonably 
addresses a problem confronting older Americans. The Commission is 
persuaded that, in order to comply with the Commission's prior policy, 
many employers would reduce the overall level of health benefits they 
offer to retirees or cease providing such benefits altogether, leaving 
many retirees without access to affordable health coverage. Indeed, the 
Commission has been presented with evidence that some public school 
districts already have reduced the health benefits they provide to 
retirees in response to the Commission's prior policy. Clearly, this 
result is inconsistent with the Act's primary purpose of protecting 
older workers.
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    \9\ See, e.g., American Association of Retired Persons v. Equal 
Employment Opportunity Commission, 823 F.2d 600, 604-605 (D.C. Cir. 
1987) (EEOC has ``unusually broad discretion'' under Section 9).
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    Finally, the Commission believes it has provided the strong and 
affirmative showing required to justify an exemption from the Act. The 
Commission conducted a comprehensive study of the relationship between 
the ADEA and retiree health benefits before it published its NPRM. As 
part of that study, the Commission met with a wide range of interested 
parties, including employers, employee and retiree groups, labor 
unions, human resource consultants, benefits consultants, actuaries, 
and state and local government representatives. Labor unions, benefits 
experts, and public and private sector employers all agreed that the 
Commission's prior policy would have a deleterious effect on the 
provision of employer-sponsored retiree health benefits, especially 
given the numerous other factors negatively impacting the availability 
of such benefits.
    Public comments filed in response to the Commission's NPRM only 
buttress this conclusion. Several organizations representing public 
school districts and employees noted that many school districts 
responded to the Commission's prior policy by reducing the overall 
level of retiree health coverage they were providing or by eliminating 
the benefit altogether. Moreover, this is what ultimately happened in 
Erie County. After the county made changes to its retiree health 
benefit plans to comply with the court's ruling, the net effect was a 
decrease in health benefits for retirees generally; older retirees 
received no better health benefits, while younger retirees were 
required to pay more for health benefits that offered fewer choices.
    Various other proposals considered by the Commission did not 
adequately protect and preserve the important employer practice of 
providing health coverage for retirees. Many of the alternative 
proposals considered would have required complex calculations regarding 
the costs of retiree health care.\10\ Given the number of variables 
involved in these calculations, including numerous subjective factors 
that are difficult to quantify, the Commission concludes that none of 
the alternatives considered would adequately address the incentive 
created by the Commission's prior policy to eliminate employer-
sponsored retiree health coverage. It is the Commission's view that the 
ADEA should not present a barrier for employers and labor unions to 
provide the broadest possible health coverage for retirees. 
Accordingly, after reviewing all data, views, and arguments presented, 
EEOC is persuaded that a narrow exemption from the prohibitions of the 
ADEA for the practice of coordinating employer-sponsored retiree health 
benefits with Medicare eligibility is necessary and proper in the 
public interest.
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    \10\ For a more detailed discussion of the alternatives 
considered by the EEOC, please refer to the ``Executive Order 
12866'' portion of this preamble. See also 68 FR 41542-41549 (July 
14, 2003) (Discussing the alternatives in the Retiree Health Notice 
of Proposed Rulemaking).
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Litigation Regarding the Exemption

    AARP filed suit to enjoin publication and implementation of the 
exemption on Feb. 4, 2005, alleging, inter alia, that the exemption 
violated the ADEA and the Administrative Procedure Act. AARP argued 
that the rule was age discriminatory because it would allow employers 
to reduce the benefits of older retirees.\11\
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    \11\ Brief in Support of Complaint at 24-25, AARP v. EEOC, 383 
F. Supp. 2d 705 (E.D. Pa. 2005) (No. 05-CV-509).
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    The EEOC agreed not to publish the exemption rule until the 
district court ruled on AARP's challenges. Although the court initially 
ruled in favor of AARP on March 30, 2005, it subsequently reversed 
itself and entered summary judgment in favor of the EEOC on September 
27, 2005, finding that the Commission did not exceed its authority in 
issuing this exemption, that the exemption was not arbitrary or 
capricious, and that the Erie County case did not render the exemption 
invalid. However, the court did continue its injunction prohibiting 
publication of the exemption until the Third Circuit could resolve 
AARP's promised appeal.
    The Third Circuit resolved AARP's appeal on June 4, 2007, holding 
that the EEOC properly exercised its exemption power under Section 9 of 
the ADEA,

[[Page 72942]]

thereby affirming the district court's decision and lifting the 
injunction that prohibited publication of the final rule.\12\ The 
court, noting the Commission's evidence that (1) health care costs 
continue to rise, (2) employers are not required to provide any retiree 
health care benefits, and (3) some employers chose to avoid ADEA 
discrimination by reducing retiree health benefits, specifically 
rejected AARP's argument that the EEOC exceeded its authority under the 
ADEA as follows:
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    \12\ AARP v. EEOC, 489 F.3d 558, 2007 WL 1584385 (3d Cir., June 
4, 2007). The Third Circuit confirmed that its decision lifted the 
district court's injunction in response to a motion for 
clarification. Id., Case No. 05-4594 (3d Cir., August 31, 2007).

    We recognize with some dismay that the proposed exemption may 
allow employers to reduce health benefits to retirees over the age 
of sixty-five while maintaining greater benefits for younger 
retirees. Under the circumstances, however, the EEOC has shown that 
[its] narrow exemption from the ADEA is a reasonable, necessary, and 
proper exercise of its section 9 authority, as over time it will 
likely benefit all retirees.\13\
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    \13\ AARP v. EEOC, 489 F.3d at 564-565.

    AARP asked the Third Circuit to rehear the case en banc, but that 
request was denied on August 21, 2007. AARP then petitioned the Supreme 
Court for a stay of the Third Circuit's mandate pending AARP's writ of 
certiorari, but that request was denied on September 19, 2007. AARP 
filed its writ of certiorari asking the Supreme Court to review the 
Third Circuit's decision on November 20, 2007.

Additional Revisions to the Rule

    The Commission made a minor editorial change to Section 
1625.32(a)(3) by changing the word ``are'' to ``is.'' The change is not 
intended to alter the definition of a comparable State health benefit 
plan for purposes of the exemption. The Commission also simplified the 
language in question and answer three in the Appendix.

Executive Order 12866

    This final rule has been drafted and reviewed in accordance with 
Executive Order 12866, Section 1(b), Principles of Regulation. This 
rule is considered a significant regulatory action, but not 
economically significant, under section 3(f)(4) of that Order and 
therefore was reviewed by the Office of Management and Budget (OMB). As 
discussed below, the rule exempts certain practices from the 
prohibitions of the ADEA in order to ensure that employers may offer 
retirees a wide range of health plan designs that coordinate with 
Medicare without violating the Act.
    Labor organizations, employees, and employers favor coordinating 
retiree health plans with Medicare benefits as a way to provide 
affordable health coverage for older Americans.\14\ The final rule 
benefits employers by allowing them to continue to coordinate retiree 
health benefits with Medicare. It will decrease, not increase, costs to 
covered employers by reducing the risks of liability for noncompliance 
with the statute.\15\ Further, this rule also will benefit retirees by 
eliminating the incentive for employers to reduce or eliminate retiree 
health coverage in order to comply with the equal benefit/equal cost 
defense.\16\ Thus, the rule should not adversely affect in a material 
way the economy, a sector of the economy, productivity, competition, 
jobs, the environment, public health or safety, or State and local 
tribal governments or communities.
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    \14\ That view is reflected in public comments made by groups 
such as the American Federation of Teachers, the National Education 
Association, the Wisconsin Education Association Council, the 
Delaware State Education Association, the National Council on 
Teacher Retirement, the American Benefits Council, the American 
Association of Health Plans, the ERISA Industry Committee, the Equal 
Employment Advisory Council, the Minnesota School Boards 
Association, the National Rural Electric Cooperative Association, 
the Society for Human Resource Management, the U.S. Chamber of 
Commerce, the Washington Business Group on Health, and the Wisconsin 
Association of School Boards, among others.
    \15\ NPRM, 68 FR at 41548.
    \16\ See id. at 41546 (explaining that without the final rule, 
``[t]his lack of regulatory protection may cause a class of people--
retirees not yet 65--to be left without any health insurance. It 
also may contribute to the loss of valuable employer-sponsored 
coverage that supplements Medicare for retirees age 65 and over.'')
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    The ADEA applies to all employers with at least 20 employees. 29 
U.S.C. Sec.  630(b). The Act prohibits covered employers from 
discriminating against an employee or job applicant who is at least 40 
years of age. 29 U.S.C. 623, 631. According to Census Bureau 
information, approximately 1,976,216 establishments employed 20 or more 
employees in 2000.\17\
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    \17\ CENSUS BUREAU, U.S. DEPARTMENT OF COMMERCE, ``Statistics of 
U.S. Businesses'' (2000).
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    The exemption would apply to all covered employers who provide 
health benefits to their retirees. In 2001, the GAO concluded that 
about one-third of large employers and less than 10% of small employers 
provided such benefits to current retirees.\18\ According to the GAO, 
in 1999, such employer-sponsored health plans were relied on by 10 
million retired individuals aged 55 and over as either their primary 
source of health coverage or as a supplement to Medicare coverage.\19\
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    \18\ Hearing Before the House Comm. on Education and the 
Workforce, 107th Cong.(2001) (statement of William J. Scanlon, 
Director of Health Care Services, GAO).
    \19\ U.S. GENERAL ACCOUNTING OFFICE, ``Retiree Health Benefits: 
Employer-Sponsored Benefits May Be Vulnerable to Further Erosion,'' 
GAO Doc. No. GAO-01-374, at 1 (May 2001).
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    After the Commission took the position that the practice of 
coordinating retiree health benefits with Medicare eligibility was 
unlawful unless an employer could meet the equal benefit/equal cost 
test set forth in Section 4(f)(2)(B)(i) of the ADEA, labor unions and 
employers expressed concern that the easiest way for an employer-
sponsored retiree health plan to comply with the Commission's policy 
was to reduce or eliminate already existing retiree health benefit 
coverage. This result has become increasingly likely given the myriad 
other factors impacting the availability of employer-sponsored retiree 
health benefits.
    In recent years, the cost of employee health care has consistently 
increased, making it difficult for employers to continue to provide 
retiree health benefits.\20\ As explained in the NPRM, two widely-cited 
surveys of employer-sponsored health plans--(1) the Health Research and 
Educational Trust survey sponsored by The Henry J. Kaiser Family 
Foundation (Kaiser/HRET) and (2) the William M. Mercer, Incorporated 
survey (formerly produced by Foster Higgins) (Mercer/Foster Higgins)--
estimate that premiums for employer-sponsored health insurance 
increased an average of about 11% in 2001.\21\ These studies also 
identify how cost increases were expected to continue and how such 
ongoing premium increases are particularly difficult for small 
employers to cover and continue offering retiree health benefits.\22\
---------------------------------------------------------------------------

    \20\ NPRM, 68 Fed. at 41543.
    \21\ THE HENRY J. KAISER FAMILY FOUNDATION & HEALTH RESEARCH AND 
EDUCATIONAL TRUST, ``Employer Health Benefits, 2001 Annual Survey'' 
(Menlo Park, CA: The Henry J. Kaiser Family Foundation and Health 
Research and Educational Trust 2001); WILLIAM M. MERCER, ``Mercer/
Foster Higgins National Survey of Employer-Sponsored Health Plans 
2001'' (New York, NY: William M. Mercer, Inc. 2002). The 2001 
Kaiswer/HRET study, conducted between January and May 2001, surveyed 
more than 2,500 randomly selected public and private companies in 
the United States. The 2001 Mercer/Foster Higgins study used a 
national probability sampling of public and private employers and 
the results represented about 600,000 employers.
    \22\ The NPRM explains that the 2001 Kaiser/HRET survey suggests 
that these changes would affect small employers, defined as those 
employing between 3-199 workers, at a greater rate than larger 
companies, THE HENRY J. KAISER FAMILY FOUNDATION & HEALTH RESEARCH 
AND EDUCATIONAL TRUST, ``Employer Health Benefits, 2001 Annual 
Survey'' (2001), and the 2002 Kaiser/HRET survey suggests that the 
number of small employers offering retiree health benefits has 
eroded. THE HENRY J. KAISER FAMILY FOUNDATION & HEALTH RESEARCH AND 
EDUCATIONAL TRUST, ``Employer Health Benefits, 2002 Annual Survey'' 
(Menlo Park, CA: The Henry J. Kaiser Family Foundation and Health 
Research and Educational Trust 2002) (reporting that the number of 
small employers who offer retiree health benefits dropped 6% between 
2000 and 2002).

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[[Page 72943]]

    Increased longevity and, thus, increased numbers of retirees, also 
will continue to mean larger and more frequent payments for health care 
services on behalf of retired workers.\23\ ``The United States General 
Accounting Office (GAO) projects that, by 2030, the number of people 
age 65 or older will be double what it is today, while the number of 
individuals between the ages of 55 and 64 will increase 75 percent by 
2020.'' \24\ Further, ``it is well-established that utilization of 
health care services generally rises with age.'' \25\ Thus, the demand 
for and cost of retiree health coverage is likely to grow significantly 
during a time that there will be comparatively fewer active workers to 
subsidize such benefits.\26\
---------------------------------------------------------------------------

    \23\ NPRM, 68 FR 41543.
    \24\ Id. (citing U.S. GENERAL ACCOUNTING OFFICE, ``Retiree 
Health Benefits: Employer-Sponsored Benefits May Be Vulnerable to 
Further Erosion,'' GAO Doc. No. GAO-01-374, at 17 (May 2001)).
    \25\ NPRM, 68 FR 41543 (citing ANNA M. RAPPAPORT, ``Planning for 
Health Care Needs in Retirement,'' in FORECASTING RETIREMENT NEEDS 
AND RETIREMENT WEALTH 288, 288-294 (Olivia S. Mitchell et al. eds., 
University of Pennsylvania Press 2000)).
    \26\ NPRM, 68 FR 41543 (citing U.S. GENERAL ACCOUNTING OFFICE, 
``Retiree Health Benefits: Employer-Sponsored Benefits May Be 
Vulnerable to Further Erosion,'' GAO Doc. No. GAO-01-374, at 17-18 
(May 2001)).
---------------------------------------------------------------------------

    Changes in accounting rules also have dramatically impacted the way 
employers account for retiree health benefit costs.\27\ The Financial 
Accounting Standards Board, which is charged with establishing U.S. 
standards of financial accounting and reporting, promulgated new rules 
for retiree health accounting in 1990, referred to as Financial 
Accounting Standards Number 106 or FAS 106.\28\
---------------------------------------------------------------------------

    \27\ NPRM, 68 FR 41543 (citing ANNA M. RAPPAPORT, ``FAS 106 and 
Strategies for Managing Retiree HealthBenefits,'' in COMPENSATION 
AND BENEFITS MANAGEMENT, 37 (Spring 2001); PAUL FRONSTIN, ``Retiree 
Health Benefits: Trends and Outlook,'' EBRI ISSUE BRIEF No. 236 
(Employee Benefit Research Institute Aug. 2001)).
    \28\ NPRM, 68 FR at 41543.

    FAS 106 requires employers to apportion the costs of retiree 
health over the working lifetime of employees and to report unfunded 
retiree health benefit liabilities in accordance with generally 
accepted accounting principles beginning with fiscal years after 
December 15, 1992. Because ``the recognition of these liabilities in 
financial statements dramatically impacts a company's calculation of 
its profits and losses,'' some companies have said that FAS 106 led 
to reductions in reported income, thus creating an incentive to 
reduce expenditures for employee benefits such as retiree 
health.\29\
---------------------------------------------------------------------------

    \29\ Id. at 41544 (quoting PAUL FRONSTIN, ``Retiree Health 
Benefits: Trends and Outlook,'' EBRI ISSUE BRIEF No. 236, at 3 
(Employee Benefit Research Institute Aug. 2001)).

    ``As a result of these increased costs and accounting changes, 
employers have actively examined ways to reduce health care costs, 
including by reducing, altering, or eliminating retiree health 
coverage.'' \30\ As explained in the NPRM, studies revealed that 
employers already were less likely to offer retiree health benefits 
than in the past and that this trend was expected to continue.\31\
---------------------------------------------------------------------------

    \30\ NPRM, 68 FR at 41544 (noting that a 2001 survey found that 
both public and private employers considered controlling health care 
costs as a top business issue for the next two to three years. THAP! 
ET AL., ``Productive Workforce Survey: Report of Findings Private 
Employer/Public Agency'' (THAP!, Andersen and CalPERS Aug. 2001); 
see also ANNA M. RAPPAPORT, ``Postemployment Benefits: Retiree 
Health Challenges and Trends--2001 and Beyond,'' in COMPENSATION AND 
BENEFITS MANAGEMENT, 52, 56 (Autumn 2001) (``Companies seeking to 
reduce costs are closely examining retiree medical benefits.'')).
    \31\ The 2001 Mercer/Foster Higgins study showed a 17% decline 
between 1993 and 2001 in the number of employers with 500 or more 
workers offering retiree health benefits, William M. Mercer, 
``Mercer/Foster Higgins National Survey of Employer-Sponsored Health 
Plans 2001'' (New York, NY: William M. Mercer, Inc. 2002), the 2002 
Kaiser/HRET study found that only 34% of employers with at least 200 
employees offered retiree health coverage in 2002, as opposed to 66% 
in 1998, The Henry J. Kaiser Family Foundation & Health Research and 
Educational Trust,'' ``Employer Health Benefits, 2002 Annual 
Survey'' (Menlo Park, CA: The Henry J. Kaiser Family Foundation and 
Health Research and Educational Trust 2002), and a study by Hewitt 
Associates LLC reached similar conclusions. Hewitt Associates LLC, 
``Trends in Retiree Health Plans'' (Lincolnshire, IL: Hewitt 
Associates LLC 2001). The Kaiser study also forecast that this trend 
would continue.

    [Further, a]s the number of employers offering retiree health 
coverage declines, so has the incentive for employers to provide 
future retirees with such coverage. Unions report that meaningful 
negotiations about the future provisions of employer-sponsored 
retiree health benefits are becoming increasingly futile. Union 
representatives have informed EEOC that increasing numbers of 
employers have refused to include retiree health among the benefits 
to be provided to employees.\32\
---------------------------------------------------------------------------

    \32\ NPRM, 68 FR at 41544.

In this environment, employers are not likely to increase any retiree's 
benefit in order to comply with the ADEA's equal benefit/equal cost 
defense. To the contrary, the equal benefit/equal cost rule creates an 
---------------------------------------------------------------------------
additional incentive for employers to reduce benefits.

    In light of the other factors affecting an employer's decision 
to provide retiree health benefits, the Commission believes that the 
current regulatory framework of the ADEA does not provide a 
sufficient safe harbor to protect and preserve the important 
employer practice of providing health coverage for retirees.
    This lack of regulatory protection may cause a class of people--
retirees not yet 65--to be left without any health insurance. It 
also may contribute to the loss of valuable employer-sponsored 
coverage that supplements Medicare for retirees age 65 and over. 
Because almost 60% of retirees between the ages of 55 to 64 rely on 
employer-sponsored health coverage as their primary source of health 
coverage, and about one-third of retirees over age 65 rely on 
employer-provided retiree health plans to supplement Medicare, the 
Commission believes that such a result is contrary to the public 
interest and necessitates regulatory action.\33\
---------------------------------------------------------------------------

    \33\ NPRM, 68 FR at 41546-47 (citing Hearing Before the House 
Comm. on Education and the Workforce, 107th Cong. (2001) (statement 
of William J. Scanlon, Director of Health Care Services, GAO); THE 
HENRY J. KAISER FAMILY FOUNDATION ET AL., ``Erosion of Private 
Health Insurance Coverage For Retirees: Findings from the 2000 and 
2001 Retiree Health and Prescription Drug Coverage Survey,'' at iv 
(Menlo Park, CA: The Henry J. Kaiser Family Foundation, Health and 
Research Educational Trust and The Commonwealth Fund April 2002); 
and additionally noting that ``[o]f the 56.8% of retirees covered by 
employer-sponsored health coverage in 1999, 36.3% were covered in 
their own name and 20.5% received health benefits through a spouse. 
PAUL FRONSTIN, ``Retiree Health Benefits: Trends and Outlook,'' EBRI 
ISSUE BRIEF No. 236, at 6-7 (Employee Benefit Research Institute 
Aug. 2001).'').

    As detailed in the NPRM, the Commission examined a variety of ways 
to end this incentive towards further benefit erosion. These 
alternatives included various proposals that would have allowed 
employers to take the cost of Medicare into account when assessing 
whether they satisfied the equal cost test, or regulations that would 
require employers to adopt or maintain benefits programs that 
supplement Medicare in order to satisfy the equal benefits test. 
However, none of these alternatives reduced the risk to employers of 
noncompliance with the ADEA while providing them with the flexibility 
to continue providing coordinated retiree health benefits.
    After extensive study, the Commission concluded that ``it does not 
appear that retiree health costs or benefits can be reasonably 
quantified in a regulation.'' \34\
---------------------------------------------------------------------------

    \34\ NPRM, 68 FR at 41546.

    Unlike valuation of costs associated with life insurance or 
long-term disability benefits, calculati[on of] retiree health costs 
is complex due to the multitude of variables, including types of 
plans, levels and types of coverage, deductibles, and geographical 
areas covered. In addition, the subjective nature of some health 
benefits, such as a greater choice in providers, makes any such 
valuation more complicated.

[[Page 72944]]

    Even allowing an employer to take into account the ``cost'' of 
Medicare is problematic because the government's cost[s in] 
provid[ing] Medicare services does not reflect what similar benefits 
would cost an employer in the marketplace. Nor can an employer's 
Medicare tax obligation, pursuant to the Federal Insurance 
Contributions Act, 26 U.S.C. Sec. Sec.  3101 et seq. (FICA), be 
considered the ``cost'' of any specific retiree's Medicare benefits 
inasmuch as most retirees have been employed by multiple employers 
over the course of their careers and employer FICA contributions are 
paid into a general Medicare fund that is not employee-specific. 
Additionally, the fact that employees themselves pay for a portion 
of the cost of Medicare further complicates cost valuation.
    The Commission therefore believes that quantifying the cost to 
employers of post-Medicare retiree health benefits under any 
formulation of the equal cost test would not be practicable. This is 
particularly true for employers who maintain multiple plans for 
different categories of employees. Even for employers with only one 
plan, the variability in health claims data from year to year can be 
great. As a result, calculating retiree health benefit expenses 
would be cost prohibitive for many employers.\35\
---------------------------------------------------------------------------

    \35\ Id.

    This is particularly true for small and medium sized employers, and 
those unable to hire sophisticated employee benefit professionals.\36\ 
``As a result, repeatedly having to calculate retiree health benefit 
expenses under the alternative proposals considered by the Commission 
would have been cost prohibitive or otherwise impracticable for many 
employers.'' \37\
---------------------------------------------------------------------------

    \36\ See id. at 41548 (noting that ``[i]t is clear that small 
and medium-sized employers, and those unable to hire sophisticated 
employee benefit professionals, would be most affected by a 
complicated rule.'').
    \37\ NPRM, 68 FR at 41548.

    Thus, even if it were possible to capture the myriad of 
complexities involved in a retiree health cost analysis in a 
regulation, the likelihood is that far too many employers might 
simply reduce or eliminate existing retiree health benefit plans 
instead of attempting to comply with such a regulation. Further 
complicating compliance with many of the alternative proposals 
considered by the Commission is the fact that employers do not have 
the same flexibility in designing retiree health benefit programs as 
they do when designing other types of retirement benefit programs, 
such as cash-based retirement incentives. For example, providing 
supplemental health benefits to retirees who are eligible for 
Medicare may require that the employer obtain and administer a 
separate policy just for that coverage. Many employers are unable or 
unwilling to bear such a burden. Instead, if faced with such a 
choice, employers are more likely to simply eliminate retiree health 
coverage altogether--for retirees under and over age 65. 
Furthermore, future changes in the private health insurance market 
or in Medicare likely would necessitate further regulatory action 
were the Commission to adopt many of the alternative proposals 
considered. [Thus, t]he Commission does not believe that it is 
possible to apply the equal benefit/equal cost test, or a variant of 
that rule, to the rapidly changing landscape of retiree health 
care.\38\
---------------------------------------------------------------------------

    \38\ Id. at 41546.

    In contrast, the Commission's final rule allows employers to offer 
a wide range of retiree health plan designs that coordinate with 
Medicare without violating the ADEA. The rule does not otherwise affect 
an employer's ability to offer health benefits to retirees, consistent 
with the law. ``This approach also benefits the significant number of 
[retirees] who rely on employer-sponsored retiree health coverage and 
would otherwise have to obtain retiree health coverage in the private 
individual marketplace at substantial personal expense.'' \39\
---------------------------------------------------------------------------

    \39\ NPRM, 68 FR at 41548. See id. at 41544 (discussing how 
those who lose coverage have limited options, such as temporary 
coverage under the Consolidated Omnibus Budget Reconciliation Act of 
1985, 29 U.S.C. Sec.  1161 et seq. (COBRA) or coverage in the 
private individual insurance market). COBRA coverage is very 
expensive because, while it allows the employee to remain in the 
employer's insurance plan, it requires the employee to pay the 
entire premium. 68 FR 41544. Coverage in the private health 
insurance often provides limited benefits, or is prohibitively 
expensive. Id. (citing U.S. General Accounting Office, ``Retiree 
Health Benefits: Employer-Sponsored Benefits May Be Vulnerable to 
Further Erosion,'' GAO Doc. No. GAO-01-374, at 20-22 (May 2001)).
---------------------------------------------------------------------------

    It is not likely that the final regulation will disrupt the 
efficient functioning of the economy and private market forces. Until 
recently, when structuring retiree health benefits, most employers 
relied on legislative history to the OWBPA stating that the practice of 
coordinating employer-sponsored retiree health benefits with Medicare 
eligibility is lawful under the ADEA. This final regulation permits the 
practice of unrestricted coordination of retiree health benefits with 
Medicare eligibility to continue.

Paperwork Reduction Act

    This final rule contains no information collection requirements 
subject to review by the Office of Management and Budget under the 
Paperwork Reduction Act (44 U.S.C. chapter 35).

Regulatory Flexibility Act

    The Commission certifies under 5 U.S.C. 605(b) that this final rule 
will not have a significant economic impact on a substantial number of 
small entities, because it imposes no additional economic or reporting 
burdens on such firms. The rule--which exempts certain practices from 
regulation--will decrease, not increase, costs to covered employers by 
reducing the risks of liability for noncompliance with the statute. For 
this reason, a regulatory flexibility analysis is not required.

List of Subjects in 29 CFR Part 1625 and 1627

    Advertising, Aged, Employee benefit plans, Equal employment 
opportunity, Reporting and recordkeeping requirements, Retirement.


0
For the reasons discussed in the preamble, Chapter XIV of Title 29 of 
the Code of Federal Regulations is amended as follows:

PART 1627--RECORDS TO BE MADE OR KEPT RELATING TO AGE: NOTICES TO 
BE POSTED

0
1. Revise the heading of part 1627 to read as set forth above.

0
2. The authority citation for 29 CFR part 1627 shall continue to read 
as follows:

    Authority: Sec. 7, 81 Stat. 604; 29 U.S.C. 626; sec. 11, 52 
Stat. 1066, 29 U.S.C. 211; sec. 12, 29 U.S.C. 631, Pub. L. 99-592, 
100 Stat. 3342; sec. 2, Reorg. Plan No. 1 of 1978, 43 FR 19807.

0
3. In Sec.  1627.1, remove paragraph (b) and redesignate paragraph (c) 
as new paragraph (b).

0
4. In part 1627, redesignate subpart C (consisting of Sec. Sec.  
1627.15 and 1627.16) as subpart C of Part 1625 (consisting of 
Sec. Sec.  1625.30 and 1625.31), respectively.

PART 1625--AGE DISCRIMINATION IN EMPLOYMENT ACT

0
5. The authority citation for 29 CFR Part 1625 is revised to read as 
follows:

    Authority: 81 Stat. 602; 29 U.S.C. 621; 5 U.S.C. 301; 
Secretary's Order No. 10-68; Secretary's Order No. 11-68; Sec. 9, 81 
Stat. 605; 29 U.S.C. 628; sec. 12, 29 U.S.C. 631, Pub. L. 99-592, 
100 Stat. 3342; sec. 2, Reorg. Plan No. 1 of 1978, 43 FR 19807.


0
6. In newly redesignated subpart C of part 1625, revise the heading of 
newly redesignated Sec.  1625.31 and the first sentence of paragraph 
(a) to read as follows:


Sec.  1625.31  Special employment programs.

    (a) Pursuant to the authority contained in section 9 of the Act and 
in accordance with the procedure provided therein and in Sec.  
1625.30(b) of this part, it has been found necessary and proper in the 
public interest to exempt from all prohibitions of the Act all 
activities and programs under Federal contracts or grants, or carried 
out by the public employment services of the several States, designed 
exclusively to provide employment for, or to encourage the

[[Page 72945]]

employment of, persons with special employment problems, including 
employment activities and programs under the Manpower Development and 
Training Act of 1962, Pub. L. No. 87-415, 76 Stat. 23 (1962), as 
amended, and the Economic Opportunity Act of 1964, Pub. L. No. 88-452, 
78 Stat. 508 (1964), as amended, for persons among the long-term 
unemployed, handicapped, members of minority groups, older workers, or 
youth. * * *
* * * * *
0
7. Add section 1625.32 to Subpart C of part 1625 to read as follows:


Sec.  1625.32  Coordination of retiree health benefits with Medicare 
and State health benefits.

    (a) Definitions.
    (1) Employee benefit plan means an employee benefit plan as defined 
in 29 U.S.C. 1002(3).
    (2) Medicare means the health insurance program available pursuant 
to Title XVIII of the Social Security Act, 42 U.S.C. 1395 et seq.
    (3) Comparable State health benefit plan means a State-sponsored 
health benefit plan that, like Medicare, provides retired participants 
who have attained a minimum age with health benefits, whether or not 
the type, amount or value of those benefits is equivalent to the type, 
amount or value of the health benefits provided under Medicare.
    (b) Exemption. Some employee benefit plans provide health benefits 
for retired participants that are altered, reduced or eliminated when 
the participant is eligible for Medicare health benefits or for health 
benefits under a comparable State health benefit plan, whether or not 
the participant actually enrolls in the other benefit program. Pursuant 
to the authority contained in section 9 of the Act, and in accordance 
with the procedures provided therein and in Sec.  1625.30(b) of this 
part, it is hereby found necessary and proper in the public interest to 
exempt from all prohibitions of the Act such coordination of retiree 
health benefits with Medicare or a comparable State health benefit 
plan.
    (c) Scope of Exemption. This exemption shall be narrowly construed. 
No other aspects of ADEA coverage or employment benefits other than 
those specified in paragraph (b) of this section are affected by the 
exemption. Thus, for example, the exemption does not apply to the use 
of eligibility for Medicare or a comparable State health benefit plan 
in connection with any act, practice or benefit of employment not 
specified in paragraph (b) of this section. Nor does it apply to the 
use of the age of eligibility for Medicare or a comparable State health 
benefit plan in connection with any act, practice or benefit of 
employment not specified in paragraph (b) of this section.
    8. In Subpart C of part 1625, add an Appendix to newly added Sec.  
1625.32 as follows:

Appendix to Sec.  1625.32--Questions and Answers Regarding Coordination 
of Retiree Health Benefits With Medicare and State Health Benefits

    Q1. Why is the Commission issuing an exemption from the Act?
    A1. The Commission recognizes that while employers are under no 
legal obligation to offer retiree health benefits, some employers 
choose to do so in order to maintain a competitive advantage in the 
marketplace--using these and other benefits to attract and retain 
the best talent available to work for their organizations. Further, 
retiree health benefits clearly benefit workers, allowing such 
individuals to acquire affordable health insurance coverage at a 
time when private health insurance coverage might otherwise be cost 
prohibitive. The Commission believes that it is in the best interest 
of both employers and employees for the Commission to pursue a 
policy that permits employers to offer these benefits to the 
greatest extent possible.
    Q2. Does the exemption mean that the Act no longer applies to 
retirees?
    A2. No. Only the practice of coordinating retiree health 
benefits with Medicare (or a comparable State health benefit plan) 
as specified in paragraph (b) of this section is exempt from the 
Act. In all other contexts, the Act continues to apply to retirees 
to the same extent that it did prior to the issuance of this 
section.
    Q3. May an employer offer a ``carve-out plan'' for retirees who 
are eligible for Medicare or a comparable State health plan?
    A3. Yes. A ``carve-out plan'' reduces the benefits available 
under an employee benefit plan by the amount payable by Medicare or 
a comparable State health plan. Employers may continue to offer such 
``carve-out plans''and make Medicare or a comparable State health 
plan the primary payer of health benefits for those retirees 
eligible for Medicare or the comparable State health plan.
    Q4. Does the exemption also apply to dependent and/or spousal 
health benefits that are included as part of the health benefits 
provided for retired participants?
    A4. Yes. Because dependent and/or spousal health benefits are 
benefits provided to the retired participant, the exemption applies 
to these benefits, just as it does to the health benefits for the 
retired participant. However, dependent and/or spousal benefits need 
not be identical to the health benefits provided for retired 
participants. Consequently, dependent and/or spousal benefits may be 
altered, reduced or eliminated pursuant to the exemption whether or 
not the health benefits provided for retired participants are 
similarly altered, reduced or eliminated.
    Q5. Does the exemption address how the ADEA may apply to other 
acts, practices or employment benefits not specified in the rule?
    A5. No. The exemption only applies to the practice of 
coordinating employer-sponsored retiree health benefits with 
eligibility for Medicare or a comparable State health benefit 
program. No other aspects of ADEA coverage or employment benefits 
other than retiree health benefits are affected by the exemption.
    Q6. Does the exemption apply to existing, as well as to newly 
created, employee benefit plans?
    A6. Yes. The exemption applies to all retiree health benefits 
that coordinate with Medicare (or a comparable State health benefit 
plan) as specified in paragraph (b) of this section, whether those 
benefits are provided for in an existing or newly created employee 
benefit plan.
    Q7. Does the exemption apply to health benefits that are 
provided to current employees who are at or over the age of Medicare 
eligibility (or the age of eligibility for a comparable State health 
benefit plan)?
    A7. No. The exemption applies only to retiree health benefits, 
not to health benefits that are provided to current employees. Thus, 
health benefits for current employees must be provided in a manner 
that comports with the requirements of the Act. Moreover, under the 
laws governing the Medicare program, an employer must offer to 
current employees who are at or over the age of Medicare eligibility 
the same health benefits, under the same conditions, that it offers 
to any current employee under the age of Medicare eligibility.

    Dated: December 17, 2007.

    For the Commission.
Naomi C. Earp,
Chair.
[FR Doc. E7-24867 Filed 12-21-07; 8:45 am]
BILLING CODE 6570-01-P