[Federal Register Volume 68, Number 134 (Monday, July 14, 2003)]
[Proposed Rules]
[Pages 41542-41549]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17738]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 68, No. 134 / Monday, July 14, 2003 / 
Proposed Rules  

[[Page 41542]]



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: Notice of proposed rulemaking.

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SUMMARY: The U.S. Equal Employment Opportunity Commission (Commission 
or EEOC) proposes to amend its regulations governing age discrimination 
in employment to exempt from the prohibitions of the Age Discrimination 
in Employment Act of 1967 the practice of altering, reducing or 
eliminating employer-sponsored retiree health benefits when retirees 
become eligible for Medicare or a State-sponsored retiree health 
benefits program. This exemption will ensure that the application of 
the ADEA does not discourage employers from providing health benefits 
to their retirees.

DATES: Comments must be received by September 12, 2003. The Commission 
will consider any comments received on or before the closing date and 
thereafter adopt final regulations. Comments received after the closing 
date will be considered to the extent practicable.

ADDRESSES: Written comments should be submitted to Frances M. Hart, 
Executive Officer, Office of the Executive Secretariat, U.S. Equal 
Employment Opportunity Commission, 1801 L Street, NW., Washington, DC 
20507. As a convenience to commentators, the Executive Secretariat will 
accept comments transmitted by facsimile (``FAX'') machine. The 
telephone number of the FAX receiver is (202) 663-4114 (This is not a 
toll free number). Only comments of six or fewer pages will be accepted 
via FAX transmittal. This limitation is necessary to assure access to 
the equipment. Receipt of fax transmittals will not be acknowledged, 
except that the sender may request confirmation of receipt by calling 
the Executive Secretariat staff at (202) 663-4078 (voice) or (202) 663-
4077 (TTY). (These are not toll free numbers). Copies of comments 
submitted by the public will be available for review on weekdays, 
except federal holidays, at the Commission's library, Room 6502, 1801 L 
Street, NW., Washington, DC, between the hours of 9:30 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT: Lynn A. Clements, Special Assistant to 
the Legal Counsel, Office of Legal Counsel, at (202) 663-4624 (voice) 
or (202) 663-7026 (TTY) (These are not toll free numbers). This notice 
is also available in the following formats: large print, braille, audio 
tape, and electronic file on computer disk. Requests for this notice in 
an alternative format should be made to the Publications Information 
Center at 1-800-669-3362.

SUPPLEMENTARY INFORMATION: Section 9 of the Age Discrimination in 
Employment Act of 1967, 29 U.S.C. 621 et seq. (ADEA or Act), 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. Accordingly, EEOC's exercise of this authority has been limited 
and tempered with great discretion.
    After an in-depth study, the Commission believes that the practice 
of altering, reducing or eliminating employer-sponsored retiree health 
benefits when retirees become eligible for Medicare or a State-
sponsored retiree health benefits program presents a circumstance that 
warrants Commission exercise of its ADEA exemption authority. For the 
reasons that follow, and pursuant to its authority under Section 9 of 
the Act, the EEOC proposes in this notice of proposed rulemaking (NPRM) 
to add a new section 32 to part 1625 of Title 29 of the Code of Federal 
Regulations exempting such coordination of employer-sponsored retiree 
health benefits with Medicare or a State-sponsored retiree health 
benefits program from all prohibitions of the ADEA.

Basis for Exemption

    In August 2001, the Commission announced that it would study the 
relationship between the ADEA and employer-sponsored retiree health 
benefit plans that alter, reduce or eliminate benefits upon eligibility 
for Medicare or a comparable State-sponsored retiree health benefits 
program. To begin the process, EEOC developed an internal Retiree 
Health Benefits Task Force headed by its Legal Counsel. The Task Force 
met with a wide range of Commission stakeholders, including employers, 
employee groups, labor unions, human resource consultants, benefit 
consultants, actuaries and state and local government representatives. 
The Task Force also reviewed available survey data regarding employer-
sponsored retiree health benefits; analyzed the May 2001 United States 
General Accounting Office's Report to the Chairman of the United 
States's Senate Committee on Health, Education, Labor and Pensions 
entitled ``Retiree Health Benefits: Employer-Sponsored Benefits May Be 
Vulnerable to Further Erosion;'' and reviewed numerous professional 
articles discussing the continued erosion of retiree health benefits.
    As a result of its study, the Commission has concluded, as 
discussed in greater detail below, that the number of employers 
providing retiree health benefits has declined considerably over the 
last ten years, even though many retired individuals rely on such 
employer-sponsored plans for affordable health coverage. Various 
factors have contributed to this erosion, including the increased cost 
of health care coverage, an increased demand for such coverage as large 
numbers of workers near retirement age, and changes in the way 
accounting rules treat the long-term costs of providing retiree health 
benefits. The Commission believes that concern about the potential 
application of the ADEA to employer-sponsored retiree health benefits 
is adversely affecting the continued provision of this important 
retirement benefit.

Employers Are Not Obligated To Provide Retiree Health Care

    Employers are not legally obligated to provide retiree health 
benefits and many

[[Page 41543]]

do not. In fact, in 2001, only about ``one-third of large employers and 
less than 10% of small employers offer[ed] retiree health benefits.'' 
\1\ Employers who choose to provide retiree health benefits are not 
required to provide such benefits indefinitely, absent some contractual 
agreement to the contrary. Employers that do offer retiree health 
benefits, however, often do so 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.
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    \1\ Hearing Before the House Comm. on Education and the 
Workforce, 107th Cong. (2001) (statement of William J. Scanlon, 
Director of Health Care Services, GAO).
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    Likewise, employer-sponsored retiree health benefits clearly 
benefit employees. In many cases, employers offer retiree health 
benefits as a bridge to Medicare so that younger retirees have access 
to affordable health care benefits when they leave the workforce before 
reaching the age of Medicare eligibility. Often those benefits are more 
generous than Medicare benefits because, for example, the employer 
simply includes younger retirees in its group plan for existing 
employees. In other cases, employers wish to offer their retirees age 
65 and older health benefit plans that supplement the coverage provided 
under Medicare so that these retirees have access to comprehensive 
health care benefits at a time when their health care needs may be 
greatest. 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.

The Rising Cost of Health Care

    The cost of employee health care has increased consistently for 
several years, making it difficult for employers to continue to provide 
retiree health benefits. One report estimates that employers will 
experience a double-digit increase in their health care costs in 2003 
for the third consecutive year.\2\ 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.\3\ The 2002 Kaiser/HRET 
study found monthly premium costs for employer-sponsored health 
insurance rose 12.7% between the Spring of 2001 and 2002, while early 
results from the 2002 Mercer/Foster Higgins study estimate that health 
care costs increased almost 15% in 2002.\4\ The 2001 Kaiser/HRET survey 
found that these large changes in premiums would affect small 
employers, defined as those employing between 3-199 workers, at a 
greater rate than larger employers.\5\ Indeed, the 2002 Kaiser/HRET 
survey suggests that there may be evidence of erosion in the number of 
small employers offering health benefits; the study reports that the 
number of small employers offering such benefits dropped 6% between 
2000 and 2002.\6\ Many employers and benefit experts believe that the 
rising cost of prescription drug coverage, in particular, has heavily 
contributed to the rising cost of health care, with 64% of employers 
responding to the 2001 Kaiser/HRET study citing ``higher spending for 
drugs'' as a significant factor in health insurance premium 
increases.\7\
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    \2\ Hewitt Associates LLC, ``Health Care Cost Increases Expected 
to Continue Double-Digit Pace in 2003,'' (Lincolnshire, IL: Hewitt 
Associates LLC Oct. 14, 2002).
    \3\ 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, N.Y.: William M. Mercer Inc. 2002). The 2001 
Kaiser/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 represent about 600,000 employers.
    \4\ 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); Mercer Human Resource 
Consulting LLC, ``Rate Hikes pushed employers to drop health plans, 
cut benefits in 2002--but average cost still rose,'' (New York, 
N.Y.: Mercer Human Resource Consulting LLC December 9, 2002). The 
2002 Kaiser/HRET study surveyed 3,262 randomly selected public and 
private employers.
    \5\ 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).
    \6\ 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).
    \7\ 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).
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    In addition to the rising cost of health care generally, increased 
longevity and, thus, increased numbers of retirees, will continue to 
mean larger and more frequent payments for health care services on 
behalf of retired workers. 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.\8\ It is well-
established that utilization of health care services generally rises 
with age.\9\ Thus, the demand for and cost of retiree health coverage 
is likely to grow significantly in the next few years, while there will 
be comparatively fewer active workers to subsidize such benefits.\10\ 
The 2000 Mercer/Foster Higgins National Survey of Employer-Sponsored 
Health Plans showed substantial cost increases for retiree health care 
coverage between 1999 and 2000, with a 10.6 percent increase for 
retirees under age 65 and a 17 percent increase for those over 65.\11\ 
A 2002 study by The Henry J. Kaiser Family Foundation and Hewitt 
Associates (Kaiser/Hewitt) found that retiree health care costs 
increased an average of 16% between 2001 and 2002 for employers with at 
least 1000 employees.\12\
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    \8\ 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).
    \9\ 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).
    \10\ 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).
    \11\ Anna M. Rappaport, ``Postemployment Benefits: Retiree 
Health Challenges and Trends--2001 and Beyond,'' in Compensation and 
Benefits Management, 52, 56 (Autumn 2001) (citing William M. Mercer, 
``Mercer/Foster Higgins National Survey of Employer-Sponsored Health 
Plans 2000'' (New York, N.Y.: William M. Mercer Inc. 2001).
    \12\ The Henry J. Kaiser Family Foundation & Hewitt Associates 
LLC, ``Kaiser/Hewitt 2002 Retiree Health Survey'' (Menlo Park, CA: 
The Henry J. Kaiser Family Foundation and Hewitt Associates LLC 
2002). This online survey, conducted between July and September 
2002, represents information from 435 private employers (with at 
least 1000 employees) that currently offer retiree health benefits.
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    Changes in accounting rules also have dramatically impacted the way 
employers account for the long-term costs of providing retiree health 
benefits.\13\ In 1990, the Financial Accounting Standards Board, which 
is charged with establishing U.S. standards of financial accounting and

[[Page 41544]]

reporting, promulgated new rules for retiree health accounting, 
referred to as Financial Accounting Standards Number 106 or FAS 106. 
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,'' \14\ 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.
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    \13\ Anna M. Rappaport, ``FAS 106 and Strategies for Managing 
Retiree Health Benefits,'' 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).
    \14\ Paul Fronstin, ``Retiree Health Benefits: Trends and 
Outlook,'' EBRI Issue Brief No. 236, at 3 (Employee Benefit Research 
Institute Aug. 2001).
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The Incentive for Employers To Reduce Health Care Costs
    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.\15\ During hearings before the U.S. House of Representative's 
Committee on Education and the Workforce in November 2001, the GAO's 
Director of Health Care Services testified that only ``one-third of 
large employers and less than 10% of small employers offer retiree 
health benefits.'' \16\ The 2001 Mercer/Foster Higgins study shows that 
the number of employers with 500 or more workers who offer retiree 
health coverage decreased by 17 percent between 1993 and 2001 for both 
pre- and post-Medicare eligible retirees.\17\ The 2002 Kaiser/HRET 
survey similarly found that a declining percentage of large companies 
(those with at least 200 employees) offer retiree health benefits; only 
34 percent of such employers offered retiree health coverage in 2002, 
compared to 66 percent of similar companies in 1988.\18\ Another survey 
completed by Hewitt Associates LLC estimates a 15 percent decline in 
the number of large employers providing pre-age 65 retiree health 
coverage between 1991 and 2000 and an 18 percent decrease in the number 
of large employers providing health benefits to retirees age 65 or 
older during the same period.\19\ The 2002 Kaiser/Hewitt retiree health 
study concluded that this trend will continue, with one in five large 
employers likely to eliminate retiree health coverage for future 
retirees within the next three years.\20\
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    \15\ A survey by THAP!, Andersen and CalPERS 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.'').
    \16\ Hearing Before the House Comm. on Education and the 
Workforce, 107th Cong. (2001) (statement of William J. Scanlon, 
Director of Health Care Services, GAO).
    \17\ William M. Mercer, ``Mercer/Foster Higgins National Survey 
of Employer-Sponsored Health Plans 2001'' (New York, NY: William M. 
Mercer, Inc. 2002).
    \18\ 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).
    \19\ Hewitt Associates LLC, ``Trends in Retiree Health Plans'' 
(Lincolnshire, IL: Hewitt Associates LLC 2001). This conclusion is 
based on information from Hewitt Associates database of 1,020 large 
employers, including 85% of Fortune 100 companies and 57% of Fortune 
500 companies.
    \20\ The Henry J. Kaiser Family Foundation & Hewitt Associates 
LLC, ``Kaiser/Hewitt 2002 Retiree Health Survey'' (Menlo Park, CA: 
The Henry J. Kaiser Family Foundation and Hewitt Associates LLC 
2002); see also 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) (11% of 
large employers predict they will eliminate retiree health benefits 
for future retirees).
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    Of those employers offering retiree health benefits, most are more 
likely to offer such benefits to early retirees and not to Medicare-
eligible retirees. A report issued by Kaiser, HRET and The Commonwealth 
Fund (Kaiser/HRET/Commonwealth) estimates that only 23% of employers 
with at least 200 workers offered retiree health benefits to Medicare-
age retirees in 2001. This is a decline of more than 10 percentage 
points in a three-year period.\21\
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    \21\ 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'' 
(Menlo Park, CA: The Henry J. Kaiser Family Foundation, Health 
Research and Educational Trust, and The Commonwealth Fund 2002); see 
also 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) (96% of employers with at least 
200 employees offer health benefits to pre-age 65 retirees, while 
only 72% of large employers offer health benefits to retirees age 65 
and above).
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    As the number of employers offering retiree health coverage 
declines, so has the incentive to provide future retirees with such 
coverage. Unions report that meaningful negotiations about the future 
provision 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. A significant number of 
employers have agreed to provide retiree health only if the benefit 
terminates when the retiree becomes eligible for Medicare.
    Alternatives to employer-sponsored retiree health coverage are 
costly, offer fewer benefits, and may be limited in availability, 
particularly for retirees not yet eligible for Medicare.\22\ Under 
provisions of the Consolidated Omnibus Budget Reconciliation Act of 
1985, 29 U.S.C. 1161 et seq. (COBRA), retirees under the age of 65 may 
be eligible for temporary health coverage from either their spouse's 
employer or their former employer, although the retiree may be required 
to pay the entire premium. Other retirees under age 65 must obtain 
coverage in the private individual insurance market, which often is 
prohibitively expensive or provides limited benefits.\23\ Those unable 
to afford coverage in the private insurance market rely on public 
insurance, pay for health care out of pocket, or are uninsured. 
Retirees age 65 or older often rely on Medicare as their primary source 
of health coverage. Nonetheless, many retirees in this age group rely 
on employer-sponsored benefits to cover Medicare's cost-sharing 
requirements or gaps in Medicare coverage. Retirees who do not have 
access to employer-sponsored supplemental coverage must obtain private 
individual ``Medicare supplement'' insurance, which can be 
prohibitively expensive, particularly if prescription drug coverage is 
desired.\24\ For these reasons, employer-sponsored retiree health 
coverage is a valuable benefit for older persons that should be 
protected and preserved to the greatest extent possible.
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    \22\ U.S. General Accounting Office, ``Retiree Health Benefits: 
Employer-Sponsored Benefits May Be Vulnerable to Further Erosion,'' 
GAO Doc. No. GAO-01-374, at 20-24 (May 2001).
    \23\ 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).
    \24\ U.S. General Accounting Office, ``Retiree Health Benefits: 
Employer-Sponsored Benefits May Be Vulnerable to Further Erosion,'' 
GAO Doc. No. GAO-01-374, at 22-24 (May 2001). GAO estimates that 
Medigap coverage costs an average of $1,300 per year. Hearing Before 
the House Comm. on Education and the Workforce, 107th Cong. (2001) 
(statement of William J. Scanlon, Director of Health Care Services, 
GAO).

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[[Page 41545]]

Interplay Between the ADEA and Employer-Sponsored Retiree Health 
Benefits
    Section 4 of the ADEA makes it unlawful for an employer to 
discriminate against any individual with respect to ``compensation, 
terms, conditions, or privileges or employment, because of such 
individual's age.'' 29 U.S.C. 623(a)(1). In 1989, the Supreme Court 
held in Public Employees Retirement Sys. of Ohio v. Betts, 492 U.S. 
158, 109 S. Ct. 256 (1989), that the ADEA, nevertheless, did not 
prohibit discrimination in employee benefits, such as health insurance. 
In response to the Supreme Court's decision in Betts, Congress enacted 
the Older Workers Benefit Protection Act of 1990, Pub. L. No. 101-433, 
104 Stat. 978 (1990) (OWBPA), which amended the ADEA and defined the 
term ``compensation, terms, conditions or privileges of employment'' in 
Section 4 of the Act as including employee benefits. 29 U.S.C. 630(l).
    For many years after, however, there was little discussion about 
the interplay between the ADEA and the provision of retiree health 
benefits by employers. Many employers relied on legislative history to 
the OWBPA which states that the practice of eliminating, reducing, or 
altering employer-sponsored retiree health benefits with Medicare 
eligibility is lawful under the ADEA. Specifically, employers looked to 
a joint ``Statement of Managers'' clarifying several proposed 
amendments to the OWBPA, which was entered into the congressional 
records of both the House and Senate and accompanied the final 
compromise bill. On the subject of ``retiree health,'' the Statement 
says:

    Many employer-sponsored retiree medical plans provide medical 
coverage for retirees only until the retiree becomes eligible for 
Medicare. In many of these cases, where coverage is provided to 
retirees only until they attain Medicare eligibility, the value of 
the employer-provided retiree medical benefits exceeds the value of 
the retiree's Medicare benefits. Other employers provide medical 
coverage to retirees at a relatively high level until the retirees 
become eligible for Medicare and at a lower level thereafter. In 
many of these cases, the value of the medical benefits that the 
retiree receives before becoming eligible for Medicare exceeds the 
total value of the retiree's Medicare benefits and the medical 
benefits that the employer provides after the retirees attains 
Medicare eligibility. These practices are not prohibited by this 
substitute. Similarly, nothing in this substitute should be 
construed as authorizing a claim on behalf of a retiree on the basis 
that the actuarial value of employer-provided health benefits 
available to that retiree not yet eligible for Medicare is less than 
the actuarial value of the same benefits available to a younger 
retiree.

Final Substitute: Statement of Managers, 136 Cong. Rec. S25353 (Sept. 
24, 1990); 136 Cong. Rec. H27062 (Oct. 2, 1990).
    In August 2000, the United States Court of Appeals for the Third 
Circuit became the first federal court of appeals to examine whether an 
employer's coordination of its retiree health plans with Medicare 
eligibility violated the ADEA. Erie County Retirees Ass'n v. County of 
Erie, 220 F.3d 193 (3rd Cir. 2000). Prior to 1992, Erie County offered 
current employees and retirees separate but similar traditional 
indemnity health insurance coverage. Id. at 196. In February 1998, 
however, in an effort to control escalating health benefit costs, the 
county began to require all eligible retirees over age 65 to accept a 
coordinated health care plan provided through a health maintenance 
organization (HMO) and Medicare. Eligible retirees had to have Medicare 
Part B Medical Insurance in order to participate in the plan. Id. at 
197. Retirees not yet eligible for Medicare continued to be covered by 
a traditional indemnity plan until October 1998 when they were 
transferred to a hybrid point of service plan where each insured could 
select between an HMO and the traditional indemnity option on an as-
needed basis. Id. In a class action lawsuit, the Medicare-eligible 
retirees alleged that the county violated the ADEA by offering them 
health insurance coverage that was inferior to that offered to the 
county's younger retirees. Id. at 193. In examining whether the 
county's practice violated the Act, the Third Circuit held that the 
Statement of Managers language was not controlling and that the ADEA 
prohibits an employer from treating ``retirees differently with respect 
to health benefits based on Medicare eligibility,'' unless the employer 
can meet any of the affirmative defenses provided in section 4 of the 
ADEA. Id. at 213-14.\25\ The one affirmative defense examined in detail 
by the Third Circuit was the equal benefit/equal cost defense set forth 
in 29 U.S.C. 623(f)(2)(B)(i). The equal benefit/equal cost defense has 
been part of the ADEA's regulatory framework since 1967.\26\ Consistent 
with Congress' concern that employers might not hire older workers 
because many employee benefits become more costly with age, Department 
of Labor and EEOC regulations interpreted section 4(f)(2) of the ADEA 
as permitting employers to offer lower levels of certain employee 
benefits to older workers as long as the benefit cost incurred on 
behalf of older workers is no less than that incurred for younger 
workers. 29 CFR 1625.10. In the OWBPA, Congress adopted this test in 
section 4(f)(2)(B)(i) of the ADEA, thereby codifying the EEOC's equal 
benefit/equal cost rule.
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    \25\ 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. 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.
    \26\ In Public Employees Retirement Sys. of Ohio v. Betts, 492 
U.S. 158, 109 S. Ct. 256 (1989), the Supreme Court held that the 
equal benefit/equal cost test did not apply to the ADEA. Congress 
believed the test should apply, and the regulatory equal benefit/
equal cost test was codified in the OWBPA.
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    In Erie County, the Third Circuit found that the costs Medicare 
incurs on behalf of retirees over age 65 cannot be considered when 
evaluating whether an employer has satisfied the equal cost prong and 
remanded the case so the district court could determine whether the 
county could nonetheless meet the equal benefit/equal cost test. Id. at 
216. On remand, the county conceded that it could not meet the equal 
cost prong using the Third Circuit's formulation of the test. Erie 
County Retirees Ass'n v. County of Erie, 140 F. Supp.2d 466, 477 (W.D. 
Pa. 2001). The district court then found that the county did not 
provide equal benefits to its retirees because (1) age 65 retirees were 
required to pay a greater portion of the total cost of their health 
insurance premiums than younger retirees; (2) the health plan offered 
to older retirees did not allow participants to alternate between 
different forms of coverage, while the plan offered to younger retirees 
did; and (3) the health plan for younger retirees did not restrict 
participants to a prescription drug formulary, while the plan for older 
retirees did contain such a restriction. Id. at 475-77.
    Many benefit experts cautioned that the Erie County decision would 
exacerbate the erosion of employer-sponsored retiree health 
benefits.\27\ The

[[Page 41546]]

Erie County decision means, among other things, that an employer who 
voluntarily provides its pre-age 65 retirees with a bridge to Medicare 
(with the intent to terminate all employer-sponsored retiree coverage 
at that time) can do so without ADEA implications only if the benefits 
provided by the bridge coverage are either the same as or less generous 
than those provided by Medicare. Stated otherwise, in every instance 
where employer-provided bridge coverage exceeds Medicare coverage, the 
employer would be prevented by the ADEA from ending its coverage when 
retirees become eligible for Medicare. The Commission is concerned that 
many employers will respond to this outcome, given the dramatic cost 
increases for retiree health benefits, not by incurring additional 
costs for retiree benefits that supplement Medicare, but rather by 
reducing or eliminating health coverage for retirees who are not yet 
eligible for Medicare.
---------------------------------------------------------------------------

    \27\ See Anna M. Rappaport, ``Postemployment Benefits: Retiree 
Health Challenges and Trends--2001 and Beyond,'' in Compensation and 
Benefits Management, 52, 55 (Autumn 2001) (Erie County will force 
employers to examine the application of the ADEA to their retiree 
health plans with ``little or no legal precedent''); Paul Fronstin, 
``Retiree Health Benefits: Trends and Outlook,'' EBRI Issue Brief 
No. 236, at 12-14 (Employee Benefit Research Institute Aug. 2001) 
(``because of the legal and cost concerns raised by the Erie County 
decision, [employers] are more likely to cut back on benefits for 
early retirees'' or eliminate retiree health benefits).
---------------------------------------------------------------------------

    In fact, this is ultimately what happened in Erie County. In an 
attempt to comply with the court's ruling, the county transferred 
younger retirees from the hybrid point of service plan--where each 
retiree had the ability to select between HMO or traditional indemnity 
plan coverage on an as-needed basis--to an HMO plan similar to that 
available to retirees over age 65 that did not provide such an option. 
Erie County Retirees Ass'n v. County of Erie, 192 F. Supp.2d 369, 372 
(W.D. Pa. 2002). The county also required employees not yet eligible 
for Medicare to pay a monthly amount for such coverage equal to the 
monthly amount of Medicare Part B premiums that retirees over age 65 
paid. Id. The result, therefore, is a decrease in health benefits for 
retirees generally; older retirees receive no better health benefits, 
while younger retirees must pay more for health benefits that offer 
fewer choices.

Alternative Proposals

    In considering the proper regulatory approach, EEOC closely 
examined whether it would be possible to apply the equal benefit/equal 
cost test in its regulations to the practice of coordinating employer-
sponsored retiree health benefits with Medicare or a State-sponsored 
retiree health benefits program. The Commission evaluated various 
proposals that would have allowed employers to take the cost of 
Medicare into account when assessing whether they satisfied the equal 
cost test. The Commission also considered the feasibility of 
implementing regulations under the ADEA that would require employers to 
adopt or maintain benefits programs that supplement Medicare in order 
to satisfy the equal benefits test.
    After extensive study, however, it does not appear that retiree 
health costs or benefits can be reasonably quantified in a regulation. 
Unlike valuation of costs associated with life insurance or long-term 
disability benefits, calculating 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.
    Even allowing an employer to take into account the ``cost'' of 
Medicare is problematic because the government's cost to provide 
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. 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. 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. The 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.
    The Commission therefore believes that application of the equal 
cost/equal benefit rule, or a variant of that rule, to the practice of 
coordinating retiree health benefits with Medicare or a State-sponsored 
retiree health benefits program would not allow employers to readily 
and cost-efficiently determine which practices are, and are not, 
permissible and therefore would not fully alleviate employers' concerns 
about offering retiree health benefits. It 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. 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,\28\ and 
about one-third

[[Page 41547]]

of retirees over age 65 rely on employer-provided retiree health plans 
to supplement Medicare,\29\ the Commission believes that such a result 
is contrary to the public interest and necessitates regulatory action.
---------------------------------------------------------------------------

    \28\ Hearing Before the House Comm. on Education and the 
Workforce, 107th Cong. (2001) (statement of William J. Scanlon, 
Director of Health Care Services, GAO). Of 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).
    \29\ 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).
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The Commission's Proposed Exemption

    When enacting the ADEA, Congress recognized that enforcement of the 
Act required a case-by-case examination of employment practices.\30\ In 
light of this recognition, Congress authorized the Commission to 
``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.'' 29 U.S.C. 628. Pursuant to that authority, the 
Commission proposes a narrowly drawn exemption that permits the 
practice of coordinating employer-provided retiree health coverage with 
eligibility for Medicare or a State-sponsored retiree health benefits 
program and shows due regard for the remedial purposes of the ADEA. 
Section 2(b) of the Act firmly establishes the goal of ``encouraging 
employers and workers [to] find ways of meeting problems arising from 
the impact of age on employment.'' 29 U.S.C. 621(b). Unrestricted 
coordination of employer-sponsored retiree health benefits with 
Medicare or a State-Sponsored health benefits program permits employers 
to provide a valuable benefit to early retirees who otherwise might not 
be able to afford health insurance coverage and allows employers to 
provide valuable supplemental health benefits to retirees who are 
eligible for Medicare.
---------------------------------------------------------------------------

    \30\ H.R. Rep. No. 90-805 (1967), reprinted in 1967 U.S.C.C.A.N. 
2213; S. Rep. 90-723 (1967).
---------------------------------------------------------------------------

    The proposed exemption shows due regard for the Act's prohibition 
against arbitrary age discrimination in employment--a central concern 
of Congress when it enacted the ADEA. The exemption also is consistent 
with the Act's purpose of promoting the employment of older persons and 
is in accord with the Statement of Managers. See Final Substitute: 
Statement of Managers, 136 Cong. Rec. 25353 (Sept. 24, 1990); 126 Cong. 
Rec. H.27062 (Oct. 2, 1990).\31\ Therefore, the Commission believes 
that the remedial purposes of the Act will be better served by allowing 
employers to coordinate retiree health benefits with Medicare or a 
State-sponsored retiree health benefits program.
---------------------------------------------------------------------------

    \31\ While the Third Circuit in Erie County did not find the 
Statement of Managers controlling, the Commission, in the exercise 
of its exemption authority, is free to take a broader look at the 
legislative record in determining whether the proposed exemption is 
consistent with the Act's purpose of promoting the employment of 
older persons. The Statement of Managers strongly suggests that it 
is.
---------------------------------------------------------------------------

Effect of Exemption

    As with any exemption from remedial legislation, the proposal is a 
narrow exemption from the prohibitions of the ADEA. The exemption 
permits employee benefit plans to lawfully 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 State-sponsored retiree health benefits program. No 
other aspects of ADEA coverage or benefits other than retiree health 
benefits are affected by this exemption.
    The proposed exemption would become effective on the date of 
publication of a final rule in the Federal Register. It is intended 
that the exemption shall apply to existing, as well as newly created, 
employer-provided retiree health benefit plans. As the Appendix to the 
proposed exemption indicates, it also is intended that the exemption 
shall apply to dependent and/or spousal health benefits that are 
included as part of the health benefits provided to retired 
participants. 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.

Additional Amendments

    In addition to the proposed exemption discussed above, the 
Commission proposes to redesignate subpart C of part 1627 as subpart C 
of part 1625 of Chapter XIV of Title 29 of the Code of Federal of 
Regulations. Subpart C of part 1627 currently includes two sections. 
The first, which will be redesignated as section 1625.30, outlines 
procedures by which the Commission may exercise its exemption authority 
under Section 9 of the ADEA. The second, redesignated as section 
1625.31, explains the parameters of an already existing exemption for 
special employment programs. Redesignation does not alter either the 
procedures by which the Commission may exercise its exemption authority 
under Section 9 of the ADEA or the Special Employment Programs 
exemption.

Comments

    The Commission invites comments on this proposed exemption from all 
interested parties, including employee rights organizations, labor 
unions, employers, benefits groups, actuaries, and state and local 
governments. In particular, the Commission would welcome comments on 
other types of government-sponsored retiree health benefit programs, 
including state and local government retiree health plans, that are 
comparable to Medicare.
    In proposing this exemption, the Commission coordinated with other 
federal agencies in accord with Executive Order 12067, and 
incorporated, where appropriate, agency comments in the proposal.

Executive Order 12866 and Regulatory Flexibility Act

    The proposed 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'' under section 
3(f)(4) of that Order and was reviewed by the Office of Management and 
Budget (OMB). The Commission does not believe that the proposed 
exemption will have a significant impact on small business entities 
under the Regulatory Flexibility Act because it imposes no economic or 
reporting burdens on such firms.
    The ADEA applies to all employers with at least 20 employees. 29 
U.S.C. 630(b). The Act prohibits covered employers from discriminating 
in employment against any individual who is at least 40 years of age. 
29 U.S.C. 623, 631. The Bureau of Labor Statistics estimates that there 
are 74,347,000 individuals in the U.S. labor force that are age 40 or 
above.\32\ According to Census Bureau information, approximately 
1,976,216 establishments employed 20 or more employees in 2000.\33\
---------------------------------------------------------------------------

    \32\ Bureau of Labor Statistics, U.S. Department of Labor, 
Current Population Survey (April 2003).
    \33\ Census Bureau, U.S. Department of Commerce, Statistics of 
U.S. Businesses (2000).
---------------------------------------------------------------------------

    The proposed 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.\34\ According to 
the

[[Page 41548]]

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 coverage or a supplement to Medicare coverage.\35\
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    \34\ Hearing Before the House Comm. on Education and the 
Workforce, 107th Cong. (2001) (statement of William J. Scanlon, 
Director of Health Care Services, GAO).
    \35\ 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).
---------------------------------------------------------------------------

    The proposal--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. When the Third 
Circuit held that the practice of coordinating retiree health benefits 
with Medicare eligibility was unlawful unless an employer could meet 
the equal benefit/equal cost test, there was widespread concern that 
employers who currently provide such retiree health benefits would 
either have to provide greater benefits to older retirees or reduce 
benefits for younger retirees to comply. The Commission believes that, 
if required to make a choice between paying more or less to comply with 
the ADEA, many employers will choose to pay less by reducing or 
eliminating health coverage for retirees who are not yet eligible for 
Medicare. This result is particularly likely given the rising costs of 
health care in general. The proposed exemption seeks to eliminate this 
incentive by making clear that the ADEA permits employers to freely 
coordinate the provision of retiree health benefits with Medicare 
eligibility. This approach also benefits the significant number of 
employees who rely on employer-sponsored retiree health coverage and 
otherwise would have to obtain retiree health coverage in the private 
individual marketplace at substantial personal expense.
    The proposed exemption has no reporting requirements. A major 
concern regarding the inequitable impact of regulation on small firms 
is that reporting and accompanying record keeping requirements can be 
as costly to smaller firms as large ones. The absence of reporting 
requirements eliminates this concern.
    It is not likely that the proposed regulation will disrupt the 
efficient functioning of the economy and private market forces. Until 
recently, when structuring retiree health benefits, many employers 
relied on legislative history to the OWBPA which states that the 
practice of eliminating, reducing, or altering employer-sponsored 
retiree health benefits with Medicare eligibility is lawful under the 
ADEA. The proposed regulation permits the practice of unrestricted 
coordination of retiree health benefits with Medicare eligibility to 
continue.
    Under other proposals considered by the Commission, many employers 
would have been forced to discontinue retiree health coverage if they 
could not afford the required actuarial analysis. It 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. Larger employers who maintain multiple plans for 
different categories of employees also would face significant expense 
complying with alternative proposals. 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 under 
alternative proposals considered by the Commission would have been cost 
prohibitive for many employers.

List of Subjects

29 CFR Part 1625

    Advertising, Aged, Employee benefit plans, Equal employment 
opportunity, Retirement.

29 CFR Part 1627

    Aged, Equal employment opportunity, Reporting and recordkeeping 
requirements.

    For the Commission.
Cari M. Dominguez,
Chair.
    For the reasons discussed in the preamble, the Equal Employment 
Opportunity Commission proposes to amend 29 CFR chapter XIV as follows:

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

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

    3. In Sec.  1627.1, remove paragraph (b) and redesignate paragraph 
(c) as new paragraph (b).
    4. In Part 1627, redesignate Subpart C and sections 1627.15 and 
1627.16 as Subpart C of Part 1625 and sections 1625.30 and 1625.31, 
respectively.

PART 1625--AGE DISCRIMINATION IN EMPLOYMENT ACT

    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.

    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 employment 
of, persons with special employment problems, including employment 
activities and programs under the Manpower Development and Training Act 
of 1962, Public Law No. 87-415, 76 Stat. 23 (1962), as amended, and the 
Economic Opportunity Act of 1964, Public Law 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. * * *
* * * * *
    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 are 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,

[[Page 41549]]

reduced or eliminated when the participant is eligible for Medicare 
health benefits or for health benefits under a comparable State health 
benefit plan. 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. 
It 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.

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 employers continue to offer ``Medicare carve-out plans'' 
that deduct from the health benefits provided to Medicare-eligible 
retirees those health benefits that Medicare provides, while 
continuing to provide to Medicare-eligible retirees those health 
benefits that Medicare does not provide?
    A3. Yes. Employers may continue to offer such ``carve-out 
plans'and make Medicare the primary payer of health benefits for 
Medicare-eligible retirees. Employers may also continue to offer 
``carve-out plans'' to those retirees eligible for health benefits 
pursuant to a comparable State health benefit plan and make the 
comparable State health plan the primary payer of health benefits 
for these State-eligible retirees.
    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 permit employers to use Medicare (or 
comparable State health benefit plan) eligibility, or the age of 
Medicare eligibility (or the age of eligibility for a comparable 
State health benefit plan) as a basis for other acts, practices or 
decisions regarding retirees?
    A5. No. Employer use of Medicare (or comparable State health 
benefit plan) eligibility or the age of Medicare eligibility (or the 
age of eligibility for a comparable State health benefit plan) in a 
manner other than as specified in paragraph (b) of this section 
likely would be considered reliance upon an age-defined factor. 
Reliance upon an age-defined factor in making distinctions in 
employee benefits violates the Act, unless the employer satisfies 
one of the Act's specified defenses or exemptions.
    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.

[FR Doc. 03-17738 Filed 7-11-03; 8:45 am]
BILLING CODE 6570-01-P