Court Ruling Threatens the Future Of Employer-Sponsored Retiree Medical Benefits

Apr 30, 2001, 01:00 ET from Watson Wyatt Worldwide

    WASHINGTON, April 30 /PRNewswire/ -- A recent court ruling against Erie
 County, Pa., poses a serious threat to the availability of employer-sponsored
 retiree medical programs, according to Rich Ostuw, global practice director of
 group and health care consulting at Watson Wyatt.
     The U.S. District Court for the Western District of Pennsylvania ruled
 April 16 that Erie County violated the Age Discrimination in Employment Act
 (ADEA) and failed the equal benefits safe harbor under the ADEA by providing a
 lesser benefit to Medicare-eligible, post-65 retirees than to early retirees
 who were not eligible for Medicare.
     Specifically, Erie County offered younger retirees a point-of-service
 health care plan that allowed them to go outside a prescribed network of
 doctors for care (though pay more when they do), while older retirees were
 covered through a health maintenance organization that required them to select
 doctors within a defined network.  The total contribution paid by retirees
 over age 65 was greater than that for pre-65 retirees.  This ruling was a
 follow up to the decision rendered by the Third Circuit Court of Appeals that
 held that the ADEA applies to retirees and retiree medical plans.
     "This case clarifies many of the rules surrounding the ADEA, but it
 contradicts the long-term general consensus about those rules," said Ostuw.
 "As a result of this ruling and the EEOC Compliance Manual that was issued
 after this case was initiated, the majority of employers that offer retiree
 medical benefits will find their plans violate ADEA because they make
 distinctions in benefits and/or contributions between retirees who are
 eligible to receive Medicare and those who aren't.  Particularly problematic
 is the court's view that the Medicare Part B premium must be considered as a
 retiree contribution under the plan, but it is not clear how this test should
 be conducted."
     Currently, most employers that offer retiree medical coverage integrate
 the benefits with Medicare coverage.  That means that the employer plan
 benefit payments are reduced because of the Medicare benefits; therefore, the
 net premium cost for an employer plan that supplements Medicare is lower after
 age 65.  But the combined benefits payable for Medicare-eligible retirees are
 commonly similar to those for pre-65 retirees.
     The Erie County decision allows some plan features to be less liberal
 after age 65 provided that the overall benefits are not less favorable to
 retirees over age 65.  However, a surprising conclusion is that in determining
 whether the retiree's contribution is an equal percentage of the cost (as
 required), the Medicare Part B premium must be factored in as a required
 contribution to the employer plan.  The rationale is that the retiree must
 enroll in Medicare to qualify for full benefits.
     "Some employers face major compliance challenges, in particular those that
 provide retiree medical coverage only until age 65," says Ostuw.
     Employers with retiree medical plans that violate ADEA now face the
 difficult choice of reducing benefits for pre-65 retirees, improving benefits
 for post-65 retirees or doing some combination of the two.  Because of the
 significant exposure for litigation, employers that are in violation must act
 quickly, notes Ostuw.
     "Unfortunately, there's no quick fix -- and the alternatives are
 unattractive," says Ostuw.  "Increasing lifetime benefits for older retirees
 is a very costly proposition, and most employers are reluctant to increase
 costs in today's economic climate.  Reducing benefits for pre-65 retirees is
 equally unappealing.
     "If employers suddenly must provide the same level of benefits to
 Medicare-eligible retirees as early retirees, I'm afraid the cost implications
 will force many employers to eliminate retiree medical coverage entirely,
 especially if this case doesn't trigger congressional action." says Ostuw.
 "It would be unfortunate if Congress stood by while employers were forced to
 discontinue retiree medical coverage. Ultimately, we believe new legislation
 that would allow employers to fund retiree medical the same way they fund
 pensions -- at the time the benefits are earned -- would contribute to fewer
 cutbacks in retiree medical benefits."
     The court ruling affects employers doing business in Pennsylvania, New
 Jersey, Delaware and the Virgin Islands, but it establishes a precedent that
 will likely have national implications, according to Ostuw. He estimates that
 75 percent of companies providing retiree medical coverage must make modest to
 significant changes to comply with these requirements.  Although the law and
 the EEOC rules are national, this is the only court ruling on the issue.
 
     Watson Wyatt is a global consulting firm that provides services in the
 areas of employee benefits, human resources technologies and human capital
 management.  The firm has more than 5,900 associates in 30 countries, with
 corporate headquarters in Reigate, England and Washington, D.C.  For more
 information about Watson Wyatt, visit http://www.watsonwyatt.com .
 
                     MAKE YOUR OPINION COUNT -  Click Here
                http://tbutton.prnewswire.com/prn/11690X10762221
 
 

SOURCE Watson Wyatt Worldwide
    WASHINGTON, April 30 /PRNewswire/ -- A recent court ruling against Erie
 County, Pa., poses a serious threat to the availability of employer-sponsored
 retiree medical programs, according to Rich Ostuw, global practice director of
 group and health care consulting at Watson Wyatt.
     The U.S. District Court for the Western District of Pennsylvania ruled
 April 16 that Erie County violated the Age Discrimination in Employment Act
 (ADEA) and failed the equal benefits safe harbor under the ADEA by providing a
 lesser benefit to Medicare-eligible, post-65 retirees than to early retirees
 who were not eligible for Medicare.
     Specifically, Erie County offered younger retirees a point-of-service
 health care plan that allowed them to go outside a prescribed network of
 doctors for care (though pay more when they do), while older retirees were
 covered through a health maintenance organization that required them to select
 doctors within a defined network.  The total contribution paid by retirees
 over age 65 was greater than that for pre-65 retirees.  This ruling was a
 follow up to the decision rendered by the Third Circuit Court of Appeals that
 held that the ADEA applies to retirees and retiree medical plans.
     "This case clarifies many of the rules surrounding the ADEA, but it
 contradicts the long-term general consensus about those rules," said Ostuw.
 "As a result of this ruling and the EEOC Compliance Manual that was issued
 after this case was initiated, the majority of employers that offer retiree
 medical benefits will find their plans violate ADEA because they make
 distinctions in benefits and/or contributions between retirees who are
 eligible to receive Medicare and those who aren't.  Particularly problematic
 is the court's view that the Medicare Part B premium must be considered as a
 retiree contribution under the plan, but it is not clear how this test should
 be conducted."
     Currently, most employers that offer retiree medical coverage integrate
 the benefits with Medicare coverage.  That means that the employer plan
 benefit payments are reduced because of the Medicare benefits; therefore, the
 net premium cost for an employer plan that supplements Medicare is lower after
 age 65.  But the combined benefits payable for Medicare-eligible retirees are
 commonly similar to those for pre-65 retirees.
     The Erie County decision allows some plan features to be less liberal
 after age 65 provided that the overall benefits are not less favorable to
 retirees over age 65.  However, a surprising conclusion is that in determining
 whether the retiree's contribution is an equal percentage of the cost (as
 required), the Medicare Part B premium must be factored in as a required
 contribution to the employer plan.  The rationale is that the retiree must
 enroll in Medicare to qualify for full benefits.
     "Some employers face major compliance challenges, in particular those that
 provide retiree medical coverage only until age 65," says Ostuw.
     Employers with retiree medical plans that violate ADEA now face the
 difficult choice of reducing benefits for pre-65 retirees, improving benefits
 for post-65 retirees or doing some combination of the two.  Because of the
 significant exposure for litigation, employers that are in violation must act
 quickly, notes Ostuw.
     "Unfortunately, there's no quick fix -- and the alternatives are
 unattractive," says Ostuw.  "Increasing lifetime benefits for older retirees
 is a very costly proposition, and most employers are reluctant to increase
 costs in today's economic climate.  Reducing benefits for pre-65 retirees is
 equally unappealing.
     "If employers suddenly must provide the same level of benefits to
 Medicare-eligible retirees as early retirees, I'm afraid the cost implications
 will force many employers to eliminate retiree medical coverage entirely,
 especially if this case doesn't trigger congressional action." says Ostuw.
 "It would be unfortunate if Congress stood by while employers were forced to
 discontinue retiree medical coverage. Ultimately, we believe new legislation
 that would allow employers to fund retiree medical the same way they fund
 pensions -- at the time the benefits are earned -- would contribute to fewer
 cutbacks in retiree medical benefits."
     The court ruling affects employers doing business in Pennsylvania, New
 Jersey, Delaware and the Virgin Islands, but it establishes a precedent that
 will likely have national implications, according to Ostuw. He estimates that
 75 percent of companies providing retiree medical coverage must make modest to
 significant changes to comply with these requirements.  Although the law and
 the EEOC rules are national, this is the only court ruling on the issue.
 
     Watson Wyatt is a global consulting firm that provides services in the
 areas of employee benefits, human resources technologies and human capital
 management.  The firm has more than 5,900 associates in 30 countries, with
 corporate headquarters in Reigate, England and Washington, D.C.  For more
 information about Watson Wyatt, visit http://www.watsonwyatt.com .
 
                     MAKE YOUR OPINION COUNT -  Click Here
                http://tbutton.prnewswire.com/prn/11690X10762221
 
 SOURCE  Watson Wyatt Worldwide