Section 3 Employee Benefits

This guidance document was issued upon approval by vote of the U.S. Equal Employment Opportunity Commission.

OLC Control Number EEOC-CVG-2001-1 Concise Display Name Section 3 Employee Benefits Issue Date General Topics Employee Benefits, Race, Color, Religion, National Origin, Sex, Age, Disability, Genetic Information

This document focuses on employee benefits that raise unique issues under EEO laws, including life and health insurance benefits, long-term and short-term disability benefits, severance benefits, pension or other retirement benefits, and early retirement

Title VII, EPA, ADEA, ADA, GINA, 29 CFR Parts 1604, 1607, 1625, 1630 Document Applicant Employers, Employees, Applicants, Attorneys and Practitioners, EEOC Staff Previous Revision

This document replaced 8 previously existing guidance documents as detailed in the document's cover page.

Disclaimer

The contents of this document do not have the force and effect of law and are not meant to bind the public in any way. This document is intended only to provide clarity to the public regarding existing requirements under the law or agency policies.

DIRECTIVES TRANSMITTAL Number
915.003
EEOC
October 3, 2000

The contents of this document do not have the force and effect of law and are not meant to bind the public in any way. This document is intended only to provide clarity to the public regarding existing requirements under the law or agency policies.

SUBJECT: EEOC COMPLIANCE MANUAL

PURPOSE: This transmittal covers the issuance of Section 3 of the new Compliance Manual on "Employee Benefits." The section provides guidance and instructions for investigating and analyzing issues that arise with regard to life and health insurance benefits, long-term and short-term disability benefits, severance benefits, pension or other retirement benefits, and early retirement incentives.

EFFECTIVE

DATE: Upon receipt

DISTRIBUTION: EEOC Compliance Manual holders

OBSOLETE

DATA: This section of the new Compliance Manual supersedes the following Commission policy documents: EEOC Compliance Manual, Volume II, Section 627, "Employee Benefit Plans;" Application of Section 4(f)(2) of the ADEA to Life Insurance and Long-Term Disability Plans (No. 87-15, September 1987); Application of Section 4(f)(2) of the ADEA to Defined Contribution Pension Plans (No. 87-21, September 1987); Effect of 1986 Amendments to ADEA on Commission's Enforcement Activities (No. N-915-024, April 1988); Application of Section 4(g) of the ADEA (Coverage of Older Workers Under Group Health Plans) (No. 88-8, May 1988); Cases Involving the Extension of Additional Benefits to Older Workers (No. 88-11, June 1988); Maternity and Pregnancy Benefits as Wages (Compliance Manual Section 633, Appendix B, January 1989); and Questions and Answers About Disability and Service Retirement Plans Under the ADA (May 1995).

FILING

INSTRUCTIONS: This is the third section issued as part of the new Compliance Manual.

/s/ Ida L. Castro Chairwoman

CHAPTER 3: EMPLOYEE BENEFITS

TABLE OF CONTENTS

INTRODUCTION

I. OVERVIEW

II. BENEFITS COVERED IN THIS CHAPTER

BASIS FOR FILING A CHARGE

ADEA ISSUES

I. INTRODUCTION

II. BACKGROUND: EQUAL BENEFITS

A. Introduction
B. How to Determine if Benefits Are Equal
C. Providing Better Benefits to Older Workers

III. BACKGROUND: EQUAL COST AND OFFSETS

A. Equal Cost Rule
1. Definition of Equal Cost
2. Benefits Subject to the Equal Cost Defense
3. Requirements of the Equal Cost Defense
4. Benefit Packaging
5. Benefit Plans Funded Solely or in Part by Employees
B. Offsets

IV. APPLYING EQUAL COST AND OFFSET ANALYSES TO SPECIFIC BENEFITS

A. Life Insurance
B. Health Insurance
C. Long-Term Disability
1. Equal Cost Rule
2. Offset
D. Disability Retirement
1. Equal Cost Rule
2. Offset
E. Severance Benefits
1. Introduction
2. Equal Cost Rule
3. Offset

V. PENSIONS

A. Introduction
B. Defenses to Unequal Benefits
1. Equal Cost
2. Offset
C. Cash Balance Plans

VI. EARLY RETIREMENT INCENTIVES

A. Introduction
B. Voluntariness
C. Equal Benefit
D. Defenses to Unequal Benefits
1. Equal Cost
2. Subsidized Portion Offset
3. Social Security Supplements
4. Plans Offered to Tenured Faculty
5. Plans Consistent with the Relevant Purpose or Purposes of the ADEA

ADA ISSUES

I. INTRODUCTION

II. EQUAL BENEFITS

III. DISABILITY-BASED DISTINCTIONS

IV. JUSTIFICATIONS FOR DISABILITY-BASED DISTINCTIONS

A. Bona Fide Plans
B. Subterfuge

V. DISABILITY RETIREMENT AND SERVICE RETIREMENT PLANS

TITLE VII/EPA ISSUES

I. INTRODUCTION

II. DISCRIMINATION BASED ON SEX, RACE, COLOR, NATIONAL ORIGIN, OR RELIGION

A. Retirement Benefits
B. Health Insurance Benefits

III. DISCRIMINATION BASED ON PREGNANCY, CHILDBIRTH, OR RELATED MEDICAL CONDITIONS

A. Introduction
B. Retirement Benefits
C. Health Insurance Benefits

CONCLUSION

APPENDIX A: GLOSSARY

APPENDIX B: DOCUMENTS TO EVALUATE BENEFITS CHARGES

APPENDIX C: FEDERAL AGENCIES DEALING WITH EMPLOYEE BENEFITS

APPENDIX D: EEOC ADEA REGULATIONS ON EMPLOYEE BENEFITS

EMPLOYEE BENEFITS

INTRODUCTION

I. Overview

The Age Discrimination in Employment Act of 1967 (ADEA), (1) the Americans with Disabilities Act (ADA), (2) and Title VII of the Civil Rights Act of 1964, (3) ban discrimination against protected groups in compensation and terms, conditions, and privileges of employment. The Equal Pay Act (EPA) (4) prohibits sex-based wage discrimination. These laws require that all employee benefits be provided in a non-discriminatory manner unless a statutory exception provides otherwise.

Many charges alleging discrimination in employee benefits -- including leave, profit sharing, and educational stipends -- can be resolved using standard theories of disparate treatment and disparate impact. The issues with regard to these types of benefits will typically be whether the differential was based on a protected classification or had the effect of discriminating, and whether the employer has a defense to that discrimination.

This Section of the Compliance Manual focuses on employee benefits that raise unique issues: life and health insurance benefits, long-term and short-term disability benefits, severance benefits, pension or other retirement benefits, and early retirement incentives. Based on explicit statutory provisions in the ADEA and the ADA, these benefits raise issues that cannot be resolved through standard disparate treatment or impact analyses. This Section addresses in depth specific issues that are likely to arise when discrimination in these benefits is alleged.

II. Benefits Covered in this Section

Life insurance benefits provide a monetary benefit for the insured and/or the insured's beneficiaries in the event of the insured's death. The benefits usually are paid in a lump sum or, occasionally, in the form of an annuity, through which the beneficiary gets periodic benefit payments for life.

Health insurance benefits cover all or part of costs incurred for medical care. Coverage may be limited to the employee or may be extended to others who have a relationship with the employee, including the employee's spouse and/or dependent children. The amounts or types of coverage available may also be capped or limited.

Disability benefits provide salary replacement for employees who are unable to work due to illness or injury. Some employers also provide a right of recall so that disabled employees can return to their jobs once they have recovered. Long-term benefits are typically paid for an extended period of time, although many plans differentiate between mental and physical impairments in determining the duration of the benefit program. Short-term benefits are those available for more temporary conditions where the employer anticipates that the employee will be able to work again in a relatively short period of time. There is no precise amount of time that differentiates long-term from short-term disability benefits, and their purpose is the same.

Like long-term and short-term disability benefits, disability retirement benefits are paid to employees who are unable to work due to illness or injury. Unlike other disability benefits, however, disability retirement benefits are typically payable until death, unless the employee is able to resume working. Therefore, they operate as a retirement benefit for former employees. Disability retirement benefits should be distinguished from service retirement benefits, which are paid to employees who have reached retirement age, have the requisite number of years of service, and/or meet the employer's other eligibility criteria.

Severance benefits are benefits offered to employees who are terminated from their jobs. In many instances, severance benefits will be provided when an employee is terminated for reasons other than his/her performance or conduct -- that is, most typically, in reductions-in-force or downsizing due to economic or business concerns. Severance benefits can be provided based on a unilateral decision by the employer or through the terms of a collective bargaining agreement. The amount of severance benefits paid also varies by employer. For example, some employers pay a set amount to all separated employees. Others may pay a week's salary for each year of service rendered by separating employees.

Retirement benefits provide former employees with a source of income after completion of their employment. These benefits are called service retirement or pension benefits. They can be distributed in a lump sum or as annuities that are paid periodically for life.

Among other criteria, employers typically require employees to reach a "normal retirement age," and/or to have rendered a particular number of years of service, in order to receive full -- "unreduced" -- retirement benefits. Employers sometimes permit employees who leave the work force before reaching the required age or years of service to retire with reduced pension benefits.

In most cases, retirement benefits are offered through defined benefit or defined contribution plans (or through a combination of the two). Under a defined benefit plan, the employer applies a specific formula to calculate each employee's retirement benefit and promises to pay that benefit once the employee becomes eligible. Formulas vary by employer and can be based on an employee's age, years of service, salary level, or some combination of these or other criteria.

Under a defined contribution plan, the employer makes set contributions to individual accounts for each plan participant. The amount of the retirement benefit then depends on the earnings of the employee's account. A "401(k)" plan is an example of a defined contribution plan. As is true of defined benefit plans, the amount of the employer's contributions, as well as the formula by which those contributions are calculated, will depend on the particular employer.

In some cases, employers may offer employees the opportunity to retire early -- that is, before they have reached normal retirement age or served the requisite number of years - in exchange for additional benefits to which those employees would not otherwise have been entitled. Employers sometimes offer these incentives, which are intended to encourage employees to take early retirement voluntarily, as a means of addressing financial concerns that might otherwise lead to layoffs.

BASIS FOR FILING A CHARGE

This Section applies where an individual has been denied benefits -- or has received lower benefits -- because of his age, disability, race, color, sex, national origin, or religion, or motivated by retaliation. The Section covers life insurance benefits, health insurance benefits, long-term or short-term disability benefits, disability retirement benefits, severance benefits, service retirement benefits, and early retirement incentives. Under the ADEA, a charge is not required in order for the EEOC to investigate an employer's fringe benefit practices.

This Section addresses the ADEA first, because that law contains extensive provisions that explicitly govern analysis of claims involving these types of benefits. These provisions permit employers (5) to give lower benefits to older than to younger workers in some circumstances. This Section explains when lower benefits are permissible, and what an employer must prove to justify giving them.

The ADA also permits employers to make certain disability-based distinctions in employee benefits. This Section addresses some of the questions that must be resolved in analyzing ADA benefit claims.

Under Title VII, an employer may never base benefit decisions on race, color, sex, national origin, or religion. An employer is also prohibited from excluding pregnancy, childbirth, or related medical conditions from its benefit plans or from singling out those conditions for different treatment. This Section discusses the coverage and application of these prohibitions.

Under all three laws, employers will be liable for discrimination in benefits whether the employer chooses to provide the benefits itself or to purchase benefits or a package of benefits from an insurer or other entity. (6) The same rules apply regardless of the source of the benefits.

Where an employer has engaged in discrimination during the term of an employee's employment, charging parties will typically be current employees. Where an individual is eligible for benefits by virtue of his/her employment, however, s/he may file a charge even if s/he is no longer employed. In some cases, for instance, a charging party will claim that an employer has discriminatorily changed retirement or other post-employment benefits since the termination of his/her employment. These former employees may challenge such discrimination, and investigators should accept such charges. See Compliance Manual Section 2 on Threshold Issues.

ADEA ISSUES

I. Introduction

If an employer provides fringe benefits to its employees, it generally must do so without regard to an employee's age. Employers may, however, provide lower benefits to older than to younger workers in limited circumstances. This section discusses those circumstances.

The first question in evaluating employee benefits is whether the employer has provided lesser benefits to older than to younger workers. If the benefits are the same, there is no need to proceed further.

If the benefits given to an older worker are not the same as those provided to a younger employee, the next question is whether any difference is permitted by the ADEA. For the types of benefits discussed in this Section, employers may provide a lesser level or duration of benefits to older workers:

In limited circumstances, the ADEA also permits employers to offer early retirement incentives that give lower benefits to older workers.

Some employers may try to defend benefit disparities on the ground that the plan meets the requirements of the Employee Retirement Income Security Act of 1974 (ERISA), which governs the establishment, coverage, and management of employee benefit plans, or the Internal Revenue Code. (7) Neither of these laws is a defense to conduct that is unlawful under the ADEA, however, because neither requires an employer to discriminate on the basis of age. Thus, the fact that a benefit plan meets the standards of ERISA or the Internal Revenue Code is typically irrelevant in determining whether the plan is in compliance with the ADEA. (8)

Thus, the relevant questions are the following:

Has the employer provided equal benefits to all of its employees?

If not,

II. Background: Equal Benefits

A. Introduction

For purposes of this analysis, benefits are "equal" only where they are the same for older and younger workers in all respects. Unequal benefits may not be unlawful. But if benefits are not the same for older and younger workers, the employer will have to justify the difference.

To receive equal benefits, older and younger workers must receive all of the following:

EXAMPLE - Benefits are not equal if 55 year olds can choose between lump-sum pension distributions and annuities but 65 year olds must take pension benefits in an annuity.

EXAMPLE - Benefits are not equal if laid-off 55 year olds get severance pay and job retraining, while laid-off 65 year olds get severance pay and life insurance -- even if the monetary value of the benefits paid to each is the same.

EXAMPLE - Life insurance benefits are equal if 50 year olds and 70 year oldsboth get a death benefit of $50,000.

EXAMPLE - Life insurance benefits are equal if 50 year olds and 70 year oldsboth get a death benefit of three times their annual salary. As long as the formula for calculating benefits is the same, the actual coverage provided toolder and younger employees may differ.

EXAMPLE - Severance benefits are equal if 50 year olds and 70 year oldsboth get $500 per month (or the same percentage of their salaries, even if the salaries are different) for the same period of time after they are laid off.

EXAMPLE - Severance benefits are equal if, for all employees, they arecalculated based on years of service, even if a younger employee with more years of service then gets a higher benefit than an older employee with fewer years of service.

Benefits will also be equal if the employer's plan provides that older and younger employees will be paid the same monthly amounts until their deaths - even if the older employee has a shorter life expectancy and is thus likely to receive less in total benefits.

EXAMPLE - Employer A pays $2,000 per month in pension benefits to aretiree who is 75 years old and to a retiree who is 65 years old. Both retirees were making the same salary, had worked for the employer for the same number of years before their retirement, and are entitled to receive the pension benefits until the date of their deaths. The pension benefit to each is the same even though the 65 year old is likely ultimately to receive a greater total amount because he has a longer life expectancy.

Benefits will not be equal, on the other hand, where a plan sets a specific, age-based cutoff for the length of time employees can receive payments.

EXAMPLE - Employer O's long-term disability plan pays $2,000 per month to eligible employees until they reach the age of 62. Under Employer O's plan, each employee will receive the same monthly amount -- but older employees will get fewer payments, based on their age, than their younger counterparts. Because the cutoff of benefits is expressly age-based, these benefits are not equal.

EXAMPLE - Employer L pays long-term disability benefits on the followingschedule: employees disabled between the ages of 50 and 54 receive monthly payments for 10 years; employees disabled between the ages of 55 and 59 receive payments for 5 years; employees disabled at ages 60 or above are not eligible for any benefits at all. Because their duration, and even availability, differs based on the age at which an employee becomes disabled, these benefits are not equal.

B. How to determine if benefits are equal

In some cases, it may be clear from the face of a benefit plan that older workers are getting lower benefits than their younger counterparts on the basis of age.

EXAMPLE - Employer R offers employees life insurance coverage valued at 50% of their base salary at age 55. The plan states that employees will lose 5% of that payment each year, and will be ineligible for coverage altogether once they turn 65. These benefits are explicitly tied to, and reduced because of, the recipient's age. (9)

Moreover, benefits will not be equal where a plan reduces or eliminates benefits based on a criterion that is explicitly defined (in whole or in part) by age.

EXAMPLE - Employer B provides health insurance for its retirees but eliminates that coverage once the retirees become eligible for old-age benefits under Medicare. Because eligibility for these Medicare benefits is tied to age, Employer B's plan treats retirees differently on the basis of age.

---- The text above has been rescinded ----

EXAMPLE - Employer F denies disability benefits to any employee who is disabled less than 5 years from the date on which s/he would be eligible for service retirement. Where age is one of the criteria for service retirement eligibility, this will be an age-based distinction. (10)

To evaluate whether older and younger workers are receiving equal benefits where benefits are not explicitly tied to age or age-based factors, compare similarly situated older and younger workers. A similarly situated younger worker is an employee who is the same as an older worker in all ways that are relevant to receipt of the benefit -- e.g., in length of service and salary, or in enrollment in the same insurance plan. A 55 year old employee with 10 years of service is not, for example, a proper comparator for a 65 year old worker with four years of service if the employer's plan bases benefits on length of service.

An investigator does not need to identify a specific younger employee who has benefitted at the expense of an older employee. In some cases, no such employee will exist. If there is no actual comparator, the investigator should calculate the benefit that the plan would pay to a hypothetical employee who is similarly situated in all relevant respects but who is younger than the charging party.

EXAMPLE - CP, age 60, alleges age discrimination in disability retirement benefits. The employer asserts that these benefits are based on a formula that takes account of salary level and years of service at the date that an employee leaves the work force. The plan contains no explicitly age-based criteria. At the date of his disability retirement, CP had worked for the employer for 15 years and received a monthly salary of $1,200. CP identifies a younger coworker who receives more in disability retirement benefits.

The investigator should determine whether the identified coworker has the same number of years of service and the same salary as CP, or whether there are other younger employees on disability retirement who are appropriate comparators. If so, the investigator should determine how much in disability retirement benefits each comparator receives.

If there are no similarly situated employees, the investigator should calculate, based on benefit plan documents or other relevant information, how disability retirement benefits would be computed for hypothetical younger employees who had 15 years of service and a monthly salary of $1,200 and compare those benefits to the amounts received by CP. In appropriate cases, employers may be asked to assist in generating such computations.

Investigators may wish to chart the relevant information as follows. Employers should be asked to explain any discrepancies in the benefits received, so that the investigator may determine if age was a factor that made a difference in the employer's calculation of benefits.

AGE MONTHLY SALARY YEARS OF SERVICE MONTHLY DISABILITY BENEFIT
60 (CP) $1,200 15 $500
55 $1,200 15 ___
52 $1,200 15 ___
50 $1,200 15 ___
45 (etc.) $1,200 15 (11) ___

The ultimate question in this portion of the analysis is whether older employees have received less favorable benefits than younger employees on the basis of age. If they have not, there will be no ADEA violation. Even if older workers do receive less than similarly situated younger employees on the basis of age, however, this does not necessarily mean that the employer has violated the ADEA. It simply means that the investigator must determine whether the less favorable benefits are justified in ways permitted by the law.

C. Providing better benefits to older workers

The Commission's ADEA regulations permit employers to provide additional benefits to older workers where the employer has a reasonable basis to conclude that the benefits will counteract problems related to age discrimination. (12)

EXAMPLE - Employer Y terminates 30 employees in a reduction-in-force. Eight of the laid-off workers are between 40 and 50 years old, and two are 55 years old. Y gives a severance benefit of $1,000 to each of the employees who are 50 or under, and provides a $2,000 severance benefit to each of the 55 year olds. When challenged, Y states that it gave the older workers a higher benefit based on a government study stating that unskilled workers over the age of 50 have a much harder time regaining employment after a lay-off than their younger counterparts. Employer Y has acted to address problems older workers have in obtaining employment and has not violated the ADEA.

If benefits are lower for older workers, a violation will be found unless the unequal benefits can be justified. The possible justifications are discussed in the sections below.

III. Background: Equal Cost and Offsets

A. Equal Cost Rule

1. Definition of equal cost

Under the ADEA, an employer that spends the same amount of money, or incurs the same cost, on behalf of older workers as on behalf of younger workers may -- if specified conditions are met -- provide certain fringe benefits to older workers in smaller amounts or for shorter time periods than it provides to younger workers. This is known as the "equal cost" defense. It is the employer's obligation to prove that all aspects of the defense have been met.

A principal objective of the ADEA was to encourage the hiring and retention of older workers. Congress recognized that the cost of providing certain benefits to older workers is greater than the cost of providing those same benefits to younger workers and that those greater costs would create a disincentive to hire older workers. It crafted the equal cost defense to eliminate the disincentive.

2. Benefits subject to the equal cost defense

The equal cost defense is not available for all benefits. Employers may use the defense only for benefits that become more costly to provide because of advancing age. The types of benefits that may meet this test are:

Many benefits do not become more expensive to provide as people get older. For example, paid vacations and sick leave are not subject to the equal cost defense. The equal cost defense also does not apply to service retirement or severance benefits.

For the benefits to which it applies, the equal cost defense comes into play when the employer provides a lesser amount and/or duration of benefits for older workers than for younger workers. However, the equal cost defense can never justify a refusal to hire or an involuntary retirement because of age. (14)

3. Requirements of the Equal Cost Defense (15)

To satisfy the equal cost defense, an employer must show that all of the following are satisfied.

The costs of life insurance, health insurance, and long-term disability benefits typically rise with age. An employer may not, however, reduce these types of benefits to older workers in order to avoid non-age-based increases in costs. If there is evidence that an employer is reducing benefits more for older than for younger workers as a means of offsetting cost increases unrelated to the age of those workers, the equal cost defense will not apply.

A plan is bona fide if its terms are accurately described in writing to all employees. Additionally, the plan must provide the benefits in accordance with the terms set forth. To determine whether a plan meets this standard, investigators typically need simply obtain a copy of the employer's plan documents and confirm that benefits have in fact been paid.

The lower level or duration of benefits for older workers must be explicitly required by the plan. The defense will not be met if the plan simply gives the employer discretion to pay lower benefits to older workers if it wishes.

The employer must pay the same premiums for the benefit for each of its employees regardless of age.

In many group benefit plans, an employer will be charged a per capita rate for each of its employees -- that is, its total premium will be calculated by multiplying the number of employees times a set amount that the insurer charges to each person to cover the risks posed by the group. In such cases, the employer's rate is typically reflected both on the face of the plan and in the bills that it pays. If so, this prong of the equal cost defense can be readily satisfied.

Where an employer cannot show that it has been charged a per capita rate, or where the employer has purchased more than one benefit as part of a package, investigators may need to seek additional information to show that the employer has incurred equal cost for (a) the particular benefit at issue for (b) each of its employees regardless of age. Employers may need to obtain documents from their insurers to provide these data.

While burdens of proof are not formally assigned during the administrative process, it is the employer's responsibility to produce the relevant documentation during the investigation. If the employer cannot do this, this prong of the equal cost defense will not be satisfied. Unless the employer can otherwise justify smaller benefits in such cases, investigators should find cause.

EXAMPLE - Employer L produces a document that shows that it pays a total of $30,000 per year to purchase disability benefits for its workforce of 300 people. Employer L must show how the $30,000 has been derived and how much it pays on behalf of each employee. Employer L may need to solicit data from its insurer.

EXAMPLE - Employer S shows that it pays $4,000 per year for each of its employees to purchase a package that includes life and health insurance benefits. Employer S must show how the $4,000 is allocated between these benefits.

Even if an employer has paid the same premium for each benefit for each of its employees, there is more to the inquiry. The employer also must show that the reduction in benefits given to older workers is justified by age-based costs.

Even if a benefit is of a type whose costs generally increase with age, an employer must demonstrate that the particular reductions in its benefits are cost-justified -- that is, that the benefit provided to older workers is no lower than is necessary to achieve equivalency in costs. In many cases, this showing will require the use of actuarial data.

Actuarial data are used in calculating the rates that will be charged for insurance -- or the amount of insurance that a particular payment will purchase -- because they measure the likelihood that an event, like death or disability, will occur. Where the likelihood of the event increases, actuarial data are also used to evaluate how much must be charged -- or how much the benefit must be adjusted -- to adequately cover the increased likelihood that the benefit will be claimed.

Because the likelihood of death, illness, or disability increases with age, the cost of insuring against these events rises correspondingly. While an employer may thus reduce these benefits, it must show that the reduction is no greater than is necessary to equalize its costs.

EXAMPLE - Employer Q pays $100 per employee for a benefit for each of its employees who are under the age of 62. Employer Q's insurer notifies Q that the premiums will increase by 50% -- that is, to $150 -- upon an insured's 62 nd birthday. Employer Q is thus spending 1/3 more for the benefit for its older than for its younger employees. If these are justified age-based cost increases, Q may reduce the benefits it pays to 62 year olds to the extent necessary to reduce its premium cost for each employee to $100. Q may not reduce the benefits by any greater amount.

EXAMPLE - Employer Q pays $1,000 per employee for its employees to participate in a group life insurance plan. Under the plan, employees who are 59 years of age or younger are entitled to $200,000 in life insurance benefits, while employees who are 60 or older are entitled to only $2,000 in benefits. Even though the employer has expended equal cost for each employee, no actuarial data could justify a 99% percent reduction in the benefits received by individuals starting on their 60th birthday. This plan thus violates the ADEA. To make out a valid equal cost defense, Employer Q would have to provide data showing how much the likelihood of death (and claiming the benefit) increases as its beneficiaries get older and how much of a reduction in the benefit would be necessary to keep its costs at $1,000 per employee.

Employers are permitted to use age brackets of up to five years for purposes of making these calculations. For example, an employer need not prove that its actuarial data justify a specific reduction in benefits between 59 and 60 year old employees. An employer may instead compare actuarial data for persons ages 55 through 59 with data for those ages 60 through 64 in setting the level of benefits for people in these age groups. An employer may implement cost comparisons using brackets of less than 5 years but may not under any circumstances use brackets in excess of 5 years. (16) The same brackets should be used throughout the plan.

The justification for particular benefit reductions must be evaluated based on the facts of a particular case. For a further discussion of actuarial principles, see Appendix A, infra. If questions arise about calculation of actuarial values in particular charges, contact the Office of Legal Counsel.

4. Benefit "packaging"

The previous sections deal with a benefit-by-benefit analysis. Employers are also permitted to offer certain benefits in a "benefit package." (17) By packaging benefits, employers may decrease one benefit more than would be justified by the cost data, if they maintain or increase other benefits within the package by a corresponding amount. Only certain benefits may be packaged, and the overall result must be (1) no lesser cost to the employer, and (2) a package that is no less favorable in the aggregate than the benefits would have been to the employee under a benefit-by-benefit approach.

EXAMPLE - Employer F provides both long-term disability benefits and life insurance. The cost of both benefits is the same for the employer. Assume that age-based cost increases would justify a 10% reduction in both benefits on a benefit-by-benefit basis for persons 55 through 59. However, Employer F decides to reduce life insurance by 20% and maintain the full long-term disability benefit without reduction for employees in this age group. This is permissible if all other aspects of benefit packaging are satisfied.

EXAMPLE - Same facts as above, except Employer F reduces life insurance coverage by 15% and disability coverage by 8%. As above, assume that age-based cost increases would justify an aggregate maximum reduction, on a benefit-by-benefit basis, of 20% (10% for each benefit). Because Employer F has made an aggregate reduction of 23%, the benefits in the package are less favorable for older workers than the benefits that would have been available under a benefit-by-benefit approach. This is not permissible.

There are certain restrictions on benefit packaging. (18)

5. Benefit plans funded solely or in part by employees

The following equal cost rules apply where an employer requires that employees contribute to the funding of available benefits and where the premium for those benefits increases with age. (20)

EXAMPLE - Employer K requires that each of its employees enroll in the company's health plan and pays for 40% of the premium cost for each employee. When CP turns 60, K's insurer notifies K that it will increase the premium for CP's health insurance by 10%. K tells CP that it can no longer afford to pay 40% of the cost for his health insurance, and that he will be required to pay the additional charge himself. K says that because all of its employees must have the same health insurance, it will be forced to terminate CP if he fails to pay the additional premium cost. Because CP is now being forced to pay more for his insurance as a condition of employment, this violates the ADEA.

EXAMPLE - Employer Z offers its employees the option to enroll in its disability benefits plan, but requires that they pay 100% of the premium cost. The premium cost rises as employees grow older; 60 year old employees thus must pay more for the disability benefits coverage offered by Z than 55 year old employees do. As long as the premium increases do not exceed the amount necessary to maintain the same level of coverage for older and younger workers, this is permissible. Enrollment in the plan is voluntary, and employees of all ages bear the same percentage -- here 100% -- of the cost of coverage for their age.

B. Offsets

In limited circumstances, employers may offset the amount of certain types of benefits they provide to their older employees with age-based benefits those employees receive, such as Medicare, Social Security, or certain other employer-provided benefits. (21) There are various rationales that underlie these offsets. In some cases, the ADEA permits offsets in order to avoid duplicative payments to older workers; in other cases, an offset is permitted in one type of benefit where an employer has offered older employees equal or more advantageous treatment in another benefit. Whatever the rationale for the offset, the general rule is that an offset will be lawful only if:

Each authorized offset is also subject to certain rules that pertain specifically to that offset. Thus, this Section discusses the requirements for each offset separately, in the section of the document that addresses the relevant types of benefits. The offsets discussed in this Section are: (22)

IV. Applying Equal Cost and Offset Analyses to Specific Benefits

A. Life Insurance

EXAMPLE - Employer M provides life insurance for all employees under a written plan. The plan provides a death benefit of $100,000 for employees under age 50. Beginning at age 50, the death benefit decreases by 10% every five years. Thus, employees aged 50 through 54 receive $90,000 in coverage, those aged 55 through 59 receive $81,000, those aged 60 through 64 receive $72,900, etc. Whenever benefits have been paid under the plan, they have been paid in accordance with the foregoing provisions. The employer shows that it has paid the same premium for each of its employees to obtain this level of coverage.

1. Same benefit

Clearly, older employees receive less coverage than do younger employees because of age. The plan will be unlawful unless the employer can prove that the lower benefits are justified.

2. Equal Cost Defense
a. Does the cost of the benefit increase with age?

Yes. Because life expectancy decreases with age, the likelihood that the benefit will be claimed in the time period covered by the premium increases.

b. Is the benefit part of a bona fide employee benefit plan?

Yes. The plan is written and the benefits have been provided in accordance with its terms.

c. Does the plan require lower benefits?

Yes. The plan explicitly decreases the benefits to be paid as employees get older.

d. Has the employer spent as much on behalf of, or incurred the same cost for, its older and younger workers?

Yes. The employer has paid the same premium for each of its employees.

e. Have the benefit levels for older workers been reduced only to the extent necessary to achieve approximate equivalency in costs for older and younger workers?

The inquiry here is whether the 10% reduction in life insurance coverage for each age group can be cost-justified -- that is, whether 10% is the level of reduction in the benefit that is necessary for the employer to keep premium costs for its older employees to the same level it pays for its younger workers. If the amount of the reduction is in question, the employer must justify it. If there are data that suggest that only a 5% reduction in benefits is cost-justified -- that is, that show that the premium should have been used to purchase $95,000 in coverage for 50 through 54 year olds -- the employer will not have satisfied the equal cost defense. See Appendix A, infra, for a further explanation of actuarial calculations.

Note that the employer has used age bracketing in this example. Thus, the employer must show that the actuarial data support five year groupings (e.g., 50 through 54, 55 through 59, etc.). The brackets may not cover more than 5 years. They must also be of equal duration regardless of the age of the employees included within the bracket. The employer could not, for example, create a 5 year bracket for employees between the ages of 50 and 54 and a 3 year bracket for those between the ages of 55 and 57.

B. Health Insurance

Under the laws governing the Medicare program, an employer must offer to current employees who are 65 or over -- that is, who are at or over the age of eligibility for Medicare benefits for the "working aged" -- the same health benefits, under the same conditions, that it offers to any current employee under the age of 65. (23) Under Medicare law, in other words, an employer may not take the availability of Medicare into account and must offer health benefits to active employees above the age of 65 that are equal to the benefits that it offers any similarly situated employee under that age. Where an employer adheres to this standard, there will be no violation of the ADEA, and investigators need make no further inquiry. (24)

Medicare provisions do not, however, require an employer to offer the same health benefits to retirees who are over the age of 65 as it offers to retirees who are younger than that age. (25) As a result, situations may arise in which employers that provide health benefits to retirees reduce or eliminate those benefits when the retirees reach the age of Medicare eligibility. As the only court to have considered this issue has recognized, "Medicare status is a direct proxy for age;" thus, this is an age-based cap on benefits, and the ADEA requires that the employer justify its actions. Erie County Retirees Ass'n v. County of Erie, 220 F.3d 193, 211 (3d Cir. 2000).

If it reduces health benefits to older retirees on the basis of Medicare eligibility, an employer may avoid liability for age discrimination by showing either:

Under principles set forth in EEOC regulations, employers may take the availability of Medicare benefits into account in structuring their health benefits to older retirees. (26) As a result, employers may deduct from the health benefits they provide any Medicare benefits for which those retirees are eligible. These plans are generally known as "Medicare carve-out" plans, and will be lawful under the ADEA as long as the total health coverage available to older retirees is at least equal, in type and value, to that offered by the employer for younger retirees. Even though a portion of the benefit for older retirees will be provided by Medicare, the older retirees will receive an equal benefit, and the employer need not cost-justify its lower expenditures for coverage for these individuals.

EXAMPLE - Employer M maintains a health plan for its retirees. That plan covers 360 days per year of inpatient care in a hospital for retirees who are under 65 years of age. Assume that Medicare covers 180 days per year of inpatient care for individuals who are 65 or above. (27) Based on this, Employer M's policy provides only 180 days of hospital coverage per year for retirees who are 65 and over. Employer M has not violated the ADEA, because all retirees get coverage for 360 days of hospital care.

Where, on the other hand, older retirees do not receive an equal benefit -- where, that is, an employer provides health benefits for younger retirees of a type or value that is not matched under Medicare and does not provide those benefits to older retirees -- the employer will be required to meet the equal cost defense to justify the resulting age-based inequality in benefits.

EXAMPLE - Same facts as above, except Employer M reduces its hospital coverage for retirees who receive Medicare benefits to 100 days. Because Medicare recipients will be covered for a total of only 280 days of inpatient care (180 days from Medicare and 100 days from the employer), they have not received an equal benefit. The employer will be liable for a violation of the ADEA unless it can show that the additional reduction is justified under the equal cost defense.

As has been recognized by the Third Circuit, this analysis accords with the language and purpose of the ADEA. Erie County Retirees Ass'n v. County of Erie, 220 F.3d 193 (3d Cir. 2000). Absent explicit authorization for an offset, the ADEA generally requires that an employer offer an equal benefit to, or expend an equal cost for, older employees. Although the ADEA spells out certain detailed exceptions to this basic principle, (28) the Third Circuit has held that, "aside from [the equal cost defense], there is no provision in the ADEA permitting an employer to treat retirees differently with respect to health benefits based on Medicare eligibility." (29) But if an employer eliminates health coverage for retirees who are eligible for Medicare -- or if it refuses to continue to cover its older retirees for the benefits it provides that are not offered by Medicare -- older retirees will get less coverage than younger retirees on the basis of their age. Unless the employer can meet the equal cost defense, the law does not permit this age discrimination. (30)

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C. Long-Term Disability

1. Equal Cost Rule

EXAMPLE - Employer D provides long-term disability benefits pursuant to the terms of a bona fide written plan. The plan provides that all employees who are eligible for the benefits will receive the same monthly amount, regardless of their age. With respect to disabilities that occur at age 60 or earlier, however, the plan provides that benefits will cease when the recipient reaches age 65. With respect to disabilities that occur after age 60, the plan states that benefits will cease 5 years after disablement.

a. Same benefit

Although Employer D pays the same monthly amount to each recipient, it pays those amounts for different periods of time depending on the age of the individual. As a result, the benefits are not equal and will be unlawful under the ADEA unless they can be justified.

b. Equal Cost Defense

Employer D has met the formal requirements for the equal cost defense. The cost of disability benefits increases with age, and the benefit is part of a bona fide employee benefit plan that explicitly sets forth the benefit schedule.

In this example, Employer D has reduced the length of time disability benefits will be paid, rather than the amount of those benefits. The ADEA permits either approach. In addition, EEOC regulations set a "safe harbor" for permissible limits on the duration of long-term disability benefits. If an employer adheres to this schedule, it has not violated the ADEA; the employer need not produce individualized cost data.

Employer D has met the safe harbor. Under EEOC regulations, there is no ADEA violation where:

This is the only "safe harbor" authorized by the EEOC regulations. Where a schedule for long-term disability benefits differs from that set forth above, employers must show that their particular plan meets the requirements of the equal cost defense.

EXAMPLE - Employer J provides long-term disability benefits pursuant to a written plan. The schedule of benefits is as follows:

Disabled at 61 or younger: benefits to age 65;

Disabled at 62: benefits for 3.5 years;

Disabled at 63: benefits for 3 years;

Disabled at 64: benefits for 2.5 years;

Disabled at 65: benefits for 2 years;

Disabled at 66: benefits for 1.75 years;

Disabled at 67: benefits for 1.5 years;

Disabled at 68: benefits for 1.25 years;

Disabled at 69 or above: benefits for 1 year.

Employer J has chosen a schedule that differs from the specific safe harbor set out in the regulations. Employer J must produce data that show that it has expended equal cost and has reduced the duration of its long-term disability benefits only to the extent necessary to preserve that cost. (32)

Of course, an employer must also satisfy the standard requirements of the equal cost defense if it reduces the amount of the benefit rather than the length of time the benefit is paid, or reduces both the amount and the duration.

2. Offset

Employers may offset from the disability benefits they pay any government-provided disability benefit that an employee is eligible to receive. Such benefits are triggered by the employee's disabling condition and are not age-based. These government-provided benefits include Social Security disability payments and workers' compensation.

In two cases, moreover, employers may also reduce long-term disability benefits to an older worker by the amount of the worker's pension benefits that are attributable to employer contributions. The employer may do so if:

EXAMPLE - Employer R maintains bona fide long-term disability and pension plans for its employees. Both plans are entirely funded by the employer. Under the pension plan, employees are eligible to retire at the age of 65; employees receive long-term disability benefits whenever they become disabled.

CP is injured and placed on the employer's long-term disability plan at the age of 62. The plan pays $1,000 in disability benefits per month. The duration of the payments adheres to the safe harbor in EEOC regulations. Under that schedule, CP is eligible to receive disability payments for 5 years (in this case, until he reaches the age of 67).

When CP reaches the age of 65 - normal retirement age under the pension plan -- Employer R eliminates his disability benefits. Employer R claims that since CP is eligible for a pension benefit of $1,200 per month, it may offset that amount against the disability benefits. Since the amount of the pension benefit for which CP is eligible exceeds the amount of the disability payment, R has terminated the disability payments altogether.

Employer R's offset is lawful because:

EXAMPLE - Same facts as above, but CP's pension is funded in part by contributions made by CP himself.

Under these circumstances, the investigator must calculate the relative portions of CP's $1,200 monthly pension benefit that are attributable to contributions made by the employer and by CP. If, for example, 50% of the money contributed to the pension was contributed by CP, the employer may offset only 50% of the resulting benefit - or, in this case, $600 - against disability payments made to CP. The employer could thus reduce CP's disability benefits to $400 per month.

EXAMPLE - Same facts as above, except that at the age of 66, CP is fully rehabilitated and informs Employer R that he wants to return to work. The disability plan provides that all employees who are receiving disability benefits will be guaranteed a position with Employer R when they are able to return to work. Employer R denies CP's request, however, stating that his decision to receive pension payments when he turned 65 meant that he was "retired" and thus forfeited his right to an automatic recall.

Employer R has violated the ADEA. Although Employer R may offset CP's disability retirement benefits with the pension benefits to which CP is entitled, Employer R may not force CP to maintain "retirement" status. Where an individual would have remained on long-term disability absent a pension offset, therefore, an employer must offer the individual the same recall rights that are available to those still receiving long-term disability payments. (35)

D. Disability Retirement

1. Equal Cost Rule

EXAMPLE - Employee A, age 30 with 10 years of service, and Employee B, age 55 with 10 years of service, take disability retirement on the same day. Under their employer's disability retirement plan, employees get monthly payments that are calculated based on their years of service. A and B thus get the same disability retirement benefit. There is no violation of the ADEA.

EXAMPLE - Same facts as above, except that the employer's disability retirement plan provides that disabled employees will receive payments based on the number of years they would have worked had they worked until normal retirement age. Normal retirement age under the pension plan is 60.

Under this formula, A will receive a disability retirement pension based on 40 years of service (10 years of actual service plus 30 years of attributed service from age 30 to age 60), while B will receive a disability retirement pension based only on 15 years of service (10 years of actual service with 5 years of attributed service until B reaches 60). A's disability retirement pension will thus be almost three times the size of B's, even though both worked for the employer for the same number of years.

a. Same benefit

Basing disability retirement benefits on the number of years a disabled employee would have worked until normal retirement age by definition gives more constructive years of service to younger than to older employees. (36) The benefits are not equal.

b. Equal Cost Defense

In the example above, the employer would have to show that -- accounting for the likelihood that more workers will qualify for disability retirement as they get older -- it costs as much to pay disability retirement to 55 year olds based on 5 extra years of service as it does to pay disability retirement to 30 year olds based on 30 extra years of service. If an employer cannot make this showing, it is liable for a violation of the ADEA.

2. Offset

As with long-term disability benefits, an employer may deduct from disability retirement payments any government-provided disability benefits an employee is eligible to receive.

E. Severance Benefits

1. Introduction

As a general rule, employers must provide equal severance benefits to similarly situated employees without regard to age. An employer may not deny severance benefits to employees because they are eligible to receive a pension from the employer, (37) or (except as explained in Section IV (E) (3), below) offset those pension benefits against the severance that is paid.

EXAMPLE - Employer F has a pension plan that permits employees to retire once they have reached age 55 and have 10 years of service. The employer shuts down one of its plants. Terminated employees at that plant are given $ 2,000 in cash and, as part of the severance package, told they will have a right to a position if the business reopens. However, the employer makes one exception -- it refuses to provide severance benefits or recall rights to any employees who are eligible to receive pensions at the time of the closing.

These facts state a violation of the ADEA, for several reasons:

EXAMPLE - Same facts as above, except that Employer F allows employees who are eligible for pensions to receive severance payments -- but only for the amount that exceeds the amount of their pension benefits. CP is eligible to receive a lifetime annuity of $1,000 per month in pension payments. Employer F offsets CP's first monthly pension payment from its $2,000 in severance payments, and pays CP only $1,000 in severance benefits.

Employer F has violated the ADEA in this example as well. Although Employer F has not denied CP severance payments altogether, it has reduced those payments by the amount of CP's pension. CP thus receives lower severance benefits than younger workers on the basis of his age. This offset of basic pension benefits is impermissible.

2. Equal Cost Rule

The equal cost defense does not apply to severance benefits. This is because severance benefits cost no more to provide to an older employee than to a younger employee with the same years of service. (38) If an employer pays unequal severance benefits and asserts only an equal cost defense, the investigator should find cause.

There are limited circumstances, however, in which the ADEA permits employers to make lower severance payments to older than to younger workers.

3. Offset

There are two types of benefits that may be offset from the amount of severance benefits employers pay to older employees:

The employer must show that it has met the following requirements for any offset that it claims.

Retiree health benefits can offset severance if:

EXAMPLE - CP, 60 years of age, loses her job during a reduction-in-force. Under the employer's severance plan, all employees affected by the reduction-in-force are eligible for a $25,000 severance payment. However, CP chooses to accept retiree health coverage from the employer. The coverage is comparable to Medicare benefits, and benefits will be paid for life. CP is also eligible for an immediate pension benefit from the employer. Under these circumstances, the employer may take an offset from CP's severance benefits for the health benefits it pays.

EXAMPLE - CP, age 60, is entitled to severance benefits of $30,000. CP's employer offers her lifetime retiree health benefits, which she declines. The employer nonetheless attempts to offset CP's severance package by the value of the health benefits. This violates the ADEA, since CP has not actually received the health benefits.

The ADEA assigns specific values for offsets for retiree health benefits that meet the requisite standards. These values are based on (a) the age of the individual at the time of termination, and (b) the duration of the health coverage. (40)

EXAMPLE - CP's employer provides severance benefits of $30,000, but also offers retiree health benefits, which are comparable to Medicare, for three years. CP, age 60, accepts the benefits and is also eligible for a pension. Under the law, the value of an offset for such benefits is $9,000 for employees who are under 65 at the time of termination. Thus, the employer must pay CP $21,000 in severance benefits ($30,000 less $9,000).

The amount of the offset must be further reduced by:

EXAMPLE - Employer L's retirement plan states that normal retirement age is 65, but permits employees to retire at age 60 with a 10 percent reduction in pension benefits. Employer L lays off CP when she is 60 years old. CP accepts retiree health benefits that are comparable to Medicare benefits and are valued at $12,000 (i.e., are available for 4 years and are valued at $3,000 per year). L offers a severance package to all employees worth $15,000, but wants to offset CP's health benefits against the severance paid to her.

Because CP's pension benefit will be reduced by 10 percent, Employer L must reduce the offset by 10 percent -- that is, from $12,000 to $10,800. Thus, Employer L must pay CP $4,200 in severance ($15,000 severance minus $10,800 in adjusted valuation of the health benefits).

EXAMPLE - Employer X provides for laid-off employees a severance package worth $45,000. CP, who is 64, files a charge alleging that her severance package has been reduced to $21,000 on the basis of her age. CP is receiving lifetime retiree health benefits that are comparable to Medicare, but must pay 50 percent of the premium for those benefits. She is also eligible for an immediate and unreduced pension from the employer.

The investigator should find no cause. Under the ADEA, the value of the lifetime retiree health benefits for those under the age of 65 is $48,000. Because CP pays 50 percent of the premiums for her benefits, however, the value of the offset must also be reduced by 50 percent, to $24,000. Offsetting $24,000 from a severance package worth $45,000 leaves CP with a severance payment of $21,000.

Additional pension benefits can offset severance if:

The offset can be taken only for additional pension benefits. Pension benefits that the employee had already accrued at the time of separation from employment may not be offset from severance payments. See discussion above at Section IV(E)(1).

The offset for additional pension benefits is different in two fundamental respects from the offset allowed for retiree health benefits:

If the employer provides additional pension benefits that are enough, or are higher than those necessary to bring an employee up to the level of an unreduced pension, the employer can offset the full amount of those benefits. On the other hand, if the employer offers benefits that are insufficient to raise the employee to an unreduced pension, the employer cannot claim any offset at all.

EXAMPLE - Employer J's pension plan has a normal retirement age of 65 and an early retirement age of 60. Under the plan, an employee who retires at age 65 with 20 years of service is eligible for $1,000 per month in pension benefits. A similarly situated employee retiring between ages 60 and 64 is eligible for a pension benefit of $900 per month.

Employer J is forced to close three of its facilities. It offers laid-off employees $200 per month in severance pay for six months. It also offers all laid-off employees who are 65 or over an additional $100 per month of pension benefits. Because the extra pension benefit is made available solely because of the layoffs, and because those over 65 are (already) eligible for an unreduced pension, Employer J can offset the present value of an extra lifetime annuity of $100 against the severance benefits to those employees. See Appendix A, infra, for an explanation of "present value."

EXAMPLE - Same facts as above, except that Employer J provides that its laid off employees who are between the ages of 60 and 64 and have worked for 20 years will receive pension benefits equivalent to those provided to 65 year old employees with the same years of service (i.e., $1,000 per month). Because this benefit is provided exclusively because of the layoffs, and because -- after application of the sweetener -- these employees will be eligible for an unreduced pension, Employer J may offset from severance the present value of the extra $100 per month it will pay to each employee in pension benefits.

EXAMPLE - Same facts as above, except that Employer J tells its laid off employees who are between the ages of 60 and 64 and who have worked for 20 years that it will provide the additional amount necessary for them to receive pensions of $950 per month. In such circumstances, Employer J cannot take an offset from severance at all, because these employees are not eligible for an immediate unreduced pension. (44)

V. Pensions

A. Introduction

Where an employer offers service retirement benefits it may, among other things:

EXAMPLE - Employer C's defined benefit pension plan provides that employees are eligible for pension benefits when they reach the age of 55 and have at least 5 years of service. CP, who is 50 years old and has 10 years of service, files an age discrimination charge. The investigator should find no cause. Employer C need not pay benefits to an employee who has not reached the age of eligibility, regardless of that employee's years of service.

EXAMPLE - Same facts as above, except that the plan is challenged by another employee who is 65 years old and has 4 years of service. The investigator should again find no cause. Employer C's requirement that employees have worked for at least 5 years to be eligible for a pension does not disadvantage any person on the basis of age. All employees who are 55 and older are immediately eligible for pension benefits once they meet this requirement.

EXAMPLE - Same facts as above, except that Employer C's plan also provides that the maximum amount of annual benefits payable under the plan is 50% of an employee's highest salary. This limitation is imposed without regard to the age of the employee, and does not violate the ADEA.

EXAMPLE - Same facts as above, except that Employer C's plan also provides that -- for calculating the amount in pension benefits an employee will receive -- no employee can be credited for more than 30 years of service, no matter how many years that employee has worked. Because this limitation is imposed without regard to age, it does not violate the ADEA.

The ADEA does, however, prohibit the following age-based limitations in a pension plan:

EXAMPLE - Employer D's pension plan has a normal retirement age of 55 but excludes those hired within five years of the plan's normal retirement age or beyond that age -- that is, those hired when they are 50 or above -- from participation in the plan. CP, who was hired at age 51 and was denied the opportunity to participate in the plan, files an age discrimination charge.

Employer D's exclusion violates the ADEA. Because normal retirement age is, by definition, age-based, any exclusion of those who are five years away from normal retirement age is also age-based. Such an exclusion thus constitutes facial age discrimination. (47) Employer D may, of course, amend its plan to require that employees attain a minimum number of years of service before they can receive pension benefits. (48)

EXAMPLE - Employer Q operates a defined benefit plan that sets a normal retirement age of 65 and pays benefits based upon the following formula: each year of employee service x 1.75% x an average of the employee's highest three years of salary (e.g., 25 years of service x 1.75% = 43.75% x $55,000 (employee's high three) = $24,062.50 lifetime pension benefit). The plan further provides that years of service will not be credited to any employee for years worked after normal retirement age. This is an age - based cap.

CP begins working for Employer Q at the age of 35 and chooses to retire at the age of 70 (after 35 years of service). However, Employer Q disregards the five years that CP worked after he turned 65, and calculates CP's benefit using only 30 years of service. This plan ceases CP's benefit accruals because of age and violates the ADEA.

EXAMPLE - Under Employer O's defined contribution pension plan, employees may contribute up to 10% of their salary each month. Employer O provides "matching" contributions to each employee's account pursuant to the following schedule: age 40 and below -- 100%; age 41-60 -- 75%; age 61 or older -- 50%. This plan is unlawful as it reduces the rate of contributions to employees' accounts because of age. (50)

Where pension accruals or contributions are conditioned on eligibility for a benefit that is itself tied to age, this will also violate the ADEA.

EXAMPLE - Under Employer Q's pension plan, benefits increase with each year of service provided by an employee. However, Employer Q disregards any years of service rendered after an employee has attained eligibility for unreduced Social Security benefits. Unreduced Social Security benefits are payable at age 65. Thus, Employer Q's policy is based on age.

B. Defenses to Unequal Benefits

1. Equal Cost

The equal cost defense does not apply to violations of Section 4(i). (51) Thus, an employer cannot defend age-based reductions in accruals or contributions on the ground that it has expended an equal amount to purchase the pension benefit for younger and older workers. In addition, an employer may not include pension plans in any benefit packaging it does under the equal cost rule. (52)

2. Offset

In three cases, an employer may offset the amount of other benefits received by an employee from the accrual of or allocation to that employee's pension benefit. (53)

EXAMPLE - A defined benefit plan provides a retirement benefit of $20 per month multiplied by years of service for retirement at the normal retirement age of 65. Where an employee delays retirement past age 65, the plan increases the monthly benefit s/he will receive to reflect the decreased number of years an older retiree is likely to receive benefits.

At age 65, CP has 30 years of service and would be entitled to a benefit of $600 per month ($20 x 30 years of service) if he were to retire. He decides to continue to work until age 67. Because CP will likely receive benefits for fewer years when he retires at a later age, his employer actuarially adjusts the $600 monthly benefit which CP would have received at age 65 and pays him $756 per month when he retires at age 67. CP claims that his employer should also have paid him the amount that he would have accrued under the plan's regular formula -- an extra $40 per month to account for his two additional years of service -- for a total benefit of $796 per month.

CP has not stated a violation of the ADEA. Because the amount of the actuarial adjustment ($156 per month from the amount to which CP would have been entitled at 65) more than offsets the $40 per month increase available to CP based on his years of service, the employer need not separately pay the $40 per month.

EXAMPLE - Same facts as above, except that CP's actuarially adjusted benefit results in a pension of $625 per month at age 67. CP's employer may offset the $25 per month increase in the value of CP's pension from CP's pension accruals between ages 65 and 67. CP's employer must still pay the difference, however, between the amount of the actuarial adjustment and the amount that CP would receive based on years of service -- in this case, $15 per month.

EXAMPLE - Same facts as above, except that CP begins to receive pension payments at normal retirement age even though he does not retire. CP continues working until age 66. Between the ages of 65 and 66, CP receives $7,200 in pension benefits ($600 per month x 12 months). The actuarial value of $7,200 over CP's lifetime -- that is, the total amount that the $7,200 will ultimately be worth to CP, counting interest that will accrue on it -- is approximately $40 per month. CP's employer may thus offset that $40 from the extra monthly pension amount -- $20 -- that CP has accrued for his one extra year of service. CP's employer must pay to CP the amount he has earned in pension benefits up to age 65, but need not pay the additional accrual he has earned by working an extra year.

An employer may in some cases deduct Social Security Old Age benefits from the pension benefits it provides to an employee. (55) The Internal Revenue Service has issued detailed regulations on the circumstances in which such deductions are permissible. If a charging party alleges that an employer has discriminated on the basis of age in making such deductions, contact the Office of Legal Counsel.

C. Cash Balance Plans

In some cases, employers have converted their traditional defined benefit plans - plans that promise a specified benefit upon retirement, based on a formula derived by the employer - into "cash balance plans." Cash balance plans are defined benefit plans in which an employer contributes either a flat amount or a percentage of salary into an employee's retirement account, and employees get a specified benefit upon retirement based on an interest rate that the employer guarantees the account will earn. The pension paid to the employee is the total of the employer's contributions multiplied by the specified interest rate.

Charges have recently been filed challenging conversions from traditional defined benefit to cash balance plans. The Commission is currently studying the allegations in these charges, and, as of the date of approval of this Chapter, has reached no conclusion as to the lawfulness of cash balance plans. In the interim, investigators are directed to follow instructions issued by the Office of Field Programs and/or the Office of General Counsel.

VI. Early Retirement Incentives

A. Introduction

Voluntary early retirement incentive plans (ERIs) have become a valuable tool in permitting employers and employees to work together in connection with corporate downsizings. In an ERI, older employees typically are offered a financial incentive in exchange for their agreement to leave the workforce earlier than they had planned. Since the older workers who accept the incentive usually are the higher-paid individuals in the workforce, employers often can save far more with an ERI than with an involuntary reduction-in-force. The older employees also benefit inasmuch as they are able to retire with larger benefits earlier than otherwise would have been possible.

As long as an ERI is voluntary, an employer may:

An employer may not, however, provide a lower level of ERI benefits (or no benefits) to older employees than to similarly situated younger employees unless the employer can justify lower benefits in one of five ways set forth in the law.

Thus, where a charge involves an ERI, investigators should ask the following questions:

If the ERI is voluntary,

If not, find cause unless

B. Voluntariness

Older workers may not be forced to take early retirement. The determination of whether an ERI is voluntary will be based upon the facts and circumstances of a particular case. The test is whether, under those circumstances, a reasonable person would have concluded that there was no choice but to accept the offer. (56) Among the considerations that can be relevant are:

A plan will not be voluntary if an employee was given inadequate time or insufficient information to make an informed decision about whether to accept the employer's offer. Where an employee or group of employees is asked to sign a waiver of rights under the ADEA in exchange for the ERI, moreover, specific time limits apply; an individual must be given at least 21 days, and a group of employees at least 45 days, to consider the waiver. (57)

On the other hand, it is not coercion for an employer to notify its work force that layoffs will be necessary if insufficient numbers of employees retire voluntarily, unless older workers are the only ones threatened. It is also not coercion that an employer's offer was "too good to refuse." (58)

EXAMPLE - Employer E offers an early retirement incentive to those employees who are 55 or older and who have at least 10 years of service. Employer E tells the employees that they have until the end of the business day to decide whether to accept the incentive. Employer E's supervisors also visit all eligible employees to advise them that the company president will be "very unhappy" and will be "forced to reconsider their standing in the company" if they decline the offer. This ERI is not voluntary.

If an employee's decision to accept early retirement was not voluntary, the investigator should find cause.

C. Equal Benefit

If a plan is voluntary, the next question is whether it provides equal benefits to older and similarly situated younger employees. Benefits must be the same in all respects (e.g., in amounts and payment options) to be considered equal.

D. Defenses to Unequal Benefits

If it does not pay equal benefits to older and younger employees, the employer must justify the difference. Each of the five justifications set forth in the ADEA is discussed below. The employer will not have violated the ADEA if it can make any one of these showings.

1. Equal cost

Employers may try to demonstrate that lower levels of ERI benefits for older workers are justified by age-based cost considerations -- that is, that they are spending equal amounts on benefits for all of their employees but that those amounts purchase less for older workers. Because the cost of early retirement benefits does not generally increase with age, this showing is unlikely to be successful.

2. "Subsidized portion" offset

Employers may limit ERIs, or pay higher ERI benefits, to younger employees where the benefits are used to bring those who retire early up to the level of an unreduced pension -- that is, to the amount that those employees would receive at normal retirement age. (59)

EXAMPLE - Under Employer C's pension plan, Employee E could retire at age 65 (normal retirement age) with an annual pension benefit of $25,000. If E retires at age 55, E will receive an actuarially reduced pension of $12,500 per year.

Employer C offers all employees who are between the ages of 55 and 65 an ERI that pays the difference between the annual pension benefit those employees would have received for early retirement under Employer C's regular pension plan and the benefit they would have received at normal retirement age. Employer C thus offers Employee E the opportunity to retire at age 55 with a pension of $25,000 per year.

Employer C's ERI is lawful under the ADEA. Although the ERI provides a greater benefit for younger employees than for older employees (indeed, employees over 65 gain nothing from the ERI), all similarly situated employees who are 55 and older will receive the same annual pension benefit.

EXAMPLE - Same facts as above, but Employer C's ERI brings Employee E up to an annual pension of only $20,000.

This ERI is also lawful. Employer C may offer any amount up to the level of the pension to which Employee E would have been entitled at normal retirement age; it need not offer the full amount necessary to close the gap.

There are limitations on the offset, however:

3. Social Security supplements

An employer may offer an ERI that, for persons who are not yet eligible for Social Security retirement benefits, "bridges the gap" between early retirement and Social Security eligibility (generally age 62 for early retirement and age 65 for unreduced Social Security retirement). (61)

EXAMPLE - Employer P offers employees who retire after age 55 at a certain salary level and have 30 years of service a supplement of $300 per month -- the amount to which those employees would be entitled in Social Security payments -- until those employees reach age 62. CP, who retires at age 64 at that salary level with 30 years of service, does not get the supplement and files an age discrimination charge.

Employer P has not violated the ADEA. Although CP cannot obtain the supplement, he is entitled to receive $300 in Social Security benefits from the government. As a result, the total annual retirement benefit received by each similarly situated retiree is the same; only the source of the benefit (entirely from the employer for the younger workers and from both the employer and the government for the older workers) is different.

The employer may choose whether to terminate the supplement at age 62 or age 65. In the example above, Employer P could have offered to pay employees a Social Security supplement until they reached the age of 65.

There are three requirements for a valid Social Security supplement ERI:

EXAMPLE - Employer A offers to pay Social Security supplements as an early retirement incentive for its employees between the ages of 55 and 62. Employee Y, age 55, would be entitled to a Social Security payment of $200 per month at age 62, and a Social Security payment of $300 per month at age 65. Employee Y's supplement cannot exceed $200 per month, and must terminate when Y turns 62.

The amount to which each individual employee will be entitled in Social Security supplements will depend on that individual's work history. Because of the ADEA's focus on the rights of individuals, and because this defense will be satisfied only if older retirees receive no less in total benefits than similarly situated younger employees, the calculation must focus on each younger employee's own Social Security entitlement. It may not be based on an average calculated for a group of employees.

4. Plans offered to tenured faculty

EXAMPLE - Employer T, a private, fully accredited university, offers its tenured faculty members an early retirement incentive. Those who retire between the ages of 55 and 60 can receive $15,000 in ERI benefits, and those who retire between the ages of 61 and 64 can receive $10,000 in ERI benefits. Those who retire at age 65 or above are not eligible for any ERI benefits. Employer T does not argue that these benefits are justified either as amounts necessary to bring eligible employees up to the level of an unreduced pension, or as Social Security supplements.

Employer T has not violated the ADEA. Under recent amendments to the law, an institution of higher education may make age-based reductions in ERI benefits offered to its tenured faculty without demonstrating that it meets one of the other tests set forth in this section. (62) There are, however, explicit limitations on this authorization:

EXAMPLE - Same facts as above, but Employer T provides that any tenured faculty member who accepts the ERI must give up his/her pre-existing right to receive retiree health benefits. If Employer T makes age-based reductions in its ERI, it cannot require its faculty to make this choice.

EXAMPLE - In January of 1999, Employer T eliminates the health benefits that it had previously made available to retirees. In June of 1999, Employer T offers a new ERI under which tenured faculty who retire between the ages of 55 and 64 are provided their prior retiree health benefits. Because it simply repackages benefits previously available to these employees, Employer T's ERI is not protected by this exemption. It will be valid only if Employer T can show that it satisfies one of the other defenses to age-based ERIs.

EXAMPLE - In January 1999, Employer T establishes an ERI that provides $20,000 to any tenured faculty member who retires between the ages of 55 and 59 and who has 10 years of service. CP, a 64 year old tenured faculty member with the required years of service, alleges age discrimination.

CP must be given the opportunity to take early retirement despite his age. CP must be given at least 180 days to choose to retire and a further 180 days after the election actually to retire.

5. Plans "consistent with the relevant purpose or purposes of" the ADEA

Under this exemption, employers may structure their ERIs to give all employees above a certain age:

Because these types of ERIs treat employees evenhandedly without regard to age, they are consistent with the relevant purpose or purposes of the ADEA. (64) This standard will be satisfied where an employer pays ERI benefits to all employees over a certain age, or where it meets the requirements of another express exemption -- namely, that the ERI (a) is the subsidized portion of an early retirement benefit; (b) offers Social Security supplements that conform to the ADEA; or (c) is offered to tenured faculty by an institution of higher education. (65)

Where, on the other hand, an ERI otherwise reduces or terminates benefits to older workers based on their age, it will not fall within this exemption. This is true whether an employer reduces ERI benefits, based upon age, to those who are eligible for the ERI (e.g., pays less to 60-64 year olds than to 55-59 year olds) or simply denies older workers the opportunity to participate in the ERI after a certain window period is past.

EXAMPLE - Employer G establishes an ERI, but offers it only to those who are between the ages of 58 and 61. Those who retire early receive monthly payments until they turn 62. As a result, employees who retire at age 58 receive forty-eight months of benefits under the plan; those who retire between the ages of 59 and 61 receive the same monthly payments, but fewer of them; and those who retire at age 62 or older receive no ERI benefits at all. Employer G offers no evidence that this payment schedule is justified either as the subsidized portion of an early retirement benefit or as a Social Security supplement. This plan is not consistent with the purposes of the ADEA. (66)

EXAMPLE - Under Employer H's ERI, employees are eligible for ERI benefits, but only if they have at least 10 years of service and retire within the year after they turn 55. Because eligibility for benefits is keyed in part to an employee's age, this ERI is not consistent with the purposes of the ADEA.

In each of these cases, the employer has engaged in arbitrary age discrimination. First, each of these plans operates on the stereotype that individuals will customarily retire at a certain age - and thus that only retirement before that age can be considered "early." The ADEA forbids such generalizations about older workers. (67) Second, each of these ERIs withholds benefits to older workers as a means to induce them to retire at particular ages; retirement pursuant to these plans thus cannot be considered to be truly voluntary.

The language, the structure, and the legislative history of the ADEA confirm this understanding. First, it is clear that Congress does not believe that the ADEA generally authorizes age-based reductions in, or cutoffs of, early retirement incentives; it was for this reason that Congress was forced to enact a specific exemption when it wanted to authorize institutions of higher education to offer age-based early retirement benefits to tenured faculty. (68)

In addition, the structure of the ADEA makes clear that employers who provide lower benefits for older workers must typically demonstrate one of two things: either that (a) the employer has incurred equal cost for the benefits for older and younger employees, or that (b) accounting for benefits from other sources, the older workers get at least the same total benefit as similarly situated younger employees. These exceptions were carefully crafted to eliminate arbitrary age discrimination while recognizing that the age of an employee can affect the costs of benefits to, and employment opportunities available for, that employee, as well as the availability of government-provided benefits for that individual. The exceptions thus meet the relevant purposes of the ADEA -- as do the exceptions for ERIs that provide the subsidized portion of an early retirement benefit or that are Social Security supplement plans. Reducing or denying ERI benefits based arbitrarily on an employee's age does not meet this test. (69)

Finally, Congress stated explicitly that "it would be unlawful . . . to exclude older workers from an early retirement incentive plan based on stereotypical assumptions that 'older workers would be retiring anyway'." (70) Where an employer has offered lower levels of ERI benefits -- or no benefits at all -- to older workers but cannot make either of the showings stated above, however, it has operated on precisely those assumptions. Such ERIs are unlawful and cannot be justified by reference to this exemption.

ADA ISSUES

I. Introduction

An employer may not discriminate against a qualified individual with a disability, on the basis of disability, with respect to fringe benefits. (71) Congress recognized, however, that some types of benefit plans rest on an assessment of the risks and costs associated with various health conditions in accordance with accepted principles of risk assessment. (72) As a result, the ADA permits employers to make disability-based distinctions in employee benefit plans where the distinctions are based on sound actuarial principles or are related to actual or reasonably anticipated experience. (73) This Section addresses some of the circumstances in which those distinctions are lawful and some in which they are not.

If a charge alleges that the terms of an employee benefit plan discriminate on the basis of disability, the first question is whether the employer has provided benefits to a qualified employee with a disability that are equal to the benefits provided to employees generally under the plan. Benefits will be equal only if all employees participating in the plan, regardless of disability, receive the same types of benefits, the same payment options, and the same amounts of coverage -- for the same cost.

If the employer has provided equal benefits, there is no ADA violation. If, on the other hand, the employer has provided benefits to a qualified employee with a disability that are unequal to the benefits provided to other employees, the next question is whether the difference is based on the employee's disability. If the difference in the benefits is not a result of a disability-based distinction, and if the challenged provision is applied equally to all employees participating in the plan, then there is no violation of the law.

If the unequal benefits provided to a qualified employee with a disability are based on disability, the benefit plan will be unlawful unless the employer can show that the disability-based distinction is not a "subterfuge" to evade the purposes of the ADA. There are several ways an employer can make this showing. See Section IV, infra.

Thus, if the charge challenges discrimination in the terms or provisions of a benefit plan, the relevant questions are the following:

If not,

If so,

II. Equal Benefits

For benefits to be equal, the same coverage must be provided, on the same terms, to all similarly situated employees. For example, benefit plans must be the same with regard to:

EXAMPLE - Employer X's health insurance plan has a separate lifetime cap of $50,000 for the treatment of HIV/AIDS, but a general lifetime cap of $2,000,000 for the treatment of all other medical conditions. These benefits are not equal.

EXAMPLE - Employer X's health insurance plan has an annual deductible of $250, but has a separate deductible of $300 for the treatment of mental disorders. People with mental disorders have not received equal benefits. (74)

III. Disability-Based Distinctions

Not all provisions of an employer's benefit plan that are related to health, and that result in unequal benefits for individuals with disabilities, are based on disability. A health-related distinction that is not disability-based, and that is applied equally to all employees, does not violate the ADA. Therefore, the next question is whether any difference in benefits arises from a disability-based distinction.

A health-related distinction in a benefit plan is disability-based if it singles out:

The following are examples of disability-based distinctions.

EXAMPLE- Singles out a particular disability. Employer Z's disability retirement plan covers all physical and mental disorders except major depression.

EXAMPLE - Singles out a discrete group of disabilities. Employer Z's health insurance plan caps coverage for treatment of cancers at one million dollars but caps coverage for the treatment of all other physical conditions at 20 million dollars.

EXAMPLE - Singles out disability in general. Employer Z requires employees who are no longer able to work because of a physical or mental disorder to retire on disability retirement, even if they also are eligible to retire under the employer's service retirement plan.

Generally, a health-related distinction in a benefit plan is not disability-based if:

EXAMPLE - Employer U's health insurance plan treats workers' compensation as primary, and provides only secondary coverage, for conditions which are attributable to occupational injury or illness. Because many different types of impairments may result from occupational injury or illness, and because the limit on coverage affects employees with and without disabilities, this is not a disability-based distinction.

EXAMPLE - Employer U's long-term disability plan has a 6-month waiting period for all pre-existing conditions. This is not a disability-based distinction.

EXAMPLE - Employer U's health insurance plan covers only two Electronic Resonance Imaging (ERI) scans per year per patient. Because ERI scans are used for all kinds of conditions and because the limitation affects both individuals with and individuals without disabilities, this provision is not based on disability.

The Commission has also taken the position that it is not necessarily a disability-based distinction if an employer's health insurance plan provides unequal benefits for mental conditions compared to physical conditions. (75) This is because, in the context of health insurance, the term "mental conditions" covers, for example, not only impairments like schizophrenia and major depression - which likely would be disabilities under the ADA - but also counseling for grief, self-esteem, or marital problems, which are not impairments and so are not ADA disabilities. (76) As a result, a distinction in a health insurance plan's coverage of expenses for treatment of physical, as compared with mental, conditions (a) constitutes a broad distinction that covers a multitude of dissimilar conditions, and (b) limits both individuals with and those without disabilities. Such distinctions in health insurance plans thus will not generally violate the ADA. (77)

IV. Justifications for Disability-Based Distinctions

If an employer has made a disability-based distinction in a benefit plan, it will be liable for a violation of the ADA unless it can show that the distinction is justified. The ADA sets forth two elements to the defense. An employer must demonstrate that:

A. Bona fide plans

Under the first prong of the defense, an employer must demonstrate that its plan is either a bona fide insured plan that is not inconsistent with state law, or a bona fide self-insured plan. (79) To be bona fide, a plan must exist and pay benefits; in addition, the terms of the plan must have been accurately communicated to eligible employees. To determine whether a plan meets this standard, investigators typically need simply obtain a copy of the employer's plan documents and confirm that benefits have in fact been paid. (80)

B. Subterfuge

The term "subterfuge" refers to disability-based disparate treatment in an employee benefit plan that is not justified by the risks or costs associated with the disability -- that is, to disability-based distinctions that are not "based on sound actuarial principles or related to actual or reasonably anticipated experience." (81) Whether a provision of a benefit plan is a subterfuge must be determined on a case-by-case basis.

There are several ways that an employer can prove that a disability-based distinction in a benefit plan is not a subterfuge. Among possible justifications are the following.

EXAMPLE - CP alleges that Employer N has refused to cover treatment for her diabetes, despite the fact that it has covered a coworker's costs for treatment of her rheumatoid arthritis. Employer N shows that it refused to cover CP's diabetes because the condition predated her enrollment in the insurance plan, and further that it treats all pre-existing conditions similarly.

Actuarial data will measure both the likelihood that the employer will incur insurance costs related to the disability and the magnitude of those costs as they arise. Thus, employers must show that the reduction in coverage for the disability or disabilities is required to account for an increased possibility that the benefit will be claimed or that the amounts required for coverage will be higher. Employers may not, however, rely on actuarial data that is outdated or that is based on myths, fears, stereotypes, or assumptions about the disability at issue.

Even where employers can produce actuarial data that demonstrates that the risks and costs of treatment of a condition justify differential treatment of it, employers must also show that they have treated other conditions that pose the same risks and costs the same way. If there is evidence that an employer has treated other conditions differently from the disability at issue, the employer has discriminated by singling out a particular disability for disadvantageous treatment. Investigators should find cause.