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

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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

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

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.

• Long-term and short-term disability benefits

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.

• Disability retirement benefits

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

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.

• Service retirement benefits

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.

• Early retirement incentives

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:

• for certain types of benefits, if the employer is spending the same amount, or incurring the same cost, for the benefit for older and younger workers; or
• if the ADEA authorizes the employer to offset the benefits it provides to its older employees, and the older employees can receive, from the employer or other sources, a total benefit that is no less favorable than the benefit provided to younger employees.

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:

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:

• The same payment options

• The same types of benefits

• The same amount of benefits

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.

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.

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.

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.

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.

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⁾

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:

• life insurance benefits;
• health insurance benefits; and
• disability benefits.⁽¹³⁾

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 benefit becomes more expensive with increasing age.

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.

• The benefit is part of a bona fide employee benefit plan.

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 plan requires the lower benefits.

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 actual amount of payment made or cost incurred on behalf of an older worker is no less than that made or incurred on behalf of a younger worker.

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.

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.

• The benefit levels for older workers are reduced only to the extent necessary to achieve approximate equivalency in cost for older and younger workers.

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.

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.

There are certain restrictions on benefit packaging.⁽¹⁸⁾

• A benefit package may include only those benefits that become more costly to provide with increasing age. An employer may not, for example, package life insurance and paid vacation. Service retirement benefits also may not be part of a package.
• If health benefits are made part of a package, they may not be reduced more than would be permitted if the health benefits stood alone and were not part of a package. See Section IV (B), infra, for more information on restrictions on reductions of health benefits to retirees.
• A benefit reduction greater than would be permitted under a benefit-by-benefit approach must be offset by another benefit available to the same employees.
• Employers who wish to justify reductions under the benefit package approach must be prepared to produce data to show that those reductions are fully cost-justified.⁽¹⁹⁾

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⁾

• An older employee may not be required to pay more for the benefit as a condition of employment. Where the premium has increased for an older employee, the employer must offer the employee the option of withdrawing from the benefit plan altogether. The employer can alternatively offer the employee the option of reducing his/her benefit coverage in order to keep his/her premium cost the same.
• An older employee who chooses to participate in a voluntary plan can be required to pay more for the benefit, but only if the employee does not pay a greater percentage of his/her premium cost than younger employees do.
• An older employee may be offered the option of paying - or paying more -- for the benefit in order to avoid otherwise justified reductions in coverage. Where the employee does choose to pay more, s/he can be charged no more than the amount that is necessary to maintain full coverage.

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:

• it is specifically authorized by the ADEA; and
• older workers are eligible to receive (from all sources available to them) benefits that are no less favorable than those the employer provides to similarly situated younger employees.

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⁾

• Deducting certain pension benefits from long-term disability payments (see Section IV(C) on long-term disability benefits);
• Deducting certain retiree health benefits or certain extra pension benefits from severance pay (see Section IV(E) on severance benefits); and
• Deducting certain amounts from pension benefit accruals (see Section V(B) on pensions).

IV. Applying Equal Cost and Offset Analyses to Specific Benefits

A. Life Insurance

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.

---- The text below has been rescinded ----

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:

• that the benefit is equal -- that is, that accounting for the availability of Medicare to those 65 and over, the total benefits available to older retirees are no less favorable than those the employer offers to younger retirees; or
• that it expends an equal cost for benefits for older and younger retirees, and the reductions in benefits for older retirees are actuarially justified.

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.

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.

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

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:

• for disabilities which occur at age 60 or less, benefits cease at age 65, and
• for disabilities which occur after age 60, benefits cease 5 years after disablement.⁽³¹⁾

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.

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:

• the worker voluntarily (at any age) elects to receive the pension, or
• the worker has attained the later of age 62 or the pension plan's normal retirement age and is eligible for an unreduced pension.⁽³³⁾

Employer R's offset is lawful because:

• the offset provision is part of a bona fide employee benefit plan -- that is, the plan exists, pays benefits, and describes the offset feature;
• the pension benefit is entirely funded by the employer;
• the amount of the pension benefit exceeds the amount of the disability benefit, thus allowing a complete offset of the disability benefit; and
• Employer R implemented the offset at the plan's normal retirement age of 65, and CP is eligible for unreduced pension benefits.⁽³⁴⁾

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.

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

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.

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

• Younger employees get more monetary benefits. Employees under age 55 who have 10 or more years of service will get both benefits -- severance pay now and a pension at age 55. Employees 55 and older with 10 or more years of service do not get a severance benefit even though they involuntarily lost their jobs just as younger workers did.
• Younger employees get recall rights. Persons 55 and older with 10 or more years of service are not given the recall rights afforded persons under 55 with 10 or more years of service. This may also amount to involuntary retirement of the older workers.
• Pension eligibility is tied directly to age. Thus, in this case, denying severance pay on the basis of pension eligibility is the same as denying it on the basis of age.

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:

• Retiree health benefits; and
• Additional pension benefits made available because of the employee's separation from employment.

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

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⁾

The amount of the offset must be further reduced by:

• any percentage by which an employee's pension has been reduced because s/he is younger than the plan's normal retirement age; and/or
• any percentage of the premium that an employee is required to pay for the retiree health coverage.⁽⁴¹⁾

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:

• For retiree health benefits, the employer may take the offset only if the employee actually receives the health benefits coverage. An employer may take an offset for additional pension benefits where it has made those pension benefits available, whether or not the employee chooses to receive those benefits.⁽⁴³⁾
• For retiree health benefits, the employer may take the offset if the employee is eligible for immediate pension benefits of any amount. An employer may take an offset for additional pension benefits only where the employee is eligible for an unreduced pension -- either because the employee has already reached normal retirement age and is eligible for a full pension, or because the pension supplement itself closes the gap between the amount the employee would otherwise have gotten and a full, unreduced pension. For employees who have not yet reached normal retirement age at the time of separation, therefore, the pension "sweetener" enables them to obtain a full pension before they would typically have been entitled to receive one.

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.

V. Pensions

A. Introduction

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

• Set a normal and/or early retirement age for receipt of benefits;⁽⁴⁵⁾
• Require a certain number of years of service or a certain time period before a person will be eligible to retire; and/or
• Set limits on the total amount of benefits provided or, in a defined benefit plan, on the number of years of service credited in calculating pension benefits, as long as those limits are not linked to age.⁽⁴⁶⁾

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

• An employer may not exclude an employee from participation in a pension plan because the employee is close to the plan's normal retirement age when hired.

• Under ADEA Section 4(i), an employer may not cease accruals or contributions -- or reduce the rate of accruals or contributions -- to an employee's pension benefits based on the employee's age.⁽⁴⁹⁾

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

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⁾

• If an employer actuarially increases the value of a pension benefit for an employee who works beyond normal retirement age, it may offset the enhanced value of the benefit from that employee's pension accrual.

• If an employer begins the payment of pension benefits while an employee is still working, the employer may offset from that employee's pension accrual the actuarial value of the amount of the pension payments actually made.⁽⁵⁴⁾

• An employer may offset Social Security Old Age Benefits from employer-provided pension benefits.

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:

• set a minimum age, or a minimum number of years of service, at which employees will be eligible to participate;
• offer an ERI for a limited period of time (e.g., only to those who retire between January 1 and April 30); and/or
• offer an ERI only to a subset of a company (e.g., only to managers, only to a particular department, or only to employees at a single facility).

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:

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:

• Was the employee given adequate time to make a decision?
• Was the employee given accurate and complete information about the plan?
• Was the employee subjected to any threats or coercion?
• Will older employees be subjected to negative consequences if they reject the offer?
• Did the employee receive advice of counsel while making his/her decision?

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⁾

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⁾

There are limitations on the offset, however:

• Employee E's total annual pension cannot exceed the pension of a similarly situated older employee who has reached normal retirement age. In other words, E's pension could not be increased to $26,000 while an older employee's pension is left at $25,000.
• The ERI benefit must be provided as part of a defined benefit pension plan.
• The plan must offer the same terms to older that it does to younger employees eligible for the ERI. An ERI could not, for example, offer 55 year old employees who take the ERI pensions of $25,000 per year while offering 60 year old employees who take the ERI pensions of only $20,000 per year.⁽⁶⁰⁾ If, moreover, an employer offered to eliminate 100% of the actuarial reduction for 55 year olds, it would also have to eliminate 100% -- and not 50%, 75%, or any other lesser percentage -- of the actuarial reduction for all those between the ages of 56 and normal retirement age.

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⁾

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:

• The supplement must terminate at the age of eligibility for reduced or unreduced Social Security benefits (now ages 62 and 65, respectively);
• The supplement must be a defined benefit to be paid to the employee; and
• The amount of the supplement cannot exceed the amount to which an employee would be entitled in Social Security payments at the date on which the supplement terminates (i.e., when the employee turns either age 62 or age 65).

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

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:

• The employer must be an institution of higher education. No other employers are covered under this exemption, even if they employ tenured faculty (e.g., as consultants).
• The employer may make age-based reductions only for tenured faculty. Even if an employer is an institution of higher education, it may not make age-based reductions in ERI benefits offered to its non-tenured employees.
• The employer may not reduce or eliminate any other benefits due to tenured faculty, unless that reduction is otherwise permitted by the ADEA.

• The employer may not repackage benefits (except for other ERI benefits) that have been offered to the employees eligible for the ERI within the prior 365 days.

• All tenured faculty must have at least one chance to elect the benefit when they first become eligible for it. This is a "grandfathering" provision to protect tenured faculty members who are over the ages eligible for early retirement when an employer first institutes an ERI.

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:

• a flat dollar amount (e.g., $20,000);
• additional service-based benefits (e.g., $1,000 multiplied by the number of years of service);
• a percentage of salary;
• flat dollar increases in pension benefits (e.g., $200 per month);
• percentage increases in pension benefits (e.g., 20%); and
• imputed years of service and/or age (e.g., adding 5 extra years of service and/or age for pension purposes).⁽⁶³⁾

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.

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:

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:

• premiums;
• deductibles;
• caps on coverage; and
• waiting periods.

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:

• a particular disability;
• a discrete group of disabilities; or
• disability in general.

The following are examples of disability-based distinctions.

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

• it is a broad distinction which applies to a multitude of dissimilar conditions, and
• it constrains both individuals with and individuals without disabilities.

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:

• the benefit plan is bona fide; and
• the plan is not a subterfuge to evade the purposes of the ADA.⁽⁷⁸⁾

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.

• The employer may prove that it has not engaged in the disability-based disparate treatment alleged.

• The employer may prove that the disability-based disparate treatment is justified by legitimate actuarial data, or by actual or reasonably anticipated experience, and that conditions with comparable actuarial data and/or experience are treated the same way.

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.

• The employer may prove that the disability-based disparate treatment is necessary to maintain the solvency of the plan. To establish this defense, employers must show:
  • that covering the disability or disabilities at issue would require such substantial payments of benefits that it would threaten the fiscal soundness of the plan under commonly accepted or legally required standards, and
  • that there is no non-disability-based benefit plan change that could be made to limit those fiscal consequences.

  If an employer raises this defense, contact the Office of Legal Counsel.

• The employer may prove that the challenged practice or activity is necessary to avoid unacceptable changes in the coverage of, or the premiums for, a benefit plan. An "unacceptable" change is a drastic increase in premium payments (or in co-payments or deductibles), or a drastic alteration to the scope of coverage or level of benefits provided, that would:
  • increase the cost to other employees so substantially that the benefit plan would be effectively unavailable to a significant number of them;
  • make the benefit plan so unattractive as to result in significant adverse selection;⁽⁸²⁾ or
  • make the benefit plan so unattractive that the employer cannot compete in recruiting and maintaining qualified workers due to the superiority of benefit plans offered by other employers in the community.
• The employer may prove that a particular treatment that it has excluded from a health insurance plan provides no medical benefit. The employer, in other words, may prove by reliable scientific evidence that the disability-specific treatment does not cure the condition, slow the degeneration/deterioration or harm attributable to the condition, alleviate the symptoms of the condition, or maintain the current health status of individuals with the disability who receive the treatment. The employer may not rely on this argument, however, if it covers treatments for other conditions that are likewise of no medical value when judged by these tests.

For a disability-based distinction to be a subterfuge, it is not necessary that it have been adopted (a) after enactment of the ADA; or (b) with the intent to discriminate in hiring, promotion, termination, or other non-benefit employment decisions.⁽⁸³⁾ First, the legislative history shows that Congress intended to reach insurance or benefit plans that were adopted prior to enactment of the ADA.⁽⁸⁴⁾ In addition, the ADA explicitly bans discrimination in fringe benefits, and is not limited to discrimination in hiring, firing, or other non-benefit aspects of employment. As a result, it is not necessary to prove that discrimination in fringe benefits was intended as a means to discriminate in other employment decisions.⁽⁸⁵⁾

V. Disability Retirement and Service Retirement Plans

Employers are not required to provide disability and/or service retirement plans for their employees. In addition, it does not violate the ADA for an employer to offer only a service retirement -- but not a disability retirement -- plan. Where an employer establishes either or both types of plans, however, it may not discriminate against employees with disabilities.

An employer will violate the ADA if it does any of the following:

• Excludes employees from participation in a service retirement or disability retirement plan because of their disabilities.

• Requires different lengths of employment for participation by individuals with disabilities and individuals without disabilities in the employer's service retirement or disability retirement plans.

• Sets different levels or types of coverage for individuals with and without disabilities in a service retirement plan.

However, the ADA does not require that service retirement and disability retirement plans provide the same level of benefits, because they are two separate benefits which serve two different purposes. As long as all employees may participate in the service retirement plan on the same terms, regardless of the existence of a disability, an employer will not violate the ADA if it provides lower levels of benefits in its disability than in its service retirement plans.

In addition, it does not violate the ADA for an employer to deny service retirement benefits to those who have previously chosen voluntarily to take disability retirement benefits. Investigators should find no cause if charges challenging such denials arise and the charging party voluntarily opted for disability retirement benefits.⁽⁸⁶⁾

TITLE VII/EPA ISSUES

I. Introduction

Under Title VII, employers may not consider a person's race, color, sex (including pregnancy), national origin, or religion in determining:

• eligibility for;
• amount of; or
• charges for

employee benefits. The cost of the benefit is not a defense. Thus, for example, even if it costs an employer more to provide benefits to women as a class than to men, the employer may not either charge women more, or provide them lesser benefits, to make up the difference.

Section II discusses specific issues that may arise in charges alleging benefits discrimination on any basis prohibited under Title VII. Section III addresses discrimination in benefits on the basis of pregnancy.

II. Discrimination Based on Sex, Race, Color, National Origin, or Religion ⁽⁸⁷⁾

A. Retirement Benefits

Although women as a class generally live longer than men, Title VII requires that each woman -- and each man -- be treated as an individual. As a result, employers may not use sex-based actuarial tables -- which rely on generalizations about womens' and mens' life expectancies -- to calculate either the amounts that the employer will pay in benefits to men and women or the amounts that it will charge its male and female employees for those benefits.⁽⁸⁸⁾ Where an employer has used sex-based actuarial tables, the investigator should find cause.

Where a portion of a retiree's pension benefits derives from contributions made prior to August 1, 1983, there may be limitations on the relief that can be given even if sex-based actuarial tables were used with regard to those contributions. If a charge involves benefits based on contributions made prior to this date, contact the Office of Legal Counsel.⁽⁸⁹⁾

B. Health Insurance Benefits

Like retirement benefits, health insurance benefits must be provided without regard to the race, color, sex, national origin, or religion of the insured. An employer must non-discriminatorily provide to all similarly situated employees the same opportunity to enroll in any health plans it offers. An employer must also ensure that the terms of its health benefits are non-discriminatory. In evaluating charges that an employer has discriminated in the terms of health benefits it offers, the following principles apply:

• The employer cannot provide different coverage to men and women where the risk insured against is mutually contractible - that is, where the underlying condition affects, or the treatment/test is available to, both men and women.

Where both men and women are, or could be, affected by the same condition or helped by the same treatment, the employer will be liable for sex discrimination if it provides different coverage to employees of each gender on the basis of gender.

• If the employer applies facially neutral standards to exclude treatment for conditions or risks that disproportionately affect either men or women, or employees on the basis of any other protected classification under the EEO laws, the employer must show that the standards are based on generally accepted medical criteria.

As the Supreme Court held in Griggs v. Duke Power Company, Title VII "proscribes not only overt discrimination but also practices that are fair in form, but discriminatory in operation."⁽⁹⁰⁾ Disparate impact analysis, which was codified as part of the Civil Rights Act of 1991,⁽⁹¹⁾ applies equally to the employer's provision of health benefits. Where an employer uses a facially neutral standard to deny insurance coverage for a condition or treatment that disproportionately affects members of a protected group, the employer's standard will create a disparate impact.⁽⁹²⁾ In the health benefits context, the employer must then show that the standards it relied on for the exclusion are based on generally accepted medical criteria.⁽⁹³⁾

The same standards apply where an employer covers the medical expenses of its employees' spouses and dependents. Such policies must offer equal coverage regardless of the gender of the employee.⁽⁹⁴⁾

If questions arise about whether an employer's criteria are based on generally accepted medical standards, contact the Office of Legal Counsel.

III. Discrimination Based on Pregnancy, Childbirth, or Related Medical Conditions

A. Introduction

Under the Pregnancy Discrimination Act (PDA), women who are affected by pregnancy, childbirth or related medical conditions must be treated the same as others who are similarly able or unable to work.⁽⁹⁵⁾ Where an employer offers benefits of any sort, therefore -- including retirement, health insurance, or disability benefits -- it must cover pregnancy and related medical conditions in the same way, and to the same extent, that it covers other medical conditions.

B. Retirement Benefits

Employers must allow women who are on pregnancy-related leaves to accrue seniority in the same way as those who are on leave for reasons unrelated to pregnancy. Thus, if an employer allows employees who take medical leave to retain their accumulated seniority and to accrue additional service credit during their leaves, the employer must accord the same treatment to women on pregnancy-related leaves. Similarly, employers must treat pregnancy-related leaves the same as other medical leaves in calculating the years of service that will be credited in evaluating an employee's eligibility for a pension or for early retirement.

These principles also apply to pregnancy-related leaves taken before the effective date of the PDA, where an employer uses years of service to establish eligibility for retirement benefits.

C. Health Insurance Benefits

Health insurance plans offered in connection with employment must cover pregnancy, childbirth, and related medical conditions in the same way, and to the same extent, that they cover other medical conditions. This means, in essence, two things:

• an employer's health insurance plan may not exclude coverage for pregnancy or related medical conditions altogether; and
• an employer's health insurance plan must offer the same terms for coverage of pregnancy, childbirth, and related medical conditions as for other medical conditions.

To offer coverage of pregnancy, childbirth, and related medical conditions on the same terms as for other medical conditions, an employer's health plan must provide for, among other things:

• the same deductibles;
• the same level of coinsurance payments;
• the same choices of physicians and hospitals;
• the same basis for reimbursement (e.g., by a flat dollar amount or by a percentage of actual charges); and
• the same apportionment of charges for premiums between employer and employees.⁽⁹⁷⁾

CONCLUSION

This Section addresses discrimination in life and health insurance benefits; long-term and short-term disability benefits; severance benefits; pension or other retirement benefits; and early retirement incentives. Under the ADEA, the ADA, and Title VII, charges involving these types of benefits may raise unique issues that require special analysis. This Section discusses that analysis in detail. At bottom, however, the fundamental principle of the anti-discrimination laws applies in this context as in all others: if an employer provides a lower level of benefits to an individual based on a prohibited factor, it must make out a defense. If it cannot do so, its conduct will be unlawful, and cause should be found.

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APPENDIX A: GLOSSARY

I. ACTUARIAL ISSUES

ACTUARIAL ASSUMPTIONS

Actuarial assumptions are reasonable predictions about variables such as interest rates, life expectancy, and expected salaries. They are used in calculating the benefits that can be expected to accrue over time and in estimating the cost of those benefits. See examples under "present value" and "early retirement: actuarial reductions" for further discussion.

EXAMPLE - In setting premium rates for life insurance coverage, an insurer will collect data on millions of individuals, developing a chart that will predict how long the average individual of a particular age will live. These "life expectancy" data permit actuaries to calculate the amount of premiums that would be necessary to cover predicted insurance payout. This schedule of premiums will also show the amount of coverage that can be offered at those prices.

EXAMPLE - In setting premiums for long-term disability coverage, an insurer will evaluate the likelihood that employees in the employer's work force will be injured. To make this determination, the insurer will consider factors such as past occurrences; type of industry (e.g., lion tamers will have a greater chance of on-the-job injury than file clerks); age of the individuals in the workforce; and area of the country.

LIFE EXPECTANCY

"Life expectancy" is the predicted average age at death of a group of individuals who are the same age.

EXAMPLE - By collecting a large amount of data on lifespans of individuals, an actuary can demonstrate that of persons retiring at age 65, some will live only a few days, while others will live beyond the age of 100. If the actuary determines that individuals retiring at 65 will live an average of 16 years, an insurer can project the average cost of providing retiree health insurance for that period of time.

PRESENT VALUE

Present value is the value today of one or more payments to be made in the future -- that is, the amount of cash an employer would need to invest today in order to make all of the promised future payments and end up with no money left. Present value takes into account the fact that the future payments will be made from both principal and interest.

II. PENSION ISSUES

A. TYPES OF PENSION PLANS

DEFINED BENEFIT PENSION PLAN

Defined benefit pension plans use a formula to promise a specified benefit upon retirement, regardless of the gains or losses on plan investments. Eligibility for payment of benefits typically depends on reaching normal retirement age with a specified number of years of service.

DEFINED CONTRIBUTION PENSION PLAN

Under defined contribution pension plans, employers make specified contributions to individual accounts for each plan participant, such as $1,000 per year or 6% of annual compensation. The benefits available when an employee retires are based upon the earnings of the employee's account. A 401(k) plan is a type of defined contribution plan.

B. ELIGIBILITY FOR BENEFITS

ACCRUED BENEFIT

The accrued benefit in a defined benefit plan is defined by Internal Revenue Service regulations as an annuity at normal retirement age. In a defined contribution plan, the accrued benefit is the amount that has accumulated in the employee's account as a result of the periodic credits defined in the plan.

 

NORMAL RETIREMENT AGE

Normal retirement age is the age at which an employee is eligible to retire immediately with unreduced benefits. The most common normal retirement age is age 65. A plan cannot require employees to retire at normal retirement age.

EARLY RETIREMENT AGE

Some defined benefit pension plans permit employees to retire before normal retirement age. Usually, these plans provide reduced benefits, based on the fact that benefits to younger retirees are likely to be paid out over a longer period of time. No pension plan is required to permit early retirement.

EARLY RETIREMENT INCENTIVE PROGRAMS

In some cases, employers offer enhanced retirement benefits to workers to induce them to retire earlier than they had otherwise planned. Such programs may, for example, eliminate the actuarial reduction for early retirement that the employer would otherwise impose, or offer payments that bridge the gap between an employee's early retirement and his/her eligibility for Social Security Old Age benefits.

YEARS OF SERVICE/PARTICIPATION

Years of service are the years an employee has worked for an employer; years of participation are the years an employee has participated in a pension plan. Because (absent discrimination on a prohibited basis) the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code) permit employers to exclude employees from a pension plan in some circumstances, years of service may differ from the years of participation that are counted under some plans.

VESTED BENEFITS

Vested benefits are pension benefits that cannot be forfeited by an employee. Under ERISA and the Code, an employer can require an employee to work for a specified number of years (generally five to seven years) before becoming fully entitled to the pension benefit. Vesting is different from eligibility. An employee may be vested in his/her pension benefits after working for five years. S/he will not be eligible to claim those benefits, however, until s/he reaches normal retirement age under the employer's pension plan.

DEFERRED VESTED BENEFITS

A person whose benefit has been vested who leaves the employ of the pension provider before reaching retirement age must wait until s/he reaches retirement age before receiving a pension benefit. The vested benefit is thus "deferred."

C. PAYMENT OF PENSION BENEFITS

IMMEDIATE/UNREDUCED PENSIONS

An employee who has satisfied all of the requirements for receipt of a pension (generally, the employee has reached normal or early retirement age and attained a minimum number of years of service) is eligible for an "immediate" pension. Usually, pension plans require that employees retire before the pension can be paid.

A pension is "unreduced" if individuals can obtain the full amount to which they would be entitled after reaching normal retirement age and attaining the requisite number of years of service. If plans authorize employees to retire earlier than normal retirement age, they typically reduce the benefit actuarially, taking into account the fact that relatively younger workers are expected to receive benefits for a longer period of time. Unreduced benefits are those that would be paid absent those actuarial reductions.

EARLY RETIREMENT: ACTUARIAL REDUCTION IN BENEFITS

Many plans that permit employees to retire earlier than normal retirement age reduce the amount of the pension provided upon early retirement, to take into account the fact that the life expectancy of the younger retiree is greater than that of the older retiree.

IN-SERVICE PENSION DISTRIBUTIONS

Pension plans typically require that an employee retire, that is, cease working for the company, before being eligible for the receipt of pension benefits. In some cases, however, plans will require the payment of pension benefits while persons are still employed. In addition, the Internal Revenue Code requires that some employees who continue working beyond the age of 70 be paid their benefits prior to retirement. In-service pension payments may not, however, be used to force an employee to retire.

PENSION PAYMENT OPTIONS

Pension plans provide a variety of optional forms of payment upon retirement. Among the more popular are:

• Lump-sum payments, where the employee is paid either the entire amount in an employee's account, in a defined contribution plan, or the present value of the benefit, in a defined benefit plan.
• Single life annuities, where the employee is paid a stated amount of money per month for the rest of the employee's life. At the employee's death, the payments terminate. Unless an employee's spouse chooses otherwise, the Internal Revenue Code requires that employers provide a joint and survivor annuity for their married employees.
• Joint and survivor annuities, where the employee and spouse (or in some plans, domestic partner) receive a lower payment until both annuitants die, at which time the payments terminate. The periodic payments in such an annuity would be lower than in a single life annuity, since the benefits likely will be paid for a longer time.

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APPENDIX B

DOCUMENTS TO EVALUATE CHALLENGES TO BENEFIT PLANS

 

 

I. PENSION PLANS

 

 

To investigate challenges to pension plans or early retirement incentive programs, investigators should typically obtain the following, as well as other documents relevant to the facts of a particular charge:

• a copy of the pension plan, along with any amendments made within the preceding eight years.
• a copy of any documents submitted to the Internal Revenue Service, the Department of Labor, or the Pension Benefit Guaranty Corporation, including annual reporting forms and documents related to the employer's request for determination of the tax status of the plan. Because the level of detail varies depending on the year, annual reporting forms should be obtained for at least the prior eight years.
• a copy of the Summary Plan Description, which is an abbreviated explanation of plan operations that must be given to each employee.
• a copy of any actuarial calculations on which the employer has relied in setting levels of benefits or funding for the plan.
• a copy of any contracts that relate to implementation of the plan, including contracts with insurers, labor unions, other employers, or pension trusts.
• information on the pensions actually paid by the plan to Charging Party and to comparator employees. If there are no employees who are similarly situated to Charging Party but of a different age, investigators should ask for data for hypothetical comparators.

II. LIFE INSURANCE, HEALTH INSURANCE, AND DISABILITY PLANS

To investigate charges that allege age discrimination in life insurance, health insurance, or disability plans, investigators should obtain the following:.

• a copy of the benefit plan, including any amendments made within the preceding eight years.
• a copy of any contracts that relate to implementation of the plan, including contracts with insurers, labor unions, or other employers.
• a copy of the bills for premiums paid by the employer.
• a copy of any actuarial calculations on which the employer or its insurer have relied in setting levels or duration of benefits or premiums to be paid.
• a schedule of benefits to be provided to employees or retirees of different ages.

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APPENDIX C

 

 

FEDERAL AGENCIES DEALING WITH EMPLOYEE BENEFITS

 

 

 

 

DEPARTMENT OF LABOR (DOL)

 

 

The Pension and Welfare Benefits Administration of the Department of Labor (DOL) enforces the provisions of the Employee Retirement Income Security Act (ERISA) that deal with the operation of pension plans, the preservation of plan assets, and the proper disposition of plan assets. DOL ascertains that employers are investing and safeguarding plan assets for the benefit of the employees, not the employer.⁽⁹⁹⁾

INTERNAL REVENUE SERVICE (IRS)

The Employee Plans Division of the Internal Revenue Service enforces the tax aspects of employee benefit plans, with special emphasis on the legality of pension plans. To encourage employers and employees to save actively to pay for the employees' retirement, employers that maintain pension plans are permitted favorable tax treatment for their contributions to the plans, including tax deductions and delayed taxation for plan earnings. The Internal Revenue Code sets out detailed rules for determining whether or not a pension plan qualifies for favorable tax treatment.

PENSION BENEFIT GUARANTY CORPORATION (PBGC)

PBGC provides insurance to guarantee the pensions of plan participants in the event that plan assets are inadequate to cover employees' pensions.

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APPENDIX D

[Code of Federal Regulations]
[Title 29, Volume 4, Parts 900 to 1899]
[Revised as of July 1, 1999]
[CITE: 29CFR1625.10]

[Page 309-315]
 
                             TITLE 29--LABOR
 
PART 1625--AGE DISCRIMINATION IN EMPLOYMENT ACT--Table of Contents
 
                       Subpart A--Interpretations
 
Sec. 1625.10  Costs and benefits under employee benefit plans.

    (a)(1) General. Section 4(f)(2) of the Act provides that it is not 
unlawful for

[[Page 310]]

an employer, employment agency, or labor organization

    to observe the terms of * * * any bona fide employee benefit plan 
such as a retirement, pension, or insurance plan, which is not a 
subterfuge to evade the purposes of this Act, except that no such 
employee benefit plan shall excuse the failure to hire any individual, 
and no such * * * employee benefit plan shall require or permit the 
involuntary retirement of any individual specified by section 12(a) of 
this Act because of the age of such individuals.


The legislative history of this provision indicates that its purpose is 
to permit age-based reductions in employee benefit plans where such 
reductions are justified by significant cost considerations. 
Accordingly, section 4(f)(2) does not apply, for example, to paid 
vacations and uninsured paid sick leave, since reductions in these 
benefits would not be justified by significant cost considerations. 
Where employee benefit plans do meet the criteria in section 4(f)(2), 
benefit levels for older workers may be reduced to the extent necessary 
to achieve approximate equivalency in cost for older and younger 
workers. A benefit plan will be considered in compliance with the 
statute where the actual amount of payment made, or cost incurred, in 
behalf of an older worker is equal to that made or incurred in behalf of 
a younger worker, even though the older worker may thereby receive a 
lesser amount of benefits or insurance coverage. Since section 4(f)(2) 
is an exception from the general non-discrimination provisions of the 
Act, the burden is on the one seeking to invoke the exception to show 
that every element has been clearly and unmistakably met. The exception 
must be narrowly construed. The following sections explain three key 
elements of the exception:
    (i) What a ``bona fide employee benefit plan'' is;
    (ii) What it means to ``observe the terms'' of such a plan; and
    (iii) What kind of plan, or plan provision, would be considered ``a 
subterfuge to evade the purposes of [the] Act.''

There is also a discussion of the application of the general rules 
governing all plans with respect to specific kinds of employee benefit 
plans.
    (2) Relation of section 4(f)(2) to sections 4(a), 4(b) and 4(c). 
Sections 4(a), 4(b) and 4(c) prohibit specified acts of discrimination 
on the basis of age. Section 4(a) in particular makes it unlawful for an 
employer to ``discriminate against any individual with respect to his 
compensation, terms, conditions, or privileges of employment, because of 
such individual's age * * *.'' Section 4(f)(2) is an exception to this 
general prohibition. Where an employer under an employee benefit plan 
provides the same level of benefits to older workers as to younger 
workers, there is no violation of section 4(a), and accordingly the 
practice does not have to be justified under section 4(f)(2).
    (b) Bona fide employee benefit plan. Section 4(f)(2) applies only to 
bona fide employee benefit plans. A plan is considered ``bona fide'' if 
its terms (including cessation of contributions or accruals in the case 
of retirement income plans) have been accurately described in writing to 
all employees and if it actually provides the benefits in accordance 
with the terms of the plan. Notifying employees promptly of the 
provisions and changes in an employee benefit plan is essential if they 
are to know how the plan affects them. For these purposes, it would be 
sufficient under the ADEA for employers to follow the disclosure 
requirements of ERISA and the regulations thereunder. The plan must 
actually provide the benefits its provisions describe, since otherwise 
the notification of the provisions to employees is misleading and 
inaccurate. An ``employee benefit plan'' is a plan, such as a 
retirement, pension, or insurance plan, which provides employees with 
what are frequently referred to as ``fringe benefits.'' The term does 
not refer to wages or salary in cash; neither section 4(f)(2) nor any 
other section of the Act excuses the payment of lower wages or salary to 
older employees on account of age. Whether or not any particular 
employee benefit plan may lawfully provide lower benefits to older 
employees on account of age depends on whether all of the elements of 
the exception have been met. An ``employee-pay-all'' employee benefit 
plan is one of the ``terms, conditions, or privileges of employment'' 
with respect to which

[[Page 311]]

discrimination on the basis of age is forbidden under section 4(a)(1). 
In such a plan, benefits for older workers may be reduced only to the 
extent and according to the same principles as apply to other plans 
under section 4(f)(2).
    (c) ``To observe the terms'' of a plan. In order for a bona fide 
employee benefit plan which provides lower benefits to older employees 
on account of age to be within the section 4(f)(2) exception, the lower 
benefits must be provided in ``observ[ance of] the terms of'' the plan. 
As this statutory text makes clear, the section 4(f)(2) exception is 
limited to otherwise discriminatory actions which are actually 
prescribed by the terms of a bona fide employee benefit plan. Where the 
employer, employment agency, or labor organization is not required by 
the express provisions of the plan to provide lesser benefits to older 
workers, section 4(f)(2) does not apply. Important purposes are served 
by this requirement. Where a discriminatory policy is an express term of 
a benefit plan, employees presumably have some opportunity to know of 
the policy and to plan (or protest) accordingly. Moreover, the 
requirement that the discrimination actually be prescribed by a plan 
assures that the particular plan provision will be equally applied to 
all employees of the same age. Where a discriminatory provision is an 
optional term of the plan, it permits individual, discretionary acts of 
discrimination, which do not fall within the section 4(f)(2) exception.
    (d) Subterfuge. In order for a bona fide employee benefit plan which 
prescribes lower benefits for older employees on account of age to be 
within the section 4(f)(2) exception, it must not be ``a subterfuge to 
evade the purposes of [the] Act.'' In general, a plan or plan provision 
which prescribes lower benefits for older employees on account of age is 
not a ``subterfuge'' within the meaning of section 4(f)(2), provided 
that the lower level of benefits is justified by age-related cost 
considerations. (The only exception to this general rule is with respect 
to certain retirement plans. See paragraph (f)(4) of this section.) 
There are certain other requirements that must be met in order for a 
plan not to be a subterfuge. These requirements are set forth below.
    (1) Cost data--general. Cost data used in justification of a benefit 
plan which provides lower benefits to older employees on account of age 
must be valid and reasonable. This standard is met where an employer has 
cost data which show the actual cost to it of providing the particular 
benefit (or benefits) in question over a representative period of years. 
An employer may rely in cost data for its own employees over such a 
period, or on cost data for a larger group of similarly situated 
employees. Sometimes, as a result of experience rating or other causes, 
an employer incurs costs that differ significantly from costs for a 
group of similarly situated employees. Such an employer may not rely on 
cost data for the similarly situated employees where such reliance would 
result in significantly lower benefits for its own older employees. 
Where reliable cost information is not available, reasonable projections 
made from existing cost data meeting the standards set forth above will 
be considered acceptable.
    (2) Cost data--Individual benefit basis and ``benefit package'' 
basis. Cost comparisons and adjustments under section 4(f)(2) must be 
made on a benefit-by-benefit basis or on a ``benefit package'' basis, as 
described below.
    (i) Benefit-by-benefit basis. Adjustments made on a benefit-by-
benefit basis must be made in the amount or level of a specific form of 
benefit for a specific event or contingency. For example, higher group 
term life insurance costs for older workers would justify a 
corresponding reduction in the amount of group term life insurance 
coverage for older workers, on the basis of age. However, a benefit-by-
benefit approach would not justify the substitution of one form of 
benefit for another, even though both forms of benefit are designed for 
the same contingency, such as death. See paragraph (f)(1) of this 
section.
    (ii) ``Benefit package'' basis. As an alternative to the benefit-by-
benefit basis, cost comparisons and adjustments under section 4(f)(2) 
may be made on a limited ``benefit package'' basis. Under this approach, 
subject to the limitations described below, cost comparisons and 
adjustments can be made with respect to section 4(f)(2)

[[Page 312]]

plans in the aggregate. This alternative basis provides greater 
flexibility than a benefit-by-benefit basis in order to carry out the 
declared statutory purpose ``to help employers and workers find ways of 
meeting problems arising from the impact of age on employment.'' A 
``benefit package'' approach is an alternative approach consistent with 
this purpose and with the general purpose of section 4(f)(2) only if it 
is not used to reduce the cost to the employer or the favorability to 
the employees of overall employee benefits for older employees. A 
``benefit package'' approach used for either of these purposes would be 
a subterfuge to evade the purposes of the Act. In order to assure that 
such a ``benefit package'' approach is not abused and is consistent with 
the legislative intent, it is subject to the limitations described in 
paragraph (f), which also includes a general example.
    (3) Cost data--five year maximum basis. Cost comparisons and 
adjustments under section 4(f)(2) may be made on the basis of age 
brackets of up to 5 years. Thus a particular benefit may be reduced for 
employees of any age within the protected age group by an amount no 
greater than that which could be justified by the additional cost to 
provide them with the same level of the benefit as younger employees 
within a specified five-year age group immediately preceding theirs. For 
example, where an employer chooses to provide unreduced group term life 
insurance benefits until age 60, benefits for employees who are between 
60 and 65 years of age may be reduced only to the extent necessary to 
achieve approximate equivalency in costs with employees who are 55 to 60 
years old. Similarly, any reductions in benefit levels for 65 to 70 year 
old employees cannot exceed an amount which is proportional to the 
additional costs for their coverage over 60 to 65 year old employees.
    (4) Employee contributions in support of employee benefit plans--(i) 
As a condition of employment. An older employee within the protected age 
group may not be required as a condition of employment to make greater 
contributions than a younger employee in support of an employee benefit 
plan. Such a requirement would be in effect a mandatory reduction in 
take-home pay, which is never authorized by section 4(f)(2), and would 
impose an impediment to employment in violation of the specific 
restrictions in section 4(f)(2).
    (ii) As a condition of participation in a voluntary employee benefit 
plan. An older employee within the protected age group may be required 
as a condition of participation in a voluntary employee benefit plan to 
make a greater contribution than a younger employee only if the older 
employee is not thereby required to bear a greater proportion of the 
total premium cost (employer-paid and employee-paid) than the younger 
employee. Otherwise the requirement would discriminate against the older 
employee by making compensation in the form of an employer contribution 
available on less favorable terms than for the younger employee and 
denying that compensation altogether to an older employee unwilling or 
unable to meet the less favorable terms. Such discrimination is not 
authorized by section 4(f)(2). This principle applies to three different 
contribution arrangements as follows:
    (A) Employee-pay-all plans. Older employees, like younger employees, 
may be required to contribute as a condition of participation up to the 
full premium cost for their age.
    (B) Non-contributory (``employer-pay-all'') plans. Where younger 
employees are not required to contribute any portion of the total 
premium cost, older employees may not be required to contribute any 
portion.
    (C) Contributory plans. In these plans employers and participating 
employees share the premium cost. The required contributions of 
participants may increase with age so long as the proportion of the 
total premium required to be paid by the participants does not increase 
with age.
    (iii) As an option in order to receive an unreduced benefit. An 
older employee may be given the option, as an individual, to make the 
additional contribution necessary to receive the same level of benefits 
as a younger employee (provided that the contemplated reduction in 
benefits is otherwise justified by section 4(f)(2)).

[[Page 313]]

    (5) Forfeiture clauses. Clauses in employee benefit plans which 
state that litigation or participation in any manner in a formal 
proceeding by an employee will result in the forfeiture of his rights 
are unlawful insofar as they may be applied to those who seek redress 
under the Act. This is by reason of section 4(d) which provides that it 
is unlawful for an employer, employment agency, or labor organization to 
discriminate against any individual because such individual ``has made a 
charge, testified, assisted, or participated in any manner in an 
investigation, proceeding, or litigation under this Act.''
    (6) Refusal to hire clauses. Any provision of an employee benefit 
plan which requires or permits the refusal to hire an individual 
specified in section 12(a) of the Act on the basis of age is a 
subterfuge to evade the purposes of the Act and cannot be excused under 
section 4(f)(2).
    (7) Involuntary retirement clauses. Any provision of an employee 
benefit plan which requires or permits the involuntary retirement of any 
individual specified in section 12(a) of the Act on the basis of age is 
a subterfuge to evade the purpose of the Act and cannot be excused under 
section 4(f)(2).
    (e) Benefits provided by the Government. An employer does not 
violate the Act by permitting certain benefits to be provided by the 
Government, even though the availability of such benefits may be based 
on age. For example, it is not necessary for an employer to provide 
health benefits which are otherwise provided to certain employees by 
Medicare. However, the availability of benefits from the Government will 
not justify a reduction in employer-provided benefits if the result is 
that, taking the employer-provided and Government-provided benefits 
together, an older employee is entitled to a lesser benefit of any type 
(including coverage for family and/or dependents) than a similarly 
situated younger employee. For example, the availability of certain 
benefits to an older employee under Medicare will not justify denying an 
older employee a benefit which is provided to younger employees and is 
not provided to the older employee by Medicare.
    (f) Application of section 4(f)(2) to various employee benefit 
plans--(1) Benefit-by-benefit approach. This portion of the 
interpretation discusses how a benefit-by-benefit approach would apply 
to four of the most common types of employee benefit plans.
    (i) Life insurance. It is not uncommon for life insurance coverage 
to remain constant until a specified age, frequently 65, and then be 
reduced. This practice will not violate the Act (even if reductions 
start before age 65), provided that the reduction for an employee of a 
particular age is no greater than is justified by the increased cost of 
coverage for that employee's specific age bracket encompassing no more 
than five years. It should be noted that a total denial of life 
insurance, on the basis of age, would not be justified under a benefit-
by-benefit analysis. However, it is not unlawful for life insurance 
coverage to cease upon separation from service.
    (ii) Long-term disability. Under a benefit-by-benefit approach, 
where employees who are disabled at younger ages are entitled to long-
term disability benefits, there is no cost--based justification for 
denying such benefits altogether, on the basis of age, to employees who 
are disabled at older ages. It is not unlawful to cut off long-term 
disability benefits and coverage on the basis of some non-age factor, 
such as recovery from disability. Reductions on the basis of age in the 
level or duration of benefits available for disability are justifiable 
only on the basis of age-related cost considerations as set forth 
elsewhere in this section. An employer which provides long-term 
disability coverage to all employees may avoid any increases in the cost 
to it that such coverage for older employees would entail by reducing 
the level of benefits available to older employees. An employer may also 
avoid such cost increases by reducing the duration of benefits available 
to employees who become disabled at older ages, without reducing the 
level of benefits. In this connection, the Department would not assert a 
violation where the level of benefits is not reduced and the duration of 
benefits is reduced in the following manner:

[[Page 314]]

    (A) With respect to disabilities which occur at age 60 or less, 
benefits cease at age 65.
    (B) With respect to disabilities which occur after age 60, benefits 
cease 5 years after disablement. Cost data may be produced to support 
other patterns of reduction as well.
    (iii) Retirement plans--(A) Participation. No employee hired prior 
to normal retirement age may be excluded from a defined contribution 
plan. With respect to defined benefit plans not subject to the Employee 
Retirement Income Security Act (ERISA), Pub. L. 93-406, 29 U.S.C. 1001, 
1003 (a) and (b), an employee hired at an age more than 5 years prior to 
normal retirement age may not be excluded from such a plan unless the 
exclusion is justifiable on the basis of cost considerations as set 
forth elsewhere in this section. With respect to defined benefit plans 
subject to ERISA, such an exclusion would be unlawful in any case. An 
employee hired less than 5 years prior to normal retirement age may be 
excluded from a defined benefit plan, regardless of whether or not the 
plan is covered by ERISA. Similarly, any employee hired after normal 
retirement age may be excluded from a defined benefit plan.
    (2) ``Benefit package'' approach. A ``benefit package'' approach to 
compliance under section 4(f)(2) offers greater flexibility than a 
benefit-by-benefit approach by permitting deviations from a benefit-by-
benefit approach so long as the overall result is no lesser cost to the 
employer and no less favorable benefits for employees. As previously 
noted, in order to assure that such an approach is used for the benefit 
of older workers and not to their detriment, and is otherwise consistent 
with the legislative intent, it is subject to limitations as set forth 
below:
    (i) A benefit package approach shall apply only to employee benefit 
plans which fall within section 4(f)(2).
    (ii) A benefit package approach shall not apply to a retirement or 
pension plan. The 1978 legislative history sets forth specific and 
comprehensive rules governing such plans, which have been adopted above. 
These rules are not tied to actuarially significant cost considerations 
but are intended to deal with the special funding arrangements of 
retirement or pension plans. Variations from these special rules are 
therefore not justified by variations from the cost-based benefit-by-
benefit approach in other benefit plans, nor may variations from the 
special rules governing pension and retirement plans justify variations 
from the benefit-by-benefit approach in other benefit plans.
    (iii) A benefit package approach shall not be used to justify 
reductions in health benefits greater than would be justified under a 
benefit-by-benefit approach. Such benefits appear to be of particular 
importance to older workers in meeting ``problems arising from the 
impact of age'' and were of particular concern to Congress. Therefore, 
the ``benefit package'' approach may not be used to reduce health 
insurance benefits by more than is warranted by the increase in the cost 
to the employer of those benefits alone. Any greater reduction would be 
a subterfuge to evade the purpose of the Act.
    (iv) A benefit reduction greater than would be justified under a 
benefit-by-benefit approach must be offset by another benefit available 
to the same employees. No employees may be deprived because of age of 
one benefit without an offsetting benefit being made available to them.
    (v) Employers who wish to justify benefit reductions under a benefit 
package approach must be prepared to produce data to show that those 
reductions are fully justified. Thus employers must be able to show that 
deviations from a benefit-by-benefit approach do not result in lesser 
cost to them or less favorable benefits to their employees. A general 
example consistent with these limitations may be given. Assume two 
employee benefit plans, providing Benefit ``A'' and Benefit ``B.'' Both 
plans fall within section 4(f)(2), and neither is a retirement or 
pension plan subject to special rules. Both benefits are available to 
all employees. Age-based cost increases would justify a 10% decrease in 
both benefits on a benefit-by-benefit basis. The affected employees 
would, however, find it more favorable--that is, more consistent with 
meeting their needs--for no reduction to be made in Benefit ``A'' and a 
greater reduction to be made in Benefit ``B.'' This ``trade-

[[Page 315]]

off'' would not result in a reduction in health benefits. The ``trade-
off'' may therefore be made. The details of the ``trade-off'' depend on 
data on the relative cost to the employer of the two benefits. If the 
data show that Benefit ``A'' and Benefit ``B'' cost the same, Benefit 
``B'' may be reduced up to 20% if Benefit ``A'' is unreduced. If the 
data show that Benefit ``A'' costs only half as much as Benefit ``B'', 
however, Benefit ``B'' may be reduced up to only 15% if Benefit ``A'' is 
unreduced, since a greater reduction in Benefit ``B'' would result in an 
impermissible reduction in total benefit costs.
    (g) Relation of ADEA to State laws. The ADEA does not preempt State 
age discrimination in employment laws. However, the failure of the ADEA 
to preempt such laws does not affect the issue of whether section 514 of 
the Employee Retirement Income Security Act (ERISA) preempts State laws 
which related to employee benefit plans.

[44 FR 30658, May 25, 1979, as amended at 52 FR 8448, Mar. 18, 1987. 
Redesignated and amended at 52 FR 23812, June 25, 1987; 53 FR 5973, Feb. 
29, 1988]

---

Footnotes

1. 29 U.S.C. § 623(a)(1).

2. 42 U.S.C. § 12112(a).

3. 42 U.S.C. § 2000e-2(a)(1).

4. 29 U.S.C. § 206(d).

5. The requirements and prohibitions set forth in this Chapter apply to employers, employment agencies, labor organizations, and joint labor-management committees. For convenience, the term "employer" is used throughout this Chapter to refer to all covered entities.

6. See, e.g., 42 U.S.C. § 12112(b)(2) (employers barred from entering into contractual or other relationships that have the effect of discriminating against their employees with disabilities, including in fringe benefits); Arizona Governing Committee v. Norris, 463 U.S. 1073, 1089 (1983) (opinion of Marshall, J.) ("an employer that adopts a [discriminatory] fringe-benefit scheme . . . violates Title VII regardless of whether third parties are also involved in the discrimination").

7. 29 U.S.C. § 1001 et seq. (ERISA); 26 U.S.C. § 1 et seq. (Internal Revenue Code).

8. Regulations implementing the Internal Revenue Code may be relevant to a charge in the limited context of pension accruals and allocations. If an employer alleges that ERISA or the Internal Revenue Code provides a defense to the provision of unequal benefits in this or other contexts, contact the Office of Legal Counsel for further guidance.

9. If an employer's benefit plan is facially discriminatory, there is no need to amass additional evidence of the employer's intent to discriminate. See, e.g., Solon v. Gary Community School Corp., 180 F.3d 844, 855 (7^th Cir. 1999) (where early retirement incentive plan explicitly restricts benefits to those under the age of 62, "independent proof of an illicit motive is unnecessary"); O'Brien v. Board of Education, 82 FEP Cases 1164, n.4 (E.D.N.Y. 2000) ("motive is irrelevant once the Court determines that the plan is facially discriminatory"); cf. International Union, UAW v. Johnson Controls, Inc., 499 U.S. 187, 199-200 (1991) (where policy is facially discriminatory, employer's motive for adopting it is irrelevant); but see Arnett v. California Public Employees Retirement Syst., 179 F.3d 690 (9^th Cir. 1999) (suggesting that employer's motives were relevant even where plan was explicitly age-based), cert. granted, judgment vacated on other grounds, 120 S.Ct. 930 (2000). The Commission believes that Arnett misreads fundamental principles of disparate treatment analysis to the extent that it suggests that proof of discriminatory motive is necessary where a benefit plan is facially discriminatory.

10. Where an individual would not have suffered the adverse treatment in benefits but for his/her age, it does not matter whether age was the sole criterion for the employer's decision. See, e.g., Auerbach v. Board of Education, 136 F.3d 104, 110 (2d Cir. 1998); Huff v. UARCO, 122 F.3d 374, 388 (7^th Cir. 1997).

11. In some cases, it may be appropriate to assess whether the benefit plan discriminates against a larger class of older employees. In such cases, investigators may need to gather additional information about the benefits the employer pays, or would pay, to employees at a range of ages, salaries, and years of service. Investigators may contact the Commission's Office of Research, Information and Planning (ORIP) or the Research and Analytic Services Staff of the Office of General Counsel for additional guidance on the information to seek and the calculations to be performed.

12. 29 C.F.R. § 1625.2(b).

13. If questions arise about application of the equal cost defense to other benefits, contact the Office of Legal Counsel.

14. 29 U.S.C. § 623(f)(2)(B)(i).

15. The equal cost defense is codified at 29 U.S.C. § 623(f)(2)(B)(i). The Commission's regulations on the requirements of the defense, which were codified by Congress and are described in this section, can be found at 29 C.F.R. § 1625.10. A copy of the regulations is attached as Appendix D.

16. 29 C.F.R. § 1625.10(d)(3).

17. 29 U.S.C. § 623(f)(2)(B)(i).

18. 29 C.F.R. § 1625.10(f)(2)(i)-(v).

19. The principles set forth in sections 3 and 4 above apply equally to "cafeteria" plans. In such plans, employers typically provide a fixed amount of money to employees, who can then choose to purchase different types and/or levels of benefits included in the plan. Under the equal cost defense, an employer would have to demonstrate that it had made the same amount of money available to its older and younger employees. The employer would also be required to prove that any reduction in the benefits that older workers could purchase for that amount was actuarially justified, under either a benefit-by-benefit or a benefit package analysis.

20. 29 C.F.R. § 1625.10(d)(4).

21. Employers may also deduct non-age-based benefits -- such as workers' compensation payments -- from benefits they provide, as long as the deductions are made uniformly for all employees.

22. If employers assert that they may make age-based offsets other than those discussed in this Chapter, contact the Office of Legal Counsel.

23. See 42 U.S.C. § 1395y(b)(1)(A)(i) (also providing that a group health plan may not take eligibility for Medicare into account in establishing an active employee's health benefits).

24. Occasionally, an employer might reduce benefits to older workers who are under the age of 65, and then raise those benefits once the workers turn 65 in order to comply with Medicare requirements. An employer might, for example, decrease benefits for employees between the ages of 56 and 64 and then restore the benefits for 65 year olds to the level received by 55 year old employees. Although such actions may not violate the Medicare laws, they would violate the ADEA unless the employer could satisfy the equal cost defense as to the benefit reductions imposed on employees between the ages of 56 and 64.

25. An employer is not required to offer health benefits to retirees; in addition, such benefits, if offered, need not be as generous as the health benefits provided to current employees. This section addresses the situation in which older retirees receive lower benefits than similarly situated younger retirees on the basis of age.

26. 29 C.F.R. § 1625.10(e).

27. The numbers used in this example are illustrative only and do not necessarily reflect the actual benefits paid by Medicare.

28. 29 U.S.C. § 623(l).

29. Erie County, 220 F.3d at 214.

30. Because the law does not itself permit employers to reduce or eliminate health benefits provided to retirees simply because those retirees are eligible for Medicare, the Commission is not persuaded by legislative history to the contrary. Final Substitute: Statement of Managers, 136 Cong. Rec. S13597 (Sept. 24, 1990). First, the legislative history contains conflicting statements on this question. See S. Rep. No. 263, 101^st Cong., 2d Sess. 21-22 (1990), reprinted in 1990 U.S.C.C.A.N. 1509, 1527 (ADEA requires that, taking Medicare into account, older retirees receive equal benefits to younger retirees). Where a law is not ambiguous on its face, moreover, resort to legislative history -- which simply states the views of legislators who may or may not have been able to enact their interpretations into law -- is unnecessary. See, e.g., Toibb v. Radloff, 501 U.S. 157, 162 (1991); Blanchard v. Bergeron, 489 U.S. 87, 97-100 (1989) (Scalia, J., concurring) (discussing unreliability of legislative history).

31. 29 C.F.R. § 1625.10(f)(ii).

32. See EEOC v. City of Mt. Lebanon, 842 F.2d 1480, 1492 & n.11 (3d Cir. 1988) (requiring detailed cost justification for this plan); Milwaukee Professional Fire Fighters Assn v. City of Milwaukee, 869 F. Supp. 633 (E.D. Wis. 1994) (safe harbor applicable only where plan meets specific requirements of EEOC regulation). The schedule set forth in the example in text was discussed in the preamble to the regulations originally drafted by the Department of Labor to implement the benefit provisions of the ADEA. 44 Fed. Reg. 30,648, 30,655 (May 25, 1979). The preamble stated that plans adhering to this schedule would be lawful only if data to support the cost justification for the plan were available.

33. 29 U.S.C. § 623(l)(3).

34. Under the statutory language, an employee need not actually receive his/her pension benefit for an employer to use it as an offset against long-term disability payments. Pensions may be offset against disability benefits at the point at which an employee becomes eligible for an unreduced pension. Note, however, that where an employee must accept retirement status in order to receive his/her pension, s/he will not be eligible for the pension - i.e., the offset will not apply -- unless and until s/he has chosen to retire. See Kalvinskas v. California Institute of Technology, 96 F.3d 1305 (9th Cir. 1996) (an employee is "eligible" for a pension only once he has chosen to retire, not simply because he has reached normal retirement age); Milwaukee Professional Fire Fighters Assn v. City of Milwaukee, 896 F. Supp. 633, 647 (E.D. Wis. 1994) (offset was "designed only to prevent double-dipping and was not designed to force the selection of inferior benefits" by requiring employees to convert to retirement status).

35. This principle stems logically from the holding in Kalvinskas. 96 F.3d 1305 (employer may not offset pension benefits that employee can receive only by involuntarily retiring); see also Milwaukee Professional Fire Fighters Assn v. City of Milwaukee, 869 F. Supp. 633 (E.D. Wis. 1994) (violates ADEA for employer to bar disability beneficiaries who have reached normal retirement age from returning to work and continuing to accrue service retirement credit).

36. See Arnett v. California Public Employees Retirement Syst., 179 F. 3d 690 (9th Cir. 1999) (where benefits paid based on an employee's potential years of service until retirement at age 55, those hired at younger ages receive greater benefits than those hired at older ages based solely on age at hire), cert. granted, judgment vacated on other grounds, 120 S.Ct. 930 (2000); but cf. Lyon v. Ohio Education Assn, 53 F.3d 135 (6th Cir. 1995) (provision of early retirement incentive plan awarding employees the same benefit they would have received had they worked until normal retirement age did not demonstrate employer's intent to discriminate based on age). Lyon did not address a disability retirement plan. The Commission in any event disagrees with the Lyon analysis. Where a benefit plan ties the amount of benefits provided to the number of years it will be before an employee reaches normal retirement age, it is explicitly age-based. This is facial discrimination that does not require additional proof of intent.

37. See, e.g., EEOC v. Westinghouse Elec. Corp., 725 F.2d 211 (3d Cir. 1983) (severance plan unlawful where unavailable to those eligible for early retirement); EEOC v. Borden's, Inc., 724 F.2d 1390 (9th Cir. 1984) (finding violations under both disparate treatment and disparate impact theories). Congress cited both of these cases with approval. 62 Cong. Rec. H8618 (Oct. 2, 1990).

38. An employer may assert that the cost of severance benefits increases with an employee's years of service, and that increases in years of service are correlated with increases in age. Even if an employer's costs increase based on a factor correlated with age, however, the Supreme Court has made clear that this is insufficient to show that the cost increases are in fact age-based. Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993). Thus, an employer cannot assert that severance benefits entail age-related cost increases that trigger application of the equal cost defense.

39. 29 U.S.C. § 623(l)(2)(A)(i).

40. The values listed in the law are:

	Benefits of Limited Duration	Lifetime Benefits
Employees under 65 at age of termination	Value benefits at $3,000 per year	Value benefits at $48,000
Employees over 65 at age of termination	Value benefits at $750 per year	Value benefits at $24,000

29 U.S.C. § 623(l)(2)(E). These valuations were to be adjusted annually on the basis of the medical component of the Consumer Price Index. If an employer is using valuations other than those set out in the ADEA, therefore, the investigator should ask for the Consumer Price Index data upon which the employer is relying. If questions about valuation arise, contact the Office of Legal Counsel.

41. 29 U.S.C. § 623(l)(2)(B), (E)(iv).

42. 29 U.S.C. § 623(l)(2)(A)(ii); Stokes v. Westinghouse Savannah River Co., 206 F.3d 420 (4th Cir. 2000).

43. Where an employee must retire in order to receive his/her pension (and thus must forfeit recall rights retained by younger workers who received severance pay), the employer should provide the same recall rights to the older employee that are provided to other terminated employees who are not eligible for a pension. That principle has been recognized where pension payments are offset from long-term disability benefits, see Kalvinskas v. California Institute of Technology, 96 F.3d 1305 (9th Cir. 1996) (pension-based offset from long-term disability benefits can be taken only where employee is not forced to retire in order to receive the pension benefits), and the Commission believes that the same analysis applies to offsets from severance benefits.

44. An employer that violates the principles governing severance offsets will be liable for a violation of the ADEA and for all applicable ADEA remedies. Congress has also explicitly recognized that an individual may sue an employer that takes an offset based on a promise to provide retiree health benefits, and then fails to provide such benefits, for specific performance -- that is, for the actual benefits the individual has been denied. See 29 U.S.C. § 623(1)(2)(F).

45. 29 U.S.C. § 623(l)(1)(A).

46. 29 U.S.C. § 623(i)(2).

47. See Quinones v. City of Evanston, 58 F.3d 275 (7th Cir. 1995) (invalidating plan that denied those hired after age 35 the opportunity to participate in the pension plan).Section 1625.10 (f)(1)(iii) of the Commission's regulations, which permits age-based exclusions by certain pension plans, has been superseded by intervening law and should no longer be applied.

48. For employees hired within five years of the plan's normal retirement age, the employer may not require more than five years of service before those individuals are eligible to participate in the pension plan. 29 U.S.C. § 623(i)(8) (incorporating relevant provisions of ERISA and Internal Revenue Code).

49. 29 U.S.C. § 623(i)(1).

50. An employer may assert that these prohibitions do not apply to pension benefits paid to highly compensated employees, or alternatively that its treatment of older employees is governed by regulations governing pension accruals and allocations under the Internal Revenue Code. See 29 U.S.C. § 623(i)(5), (7) (anticipating these arguments). If an employer makes either of these assertions, contact the Office of Legal Counsel for further guidance.

51. See Pub. L. No. 101-433, § 105(d) (nothing in Older Workers Benefit Protection Act "shall be construed as limiting the prohibitions against discrimination" set forth in Section 4(i), dealing with pensions); H.R. Conf. Rep. No. 1012, 99^th Cong., 2d Sess. 382, reprinted in 1986 U.S.C.C.A.N. at 4027 ("the requirements contained in [the ADEA section addressing pensions] related to an employee's right to benefit accruals with respect to an employee benefit plan . . . shall constitute the entire extent to which ADEA affects such benefit accrual and contribution matters...").

52. 29 C.F.R. § 1625.10(f)(2)(ii).

53. 29 U.S.C. § 623(i)(3).

54. If questions arise about how to compute the actuarial value of pension payments, contact the Office of Legal Counsel.

55. 29 C.F.R. § 1625.10 (e). An employer may not, however, stop pension accruals or contributions because an employee is eligible for Social Security benefits.

56. Auerbach v. Board of Education, 136 F.3d 104, 113 (2d Cir. 1998). The employee has the burden of proving that an ERI is not voluntary.

57. 29 U.S.C. § 626(f); 29 C.F.R. § 1625.22. Employers must also meet various other criteria for a waiver to be valid. Id.

58. Final Substitute: Statement of Managers, 136 Cong. Rec. S13596 (Sept. 24, 1990). For cases addressing voluntariness, see, e.g., Auerbach v. Board of Education, 136 F.3d 104, 113 (2d Cir. 1998) (plan voluntary where no coercion, employees got complete and accurate information, and employees had four months to make decision); Anderson v. Montgomery Ward & Co., Inc., 650 F. Supp. 1480 (N.D. Ill. 1987) (factual issue about voluntariness precluded summary judgment where employer encouraged some employees to stay and threatened others that they would be terminated without separation benefits if they rejected the ERI).

59. 29 U.S.C. § 623(l)(1)(B)(i).

60. Because the actuarial reduction is larger for younger than for older workers, bringing both workers up to a pension of $25,000 will be more of a benefit for those younger workers. This will not violate the ADEA, as long as the older workers eligible for the ERI receive at least the same total pension amount as similarly situated younger employees.

61. 29 U.S.C. § 623 (l)(1)(b)(ii).

62. 29 U.S.C. § 623(m). Employers eligible for this exemption may also attempt to justify any age-based reductions in ERI benefits under one of the other rationales set forth in this section.

63. See Final Substitute: Statement of Managers, 136 Cong. Rec. S13596 (Sept. 24, 1990).

64. 29 U.S.C. § 621(b) (purposes of ADEA are to promote employment of older persons based on their abilities; to prohibit arbitrary age discrimination; and to help employers and employees solve problems arising from the impact of age on employment). The prohibition on arbitrary age discrimination is the purpose generally implicated when considering ERIs. Final Substitute: Statement of Managers, 136 Cong. Rec. S13596 (Sept. 24, 1990).

65. 29 U.S.C. §§ 623(l)(1)(B)(i), (ii); 623(m).

66. Solon v. Gary Community School Corp., 180 F.3d 844 (7th Cir. 1999); O'Brien v. Board of Education, 82 FEP Cases 1164 (E.D.N.Y. 2000) (plan that reduced compensation for accumulated sick leave if teachers did not retire within their first year of eligibility violated ADEA).

67. Solon v. Gary Community School Corp., 180 F.3d 844, 853 (7^th Cir. 1999) (once employee has reached maximum age at which ERI is available, "all early retirement incentives are withheld, no matter how ahead of schedule the employee elects to retire in terms of his years of service . . ."); EEOC v. Crown Point Community School Corp., 72 FEP Cases 1803 (N.D. Ind. 1997) (age-based cutoffs in ERI unlawful because based on assumption that employees will typically retire at age 65 and no longer need extra incentive to do so); Karlen v. City Colleges of Chicago, 837 F.2d 314 (7th Cir.) (plan that sharply decreased ERI benefits at age 65 was intended to induce employees to retire by that age and thus violated the ADEA), cert. denied, 486 U.S. 1044 (1988).

68. Indeed, in enacting this exemption, Congress stated explicitly that nothing in the exemption was intended to affect application of the ADEA to any other type of plan or to any employer other than an institution of higher education. P.L.105-244, § 941(c)(2),(3). Thus, Congress clearly intended to limit the use of age-capped plans to these employers alone.

69. For these reasons, the Commission disagrees with Auerbach v. Board of Education, 136 F.3d 104, 113 (2d Cir. 1998) (authorizing plan that offered ERI for a limited period of time after an employee turned 55), and Lyon v. Ohio Education Assn, 53 F.3d 135, 139 (6th Cir. 1995) (not unlawful for ERI plan to pay more to younger than older employees). Because, moreover, the challenged conduct in each of these cases occurred before Congress enacted the amendments permitting age-capped benefits for tenured faculty -- and making clear that authorization for age-capped benefits is limited to this context -- it is unclear that the courts in each case would reach the same result today.

70. Final Substitute: Statement of Managers, 136 Cong. Rec. S13596 (Sept. 24, 1990); see also 136 Cong. Rec. H8621 (October 2, 1990) (statement of Congressman Goodling, minority floor manager of the bill) ("[t]he bill would not permit employers to use window plans targeted at a select group of employees with an upper age bracket--that is, those aged 55 to 60"); id. at H8618, 8623 (statements of Congressmen Clay and Roybal). Other parts of the legislative history, as well as the Final Substitute: Statement of Managers, contain some conflicting language on this question. 136 Cong. Rec. S13596 (Sept. 24, 1990) (ERIs available to "employees who have attained age 55 and who retire during a specified window period . . . would be lawful"). To the extent that this language does anything more than authorize employers to set a minimum age for eligibility for ERI benefits, the Commission believes that it is inconsistent with the language and purposes of the ADEA.

71. 42 U.S.C. § 12112(b)(2) (defining prohibited discrimination to include participation in a contractual relationship with, inter alia, an entity "providing fringe benefits to an employee" with the effect of subjecting a qualified applicant or employee to prohibited discrimination); 29 C.F.R. § 1630.6(b)(same); 29 C.F.R. § 1630.4(f) (unlawful to discriminate based on disability with regard to "fringe benefits available by virtue of employment").

72. See S. Rep. No. 116, 101st Cong., 1st Sess. 85-86 (1989); H.R. Rep. No. 485 part 2, 101st Cong., 2d Sess. 137-138 (1990), reprinted in 1990 U.S.C.C.A.N. 267, 420-21.

73. 42 U.S.C. § 12201(c); 29 C.F.R. § 1630.16(f).

74. The fact that individuals with particular disabilities have not received equal benefits does not necessarily mean that the plan violates the ADA. An investigator must still determine whether the distinction drawn by the plan is disability-based. In the context of health insurance, for example, differences in the coverage of expenses for mental and physical conditions are not disability-based distinctions. See p. 54, infra.

75. Interim Enforcement Guidance on the Application of the Americans with Disabilities Act of 1990 to Disability-Based Distinctions in Employer Provided Health Insurance, No. N-915.002 (June 8, 1993), at p. 6.

76. Mental conditions are "impairments" only if they are based on a mental or psychological "disorder." 29 C.F.R. § 1630.2(h) (1998).

77. The Commission has taken the position in litigation, on the other hand, that distinctions between mental and physical conditions in long-term disability (LTD) plans are disability-based. Generally, an employee becomes eligible for LTD benefits when s/he is no longer able to work because of a serious permanent or long-term illness or injury. This means that in most instances employees who are eligible for or are receiving LTD benefits have disabilities as defined by the ADA, because their impairments substantially limit their ability to work or to engage in one or more other major life activities. Courts have disagreed with the Commission's position and have held that treating physical and mental conditions differently in an LTD plan does not violate the ADA. See, e.g., EEOC v. Staten Island Savings Bank, 207 F.3d 144 (2d Cir. 2000) (equal coverage of all disabilities not required by ADA); Lewis v. Kmart Corp., 180 F.3d 166, 170 (4th Cir. 1999) (ADA does not require a long- term disability plan sponsored by a private employer to provide the same level of benefits for mental and physical disabilities), cert. denied, 68 U.S.L.W. 3311 (U.S. Jan. 24, 2000); Ford v. Schering-Plough Corp., 145 F.3d 601, 611 (3d Cir. 1998) (en banc) (employer and insurance company need not justify actuarial basis for difference in benefits in long-term disability plan for mental and physical conditions), cert. denied, 119 S. Ct. 850 (1999); but see Olmstead v. L.C., 527 U.S. 581(1999) (ADA prohibits discrimination between different types of disabilities).

78. 42 U.S.C. § 12201 (1994); 29 C.F.R. § 1630.16(f) (1998).

79. An "insured" benefit plan is a plan that is purchased from an insurance company or other entity. In a "self-insured" plan, the employer directly assumes the liability of an insurer. Insured benefit plans are regulated by both ERISA and state law. Self-insured benefit plans are typically subject to ERISA, but are not subject to state laws that regulate insurance.

80. If questions arise concerning whether a bona fide insured plan is consistent with state law, contact the Regional Attorney.

81. H.R. Rep. No. 485, part 3, 101st Cong., 2d Sess. 7 (1990), reprinted in 1990 U.S.C.C.A.N. 267, 494; see also S. Rep. No. 116, 101st Cong., 1st Sess. 85-86 (1989) (benefit plan protected under the ADA only if administered in a manner consistent with basic principles of insurance risk classification).

82. Adverse selection is the tendency of people who represent greater risks to apply for and/or retain a fringe benefit to a greater extent than people who represent average or below average risks. Drastic increases in premiums and/or drastic decreases in benefits foster an increase in adverse selection, as those who are considered to be "good" risks drop out and seek enrollment in a benefit plan with lower premiums and/or better benefits. A benefit plan that is subjected to a significant rate of adverse selection may, as a result of the increase in the proportion of "poor risk/high use" enrollees to "good risk/low use" enrollees, become not viable or financially unsound.

83. This showing was required under a prior version of the ADEA in order to prove that an age-based distinction in benefits was a subterfuge to evade the purposes of that law. See Ohio Public Employees Retirement Syst. v. Betts, 492 U.S. 158 (1989). Congress legislatively superseded Betts by enacting amendments to the ADEA in the Older Workers Benefit Protection Act of 1990, codified at 29 U.S.C. § 623(f)(2).

84. See H.R. Rep. No. 485, part 2, 101st Cong., 2d Sess. 137, reprinted in 1990 U.S.C.C.A.N. at 420; S. Rep. No. 116, 101st Cong., 1st Sess. 85 (1989).

85. Courts are split on the issue of whether the Betts analysis applies to disability-based distinctions in fringe benefits. Compare, e.g., Cloutier v. Prudential Ins. Co. of Am., 964 F. Supp. 299, 304 (N.D. Cal. 1996) (Betts inapplicable; to meet defense, insurers must show that underwriting decisions accord with either sound actuarial principles or with actual or reasonably anticipated experience), with, e.g., Ford v. Schering-Plough Corp., 145 F.3d 601, 611 (3d Cir. 1998) (en banc) (Betts applies and bars most challenges to LTD plans adopted after enactment of the ADA), cert. denied, 119 S.Ct. 850 (1999). The Commission disagrees with cases applying the Betts analysis because the ADA makes clear that discrimination in fringe benefits is covered, regardless of the date of adoption of the plan, and is unlawful absent an actuarial justification for disability-based distinctions in coverage.

86. See Castellano v. City of New York, 142 F.3d 58, 70 (2d Cir.), cert. denied, 119 S.Ct. 60 (1998).

87. This section focuses on sex discrimination in benefits because most Title VII benefits issues have arisen in this context. The same principles will apply, however, to charges challenging benefits discrimination on the bases of race, color, national origin, or religion. Although the analytic framework is different, moreover, the same basic principles apply to charges of gender discrimination brought under the EPA, since fringe benefits constitute compensation covered by that law.

88. Arizona Governing Committee v. Norris, 463 U.S. 1073 (1983) (unlawful to pay lower monthly retirement benefits to women than to men); Los Angeles Dep't of Water and Power v. Manhart, 435 U.S. 702 (1978) (unlawful to require larger contributions from female than male employees to obtain the same benefit).

89. Investigators may also refer to the "Policy Guidance Addressing the Issue of Retroactive Relief for Sex-Based Discrimination in Employee Retirement Plans," No. N-915.037A (July 3, 1989), for additional guidance on this issue.

90. 401 U.S. 424, 431 (1971).

91. 42 U.S.C. § 2000e-2(k)(1).

92. Sometimes the excluded condition, treatment, or test will affect either exclusively or nearly exclusively members of one protected group. For instance, as discussed in the example in text, the employer's neutral standard might have the effect of excluding a treatment for breast cancer. In such circumstances, the Commission will find that there is a disparate impact on the basis of sex without the need for further investigation. In other circumstances, the effect of the exclusion may not be as clearly linked to the protected classification. In these circumstances, the Commission will apply other established principles to evaluate whether the exclusion has a cognizable adverse effect on a prohibited basis. It is important to keep in mind that determining whether there is a disparate impact is only the first part of the analysis and is not determinative of whether there is unlawful discrimination.

93. Of course, the standard must, in fact, be neutrally applied. If it is not, the investigator should consider whether the employer's practice constitutes unlawful disparate treatment. In addition, an employer's failure to cover treatment for a particular condition may, independent of Title VII, also violate the ADA. Cf. Henderson v. Bodine Aluminum, Inc., 70 F.3d 958 (8th Cir. 1995) (exclusion of bone marrow transplants for breast cancer likely to violate ADA where employer covered such transplants for other comparable conditions); Polifko v. OPM, EEOC Appeal No. 0190976 (Apr. 3, 1997) (exclusion of treatment for breast cancer was a disability-based distinction that was a subterfuge to violate Rehabilitation Act where agency applied inconsistent standards in evaluating efficacy of treatment for other conditions).

94. See 29 C.F.R. § 1604.9(d) (employers must make available same benefits for spouses and families of male employees that it provides to spouses and families of female employees); cf. Newport News Shipbuilding and Dry Dock Co. v. EEOC, 462 U.S. 669 (1983) (unlawful to exclude coverage of pregnancy from policies provided to spouses of male employees where employer covered all medical expenses of spouses of female employees).

95. 42 U.S.C. § 2000e(k). For a more extensive discussion of the standards of the PDA, see Compliance Manual Section ___.

96. See, e.g., Pallas v. Pacific Bell, 940 F.2d 1324 (9th Cir. 1991) (authorizing PDA claim on these facts), cert. denied, 502 U.S. 1050 (1992); Carter v. American Tel. and Tel. Co., 870 F. Supp. 1438 (S.D. Ohio 1994) (same), vacated by consent, 1996 WL 656571 (S. D. Ohio Sept. 13, 1996); EEOC v. Bell Atlantic Corp., 80 FEP Cases 164 (S.D.N.Y. 1999) (claim is timely where it challenges incorporation of prior service credit decisions into new retirement incentive plan); but see Ameritech Benefit Plan Comm. v. Communications Workers of America, 220 F.3d 814 (7^th Cir. 2000) (finding challenge to seniority system that denied credit for pre-PDA maternity leaves to be time-barred) cf. Whitehead v. Oklahoma Gas & Elect. Co., 187 F.3d 1184 (10^th Cir. 1999) (denying PDA claim where plaintiff compared herself to men who had worked for employer continuously rather than to men on leave for reasons unrelated to pregnancy). The Commission disagrees with the court's analysis in Ameritech and believes that the Pallas decision states the correct application of the law.

97. See generally 29 C.F.R. part 1604 app., Questions and Answers ## 25-27, 33. The same requirements apply whether the insurance plan is funded by the employer, by the employees, or by a combination of the two. Id., Question and Answer # 23.

98. It is not necessary that an employer's health plan be shown to benefit men. It is sufficient to establish a violation of the PDA if an employer treats pregnancy differently from other medical conditions, whether those conditions affect men, women, or individuals of both genders.

99. Pension plans maintained by state and local governments and religious institutions generally are exempt from the requirements of ERISA and the Internal Revenue Code. If a plan's exemption from those statutes is at issue, please contact the Office of Legal Counsel. Note, however, that exemptions from ERISA and the Internal Revenue Code do not constitute a defense under any EEO statutes.