A federal appeals court in Philadelphia says employers can spend more on health insurance benefits for retirees who are not yet eligible for Medicare than on retirees who qualify for Medicare.

The Equal Employment Opportunity Commission has the legal authority to create a regulation that would exempt employer coordination of retirement benefits with Medicare benefits from the federal Age Discrimination in Employment Act, according to a unanimous decision by 3 judges who sit on the 3rd U.S. Circuit Court of Appeals.

The EEOC issued the early retiree health benefits ADEA exemption regulation in 2004.

Section 9 of the ADEA “clearly and unambiguously grants to the EEOC the authority to provide, at least, narrow exemptions from the prohibitions of the ADEA,” Jane Restani writes in an opinion for the court concerning the case, American Association of Retired Persons et al. vs. Equal Employment Opportunity Commission.

Restani, chief judge of the U.S. Court of International Trade, sat on the AARP case panel “by designation.”

The 3rd Circuit appellate court has jurisdiction over Delaware and New Jersey as well as over Pennsylvania.

The 3rd Circuit panel affirmed a ruling by a judge in the U.S. District Court in Philadelphia, who sided with the EEOC, but the appellate panel based its decision on a different line of reasoning.

The district court judge first sided with the AARP, Washington.

Later, the U.S. Supreme Court issued a 2005 ruling holding that “prior judicial interpretation of a statute bars subsequent agency interpretations only where the precedent ‘unambiguously forecloses the agency’s interpretation, and therefore contains no gap for the agency to fill.”

The district court judge responded to the Supreme Court decision by vacating the first decision and siding with the EEOC.

The appellate court has based its decision primarily on the language of the ADEA and federal laws and rules governing interpretation of statutes.

The appellate court also considered the possible effects of siding with the AARP on health benefits for retirees.

One concern is that no law requires employers to offer health benefits for either early retirees or for retirees who are eligible for Medicare, Restani writes.

When employers believed that the ADEA might require them to spend equal amounts on health coverage for early retirees and Medicare-eligible retirees, “rather than maintaining retiree benefits at pre-Medicare eligibility levels for all retirees in order to avoid discrimination under the ADEA, some employers chose to reduce all retiree health benefits to a lower level,” Restani writes.

The EEOC issued the 2004 regulation to address the decline in employer-sponsored retiree health benefits programs, Restani writes.

“We recognize with some dismay that the proposed exemption may allow employers to reduce health benefits to retirees over the age of 65 while maintaining greater benefits for younger retirees,” Restani writes.

But the EEOC has shown that allowing employers to pay more for early retiree health benefits is a reasonable, necessary and proper exercise of authority, Restani writes.

Organizations joining to file briefs supporting the EEOC exemption include groups such as America’s Health Insurance Plans, Washington, and the American Benefits Council, Washington.

AARP “fails to appreciate that many retirees could lose coverage entirely if employers were told they must spend as much on health benefits for retirees who already have Medicare coverage as they spend on early retirees who have no coverage other than the health plan from their former employer,” American Benefits Council President James Klein says in a statement about the 3rd Circuit ruling.