Ruling Puts Retiree ‘Bridge’ Health Benefits in Question

A surprise decision by a Pennsylvania appellate court could imperil retiree health benefits, particularly costly “bridge” benefits that provide health insurance to early retirees who are too young to qualify for Medicare.

The ruling, by the U.S. 3rd Circuit Court of Appeals, says that plans cannot provide more costly benefits to early retirees than to retirees who are over age 65, and thus eligible for Medicare, without running afoul of the federal Age Discrimination in Employment Act.

“If not legislatively or judicially reversed, this decision will affect many large employers,” said Henry Saveth, a New York-based attorney with William M. Mercer Inc., a national benefit-consulting firm. “The distinct danger is that employers would choose to drop retiree health benefits rather than pay the additional cost that this ruling would require.”

About 70% of the nation’s largest employers offer so-called bridge benefits to early retirees. These benefits generally provide full health insurance coverage between early retirement and when retirees hit age 65 and can qualify for Medicare. At that point, most plans either drop coverage completely or become secondary insurers, only picking up health costs that Medicare doesn’t pay.

As a result, the cost of providing health coverage to retirees who are too young to qualify for Medicare is vastly greater than providing coverage to those over 65, according to the Employee Benefit Research Institute in Washington. It costs roughly $5,200 annually to provide health insurance to an early retiree, compared with $1,874 each year once the retiree turns 65, institute figures show.

Under this ruling, affected companies can do one of two things: They can spend more on every retiree older than 65 or they can cut coverage to younger retirees.

“These plans are very expensive now and employers have been looking for ways to reduce the cost,” said John D. Piro, chairman of the health-care practice at Hewitt Associates in Norwalk, Conn. “This type of ruling is a big disincentive to keep these plans going.”

It’s unclear how widespread the ruling’s effect will be. The decision, made this month, is technically binding only in the three states covered by the 3rd circuit--Pennsylvania, New Jersey and Delaware. But experts are unsure whether it affects companies headquartered in those states or all companies that have operations or retirees in those states. Moreover, because the ruling involves a federal law, it can serve as legal precedent, sparking lawsuits and change all over the country, industry experts said.

The Age Discrimination in Employment Act is a federal law. “It should apply equally across the country,” said Rich Ostuw, global health-care practice director at the national benefit-consulting firm of Watson Wyatt Worldwide in Stamford, Conn. “This will either expand to other states or be reversed.”

At the moment, benefit consultants are betting that the case will be overturned either by federal legislation or further legal appeals.

Congress modified the age discrimination act in 1990 to make it clear that age discrimination laws affected benefit plans as well as work rules. But congressional leaders at the time made a point of going through the law’s legislative history to clarify that the act should not hamper companies from coordinating their benefit plans with government-sponsored plans, such as Medicare.

As a result, a district court had rejected a claim by a group of retirees of Erie County, Pa., when they said the county had discriminated against them by providing better benefits to younger retirees than to those older than 65. However, the appeals court put the legislative history aside, saying that the letter of the law was clear. Legislative history is considered by the courts only when laws are ambiguous, the court said.

It is unclear how companies will react to the ruling, which most companies contacted Monday said was too new to analyze.

“It’s too soon to comment,” said Gary Sheffer, spokesman for General Electric Co. in Fairfield, Conn.

However, consultants expect most companies will take a “wait-and-see” posture, figuring that either Congress or the courts will act quickly to reverse the decision once they realize what a negative impact the ruling might have on early retirees.

“What the court has done is put into stark relief the question of whether or not pre-65 retiree medical plans can survive,” Piro said. “As a matter of public policy, I would hope the answer will be yes. But, that will have to wait until this issue is taken further.”