The Age Discrimination in Employment Act

The Age Discrimination in Employment Act applies to employers with 20 or more employees and affects employees aged 40 and older. With some exceptions, such as individuals in executive or high policymaking positions, compulsory retirement is no longer allowed. Employee benefits, which traditionally ceased or were severely limited at age 65, must be continued for older workers. However, some reductions in benefits are allowed. While the federal act does not prohibit such discrimination in benefits for employees under age 40 or for all employees of firms that employ fewer than 20 persons, some states may prohibit such discrimination under their own laws or regulations.

The act permits a reduction in the level of some benefits for older workers so that the cost of providing benefits for older workers is no greater than the cost of providing them for younger workers. However, the most expensive benefit—medical expense coverage—cannot be reduced. The following discussion is limited to reductions after age 65, by far the most common age for reducing benefits, even though reductions can start at an earlier age if they are justified on a cost basis. It should be emphasized that these restrictions apply to benefits for active employees only; there are no requirements under the act that any benefits be continued for retired workers.

When participation in an employee benefit plan is voluntary, an employer can generally require larger employee contributions instead of reducing benefits for older employees, as long as the proportion of the premiums paid by older employees does not increase with age. Thus, if an employer pays 50 percent of the cost of benefits for younger employees, it must pay at least 50 percent of the cost for older employees. If employees pay the entire cost of a benefit, older employees may be required to pay the full cost of their coverage to the extent that this is a condition of participation in the plan. However, this provision does not apply to medical expense benefits. Employees over age 65 cannot be required to pay any more for their coverage than is paid by employees under age 65.

In cases where benefits are reduced, two approaches are permitted: a benefit-by-benefit approach or a benefit-package approach. Under the more common benefit-by-benefit approach, each employee benefit may be reduced to a lesser amount as long as each reduction can be justified on a cost basis. Under a benefit-package approach, the overall benefit package may be altered. Some benefits may be eliminated or reduced to a lesser amount than can be justified on a cost basis, as long as other existing benefits are not reduced or the benefit package is increased by adding new benefits for older workers. The only cost restriction is that the cost of the revised benefit package may be no less than if a benefit-by-benefit reduction had been used. The act also places two other restrictions on the benefit-package approach by prohibiting any reduction in medical expense benefits or retirement benefits.

In reducing a benefit, an employer must use data that approximately reflect the actual cost of the benefit to the employer over a reasonable period of years. Unfortunately, such data either have not been kept by employers or are not statistically valid. Consequently, the reductions that have taken place have been based on estimates provided by insurance companies and consulting actuaries. This approach appears to be satisfactory to the Equal Employment Opportunity Commission (EEOC), which enforces the act's provisions. The act allows reductions to take place on a yearly basis or to be based on age brackets of up to five years. Any cost comparisons must be made with the preceding age bracket. For example, if five-year age brackets are used, the cost of providing benefits to employees between the ages of 65 and 69 must be compared with the cost of providing the same benefits to employees between the ages of 60 and 64.

While reductions in group insurance benefits for older employees are permissible, they are not required. Some employers make no reductions for older employees, but most employers reduce life insurance benefits at age 65 and long-term disability benefits at age 60 or 65.

Group Term Life Insurance Benefits
Based on mortality statistics, most insurance companies feel that group term life insurance benefits can be reduced to the percentages of the amount of coverage provided immediately prior to age 65 as shown.

Age Percentage

65–69 65

70–74 45

75–79 30

Over 79 20

Therefore, if employees normally receive $40,000 of group term life insurance, those employees between the ages of 65 and 69 can receive only $26,000, employees between the ages of 70 and 74 can receive $18,000, and so forth. Similarly, if employees normally receive coverage equal to 200 percent of salary, this may be reduced to 130 percent of salary at age 65, with additional reductions at later ages.

Reductions may also be made on an annual basis. If an annual reduction is used, it appears that a reduction of up to 11 percent of the previous year's coverage can be actuarially justified, starting at age 65 and continuing through age 69. Starting at age 70, the reduction should be 9 percent.

In a plan with employee contributions, the employer may either reduce benefits as described above and charge the employee the same premium as those employees in the previous age bracket or continue full coverage and require that the employee pay an actuarially increased contribution.

Group Disability Income Benefits
The Age Discrimination in Employment Act allows reductions in insured short-term disability income plans, but no reductions are allowed in uninsured sick-leave plans. While disability statistics for those aged 65 and older are limited, some insurance companies feel a benefit reduction of approximately 20 percent is appropriate for employees between the ages of 65 and 69, with additional decreases of 20 percent of the previous benefit for each consecutive five-year period. However the laws of the few states that require that short-term disability income benefits be provided allow neither a reduction in benefits nor an increase in any contribution rate for older employees.

Under the act, two methods are allowed for reducing long-term disability income benefits for those employees who become disabled at older ages. Either the level of benefits may be reduced without altering benefit eligibility or duration or the benefit duration may be reduced without altering the level of benefits. These reductions again must be justified on a cost basis. Unfortunately, no rough guidelines can be given because any possible reductions will vary considerably, depending on the eligibility requirements and the duration of benefits under a long-term disability plan.

Group Medical Expense Benefits
The Age Discrimination in Employment Act requires that employers offer all employees over age 65 (and any employees' spouses who are also over age 65) the same medical coverage they provide for younger employees (and their spouses). Consequently, benefits cannot be reduced for older employees because of increasing cost to the employer. In addition, older employees cannot be required to contribute more than younger employees.

The employer's plan is the primary payer of benefits, with Medicare assuming the secondary-payer role. However, employees may reject the employer's plan and elect Medicare as the primary payer of benefits, but federal regulations prevent an employer from offering a health plan or option designed to induce such a rejection. This effectively prohibits an employer from paying the Part B premium or offering any type of supplemental plan to employees who elect Medicare as primary. (However, supplemental and carve-out plans can be used for retirees.) Therefore, most employees elect to remain with the employer's plan unless it requires large employee contributions. When Medicare is secondary, the employer may pay the Part B premium for those employees who elect Medicare, but the employer has no legal responsibility to do so.