The U.S. Equal Employment Opportunity Commission
QUESTIONS AND ANSWERS: COMPLIANCE MANUAL SECTION ON EMPLOYEE BENEFITS
INTRODUCTION
What does this Compliance Manual section address?
- This Compliance Manual section explains how the employment discrimination laws
apply to life and health insurance benefits, long-term and short-term disability benefits,
severance benefits, pension or other retirement benefits, and early retirement
incentives. The section covers discrimination in these benefits under the Age
Discrimination in Employment Act (ADEA), the Americans with Disabilities Act
(ADA), Title VII of the Civil Rights Act of 1964 (Title VII), and the Equal Pay Act
(EPA).
Why did the EEOC issue this Compliance Manual section?
- This Compliance Manual section is part of an ongoing EEOC project to update and
streamline its Compliance Manual. It is the Commission's first broad-based treatment
of benefits issues. It also replaces seven Commission policy statements on benefits
issues.
What is the structure of the Compliance Manual section?
- The section first defines the types of benefits it discusses and then provides an
overview of applicable rules. It then separately explains the requirements regarding
benefits under the ADEA, the ADA, and Title VII and the EPA. The section
contains a detailed Table of Contents to permit users to quickly find relevant
information.
The following Questions and Answers summarize the most important points in this
chapter of the Compliance Manual. We encourage you to refer to the relevant sections
for further information. We have included section numbers to make it easier to find the
information that interests you.
AGE DISCRIMINATION IN EMPLOYMENT ACT
Does the ADEA bar discrimination on the basis of age in connection with employee
benefits?
- Yes. However, it permits employers to provide different benefits to older than to
younger workers in some circumstances.
What are those circumstances?
- The ADEA permits employers to provide lower life, health, and disability benefits to
older workers if the employers pay an equal amount for those benefits for the older
and younger employees. The ADEA also authorizes employers to offset, from certain
benefits, other benefits older workers receive. There are also special rules that apply
to early retirement incentive programs.
Equal Cost/Equal Benefit
What is the "equal cost or equal benefit" rule?
- The "equal cost or equal benefit" rule gives employers a choice: they will avoid
violating the law if they either provide equal benefits to their older and younger
workers or spend an equal cost to purchase those benefits, even if the benefits are not
equal. In some cases - for example, life insurance benefits, disability benefits, and
health insurance benefits - the cost of benefits may increase as people get older and
as the likelihood of death, disability, or illness increases. Congress recognized that
these greater costs might discourage employers from hiring older workers. The equal
cost defense addresses this problem.
What are the requirements for meeting the equal cost defense?
- An employer must show several things. First, the benefit must be one that becomes
more expensive as people get older - the equal cost defense does not apply to
benefits, like severance pay, which cost the same amount no matter what the age of
the employee may be. Second, the benefit must be part of a benefit plan that requires
the reduction of benefits as employees age. Third, the employer must show that it has
spent an equal amount for each of its employees, regardless of age, to purchase the
benefit. Finally, the employer must show that it has reduced the benefits for older
workers only as much as is necessary to equalize the cost of the benefit for each
worker.
Is application of the equal cost defense always the same, no matter what types of benefits
are at issue?
- No. There may be differences depending on the benefit. Special rules apply to health
insurance benefits, for example, as well as to long-term disability benefits.
What are the special rules that apply to health insurance?
- Under Medicare law, employers must offer to current employees who are aged 65 or
over the same health benefits that they offer to any current employee under the age of
65. As long as employers follow this rule, they will have provided an equal benefit
and no inquiry about equal cost will be necessary.
With regard to health benefits offered to retirees, employers may take Medicare
benefits into account in determining whether equal benefits have been provided. There
is no violation of the ADEA as long as older retirees receive the same total health
benefits -- including both Medicare and employer-provided benefits -- as younger
retirees get from the employer. However, if an employer reduces the health benefits it
provides to older retirees by more than the amount provided by Medicare, it must
meet the equal cost defense. Otherwise, it will be in violation of the ADEA.
What are the special rules with regard to long-term disability benefits?
- EEOC regulations provide a "safe harbor" under which employers may set specified
age-based time limits for the receipt of long-term disability benefits. As long as
employers follow these rules, which depend on the age at which the person becomes
disabled, they will not run afoul of the ADEA.
Offsets
What is an "offset"?
- An employer takes an offset when it deducts from a worker's benefits amounts that the
worker receives in other benefits. For example, an employer may deduct retiree health
benefits, or extra pension benefits that are offered because of the termination from
employment, from severance packages it pays to older employees.
What offsets does the ADEA permit?
- The ADEA permits three types of offsets: (1) the deduction of certain pension benefits
from long-term disability benefits; (2) the deduction of certain retiree health benefits
or extra pension benefits from severance pay; and (3) the deduction of certain amounts
from pension benefit accruals.
What are the offset rules that apply to long-term disability benefits?
- An employer may reduce long-term disability benefits by the amount of a worker's
pension benefits in two cases: where the worker chooses to receive the pension, or
where s/he has reached the later of age 62 or the normal retirement age under the plan
and can get an unreduced pension. The employer may deduct only those portions of
the worker's pension benefit that are based on the employer's contributions to the
pension plan. In other words, the employer may not deduct pension benefits resulting
from the employee's contributions, if any, to the pension plan.
What are the offset rules that apply to severance pay?
- An employer may not deny severance benefits to its employees because they are
eligible to receive a pension from the employer. However, under certain
circumstances, the employer may deduct from severance benefits any retiree health
benefits the older employees receive, as well as any extra pension benefits that the
employer provides because of the employee's separation from employment.
What are the offset rules that apply to pension benefit accruals?
- Employers may offset certain amounts from employee pension accruals if the
employee either works past normal retirement age or begins to receive pension
payments while s/he is still working.
Early Retirement Incentive Programs
What is an early retirement incentive program?
- In early retirement incentive programs, employers offer employees additional benefits
to which they would not otherwise be entitled if they retire before they reach normal
retirement age. For example, an employer might offer to eliminate the reduction in
pension it would normally make if a person retired early. Under such a program,
eligible employees could then get full pensions before normal retirement age.
Does the ADEA permit early retirement incentive programs?
- Yes. The ADEA permits employers to offer early retirement incentive programs to
their employees as long as participation is voluntary and as long as the plan is
otherwise non-discriminatory. Older workers may not be forced to retire.
Must an employer provide equal early retirement benefits to all employees, regardless of
their age?
- Not necessarily. Under certain circumstances, employers may provide higher benefits
to younger employees. For example, an employer may, as an early retirement
incentive, eliminate the reduction that it would normally make if employees retired
before normal retirement age. This benefits younger workers more since the reduction
which would otherwise apply to them would be greater.
The ADEA also permits employers to offer Social Security supplements to employees
who retire before they are eligible for Social Security, and allows age-based reductions
in early retirement benefits provided to tenured faculty by colleges and universities.
Otherwise, the ADEA does not permit employers to reduce or terminate early
retirement benefits to older workers based on their age.
Pensions
What are the basic rules governing pensions under the ADEA?
- Employers have substantial flexibility in designing their pension plans. Among other
things, employers may set normal and/or early retirement ages for the receipt of
benefits; require a certain number of years of service or a certain time period before
an employee will be eligible to retire; and set limits on the total amount of benefits
provided by a plan.
What an employer may not do is to stop or reduce accruals in or contributions to an
employee's pension benefits based on the employee's age. Employers also may not
exclude an employee from participation in a pension plan simply because the
employee is close to the plan's normal retirement age when hired.
AMERICANS WITH DISABILITIES ACT
Does the ADA bar discrimination on the basis of disability in benefits?
- Yes. Employers may not make disability-based distinctions in employee benefits
unless they can show that the distinction is not a subterfuge to evade the purposes of
the ADA.
What is a disability-based distinction?
- A disability-based distinction singles out for different treatment (a) a particular
disability; (b) a discrete group of disabilities; or (c) disability in general. For example,
a cap on the health insurance benefits that an employer will pay for AIDS is a
disability-based distinction.
A benefit plan provision that applies to a number of dissimilar conditions, and that
affects both individuals with and individuals without disabilities, is not a disability-based distinction. It is not a disability-based distinction, for example, if an employer's
health insurance plan has a waiting period for pre-existing conditions.
Distinctions that are not disability-based do not violate the ADA.
What is a subterfuge to evade the purposes of the ADA?
- A subterfuge is a disability-based distinction that an employer cannot justify. The
ADA provides for several types of justifications. For example, an employer will not
violate the ADA if a disability-based distinction is justified by actuarial data or is
necessary to avoid prohibitive increases in the premiums for other employees.
May an employer provide different benefits in its disability retirement and service
retirement plans?
- Yes. Because disability retirement and service retirement plans serve two different
purposes, the ADA does not require that they each provide the same benefits. The
ADA is satisfied as long as all employees may participate in the service retirement
plan on the same terms, regardless of the existence of a disability.
TITLE VII/EPA
Discrimination Based on Sex, Race, Color, National Origin, or Religion
Does Title VII ever permit employers to take sex, race, color, national origin, or religion
into account in their benefit programs?
- No. An employer is never permitted to consider these factors in connection with its
benefit programs.
How does this rule apply to health plans?
- An employer must provide identical coverage to men and women if both men and
women can contract a condition or benefit from a treatment or test. Sometimes an
employer will use a neutral standard to exclude treatment for a condition that only, or
disproportionately, affects members of one sex, race, or other protected group. For
example, an employer might refuse to cover certain treatments for breast cancer as
"experimental." In that case, the employer would have to show that its standard was
neutrally applied and is based on generally accepted medical criteria.
Discrimination Based on Pregnancy, Childbirth, or Related Medical Conditions
What does the Pregnancy Discrimination Act (PDA) require with regard to employee
benefits?
- The PDA requires that women who are affected by pregnancy, childbirth, or related
medical conditions be treated the same as any other employee who is similarly able or
unable to work. Where an employer offers benefits of any sort, therefore, it must
cover pregnancy and related medical conditions in the same way that it covers other
medical conditions.
This page was last modified on October 3, 2000.
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