Blogging Employee Benefits

August 24, 2006

Age Discrimination in Early Retirement Incentives

Filed under: ADEA, Pensions — Fuguerre @ 9:28 am

Earlier this week, the EEOC announced settlement of age discrimination allegations relating to an early retirement incentive program under which the employer “reduced the amount of the early retirement incentive payment for each year as the employee grew older.” [Stillwater School District to Pay $1.12 Million for Age Bias Against Class of Retired Employees, 8/21/06]

Such are the times I’m content to only be closely acquainted with actuarial matters as opposed to actually practicing that dark mysterious science. To my simplistic mathematical mind, offering a 55-year-old worker the same incentive to retire early as you’re offering one of your workers who has hung on in the workplace until 70 is quite meaningless: the septuagenarian will be out taking cruises with what the younger retiree needs to penny-pinch just to hang on until Social Security kicks in. Or from the employer’s perspective, age-neutral incentives simply are going to cost too much for the older workers to be of any value in encouraging retirement among the younger workers.

Now true, as the Employee Benefits section of the EEOC’s Compliance Manual points out in V.B.1., in general pension benefits cannot use ADEA’s equal cost defense, such as would be available to support similar cost justification arguments if we were dealing with retiree medical benefits or disability benefits. Even so, my aging rusted memory could have sworn that the natural age bais of early retirement incentive programs was openly acknowledged and accepted by Congress during 1990 enactment of the Older Workers Benefit Protection Act, that there was rather specific congressional intent enunciated somewhere that might have better illuminated OWBPA 103(1)’s addition of ADEA 4(f)(2)(B)(ii), stating, “It shall not be unlawful for an employer . . . to observe the terms of a bona fide employee benefit plan . . . that is a voluntary early retirement incentive plan consistent with the relevant purpose or purposes of this Act.” Whereas in 1990 it seemed completely evident and untouched by OWBPA that prevailing universal practice was for an early retirement incentive plan to grant those who would have longer periods of retirement a larger incentive than those with shorter periods — that is, essentially relating the value of the incentive to the period of expected retirement, rather than to the attained age of the worker — apparently “consistency” with OWBPA’s purpose is a fluid concept that may have lost its original intent.

So will early retirement incentive plans go the way of the dinosaurs, with employers less and less inclined to pay windfalls to the oldest workers just to be able to scrape together enough of an incentive to be anywhere near meaningful to younger ones in the targeted group? Perhaps not. Presumably the Stillwater settlement is not reversing anything in the Early Retirement Incentives section of the EEOC’s Compliance Manual, which among other potential defenses to an age discrimination claim does still accept an early retirement incentive that provides the “subsidized portion” offset (i.e., the portion of retirement benefit necessary to bring a retiree’s benefit up to an unreduced level) or that provides Social Security supplements, either of which would provide higher incentives to younger workers than to older workers. In fact, despite the general ban against applying cost justification to pension benefits, the EEOC Compliance Manual does offer employers the opportunity to attempt an equal cost demonstration of age-distinct incentives; although the EEOC opines that such a demonstration “is unlikely to be successful,” one might imagine an incentive package that includes a portion aimed at supporting retiree healthcare costs as a possible illustration of one that might stand the chance. Without additional details on the Stillwater incentives, it’s not clear where the employer went astray; but barring any EEOC shift not yet expressed in its Compliance Manual, traditional early incentive programs should not necessarily be threatened, even though younger workers will quite commonly receive significantly higher incentives under those traditional programs than their elder counterparts.

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