Termination of Retiree Medical Benefits not Age Discriminatory

December 4, 2008 (PLANSPONSOR.com) - The U.S. District Court for the District of Kansas has determined that Embarq Corp. and its former wireless company owner Sprint Nextel Corp. did not violate the Age Discrimination in Employment Act (ADEA) when Embarq dropped medical and pharmacy benefits for Medicare-eligible retirees.

In granting Embarq’s motion to dismiss the ADEA claim in the lawsuit, the court noted that Section 9 of the ADEA expressly grants the Equal Employment Opportunity Commission (EEOC) “authority to establish reasonable exemptions which are necessary and proper in the public interest.” The court cited a federal appeals court ruling that upholds an Equal Employment Opportunity Commission (EEOC) rule allowing employers to reduce health care benefits when retirees become eligible for Medicare which the U.S. Supreme Court declined to review (See EEOC Rule on Retiree Health Care Reductions Stands ).

However, according to the ruling, former employees’ charge that Embarq violated the ADEA when it reduced life insurance benefits for retirees was not dismissed, as the court said the defendants did not give a reason the former employees could not prevail on their ADEA claim.

The Fight Continues

Embarq and other defendants in the case must continue their fight on other charges.

The court noted that under the Employee Retirement Income Security Act (ERISA), unless an employer or other plan sponsor contractually agrees to grant vested benefits, it is generally free to adopt, modify or terminate welfare benefit plans at any time for any reason. “A promise to provide vested benefits must be stated in “clear and express language” and be incorporated into the formal written ERISA plan in some fashion,” the opinion said.

The court pointed out that the 10th Circuit has found that subsequent writings can create a new employee benefit plan for purposes of ERISA, and the defendants made at least two representations in writing that the retirees medical and pharmacy benefits would be for life.

In addition, the court said the former employees point to plan language which indicates that coverage will continue until the employee either dies or fails to pay his or her share of the cost. This potentially conflicting language may render the plans ambiguous, in which case the court can consider extrinsic evidence to determine the parties’ intent.

Embarq announced on July 26 it would drop medical coverage and Medicare premium subsidies for Medicare-eligible retirees and dependents, effective January 1, 2008 and would cap life insurance benefits through company-sponsored plans for qualified retirees to $10,000, also effective January 1. The company eliminated life insurance coverage for retirees receiving benefits through a subsidiary company plan, effective September 1, 2007, and dropped a $500 annual cash subsidy that helped pay for medications.

According to the court opinion, the retirees claim they accepted lower compensation while working because they understood they were also earning a valuable program of retiree benefits which would help them remain financially secure. The plaintiffs also claim the company used the promises of benefits to induce senior employees to retire early.

A group of 10 former telephone company employees, seeking class-action certification, sued Embarq and Sprint claiming ERISA violations, asking that their benefits be restored (See Phone Co. Retirees Take Benefit Cutback Fight to Court ).

The opinion in Fulghum v. Embarq Corp. is here .