Washington -- The Equal Employment Opportunity Commission voted Thursday to allow employers to reduce or eliminate health benefits for retirees when they become eligible for Medicare at age 65.
The new rule creates a potentially explosive political issue, since it will create anxiety for many of the 12 million Medicare beneficiaries who also receive health benefits from their former employers.
The commission approved a final rule saying that such cuts do not violate the civil rights law banning age discrimination. The vote was 3-1, with Republicans lining up in favor of the rule and a Democrat opposing it.
Employers and some labor unions supported the change, saying it will help preserve coverage for early retirees. But AARP, which represents millions of Americans age 50 and older, strenuously objected.
Employer-sponsored health plans help retirees pay medical expenses not covered by Medicare. Those expenses could include co-payments and deductibles, the catastrophic costs of severe illness and the cost of preventive care and prescription drugs beyond what Medicare might pay.
Debate over the rule highlights the tradeoffs employers make as they decide what benefits, if any, to provide workers and retirees when health care is gobbling up a growing share of total compensation.
The rule creates an explicit exemption to the Age Discrimination in Employment Act of 1967. In practice, it allows employers to reduce health benefits for retirees when they become eligible for Medicare at age 65.
A federal appeals court ruled in 2000 that such age-based distinctions were illegal.
No law requires employers to provide health benefits to workers or retirees. Employers can provide benefits to active workers and not to retirees. Courts have said that if an employer provides benefits, it cannot discriminate among retirees on the basis of age.
But the commission said that under the age discrimination act, it has authority to make reasonable exemptions to the law in the public interest. The law does not define reasonable.
Leslie Silverman, a member of the commission, said the court decision had confronted employers with an all-or-nothing choice: "Give all of your retirees the exact same benefits, which is incredibly difficult, or eliminate your retiree health benefits altogether."
Several commissioners said employers were more likely to continue providing health benefits to retirees under 65 if they were allowed to reduce or eliminate benefits for those 65 and older.
A preamble to the final rule says it "is not intended to encourage employers to eliminate any retiree health benefits they may currently provide."
However, Michele Pollak, a lawyer at AARP, said that might well occur.
"This rule will allow employers to reduce or eliminate retiree health benefits for anyone over the age of 65," Pollak said. "More than 12 million Medicare beneficiaries currently receive retiree health benefits from employers and could potentially be affected."
Pollak said the commission did not have authority to create such an exemption.
Cari Dominguez, chairwoman of the commission, insisted that it did have the authority, though it was rarely used.
Paul Dennett, vice president of the American Benefits Council, a trade group for large employers, welcomed the rule: "It removes a cloud that has been hanging over retiree health coverage since the court decision in 2000."
The American Federation of Teachers and the National Education Association also supported the rule. School employees often retire early and rely on employer-provided health benefits until they become eligible for Medicare.
Stuart Ishimaru, who cast the only no vote, said: "I came to the commission as a civil rights lawyer. Before making an exemption to a major civil rights law, you need a compelling reason, which I have not seen."
The rule is subject to comment by other federal agencies that might have a perspective on it, and it will be reviewed by the Office of Management and Budget. But it is within the jurisdiction of the employment commission and is expected to stand.
AARP said it will "explore a range of different steps, including litigation," to block the rule.