The U.S. Supreme Court has ruled 5-4 that Kentucky’s disability pension arrangements for disabled police and firefighters do not violate the Age Discrimination in Employment Act of 1967 (“ADEA”), despite providing greater benefits to employees who become disabled at younger ages. Kentucky Retirement Systems v. EEOC, No. 06-1037 (June 19, 2008).
Case History
Kentucky’s retirement plan for hazardous duty workers (police, firefighters, paramedics and prison workers) allows normal retirement with 5 years of service at age 55, or with 20 years of service at any age. Benefits are proportional to years of service and final pre-retirement pay. However, employees who become disabled receive a disability retirement, which imputes additional years of service equal to the number of years the employee would have had to continue working to become eligible for a normal retirement benefit. The imputed additional years may not exceed an employee’s actual years of service. Pension benefit formulas of many other states have comparable disability pension formulas.
Charles Lickteig, a participant in the Kentucky plan, became disabled and retired at age 61 with 18 years of service. Because Lickteig was already eligible to retire when he became disabled, he did not receive any additional imputed years of service for his “disability retirement”. The U.S. Equal Employment Opportunity Commission (“EEOC”) contended this was impermissible age discrimination, reasoning that Lickteig would have received additional benefits if he had been younger. For example, if he had been age 53 when he became disabled, he would have received two imputed years of service (and thus a larger disability pension) based on the difference between age 53 and his normal retirement eligibility age of 55.
The federal trial court and a panel of the Sixth Circuit Court of Appeals ruled for the employer, but the Sixth Circuit sitting en banc reversed and ruled in favor of the EEOC. The Supreme Court then reversed and found in favor of the employer, holding that Kentucky’s system did not violate the ADEA. Justice Breyer wrote for an unusual majority consisting of himself, Chief Justice Roberts, and Justices Stevens, Souter, and Thomas. Justices Kennedy, Scalia, Ginsburg, and Alito dissented.
Supreme Court Analysis
The majority and dissenting opinions both focused on Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993), in which the Supreme Court found that an employee did not state a claim under the ADEA where he was discharged shortly before vesting in a pension that was based solely on service. In Hazen Paper, the Court found that age and pension status were analytically distinct, and that liability would not lie under the ADEA without proof the employer’s action was “actually motivated” by age.
The majority in Kentucky Retirement found that Hazen Paper controlled and supported Kentucky, in part because there was a non-discriminatory reason for the Kentucky Retirement System’s rules. Specifically, the Retirement System simply treated a disabled worker as though he or she had become disabled after, rather than before, eligibility for normal retirement, without regard to age. According to the Court, “[a]ge factors into the disability calculation only because the normal retirement rules themselves permissibly include age as a consideration.”
The majority acknowledged that disparate treatment based on pension status would violate the ADEA if it served as a mere “proxy” for age. Nevertheless, the Court found that pension status (i.e., eligibility for normal retirement benefits) was not a proxy for age in this case because the disparate treatment was based on a “clear non-age-related rationale,” and because Kentucky’s disability pension is offered on nondiscriminatory terms to all hazardous position employees when they are initially hired. The Court further noted that the ADEA permits pension eligibility to turn on age, that the Social Security Administration takes age into account when computing Social Security disability benefits, and that a previous version of the formula for calculating permanent disability benefits for federal employees also imputed service based on age.
Justice Kennedy’s dissent distinguished Hazen Paper on the grounds that the employer’s plan in Hazen was not contingent on age in any way, while Kentucky’s system was explicitly based on age. He argued that the majority’s reasoning consisted primarily of policy justifications, and would have found that Kentucky’s plan resulted in disparate treatment. He further noted the irony that the issue arose only because Kentucky’s plan generously allows retirement to employees over age 55 with only five years of service. Thus, Justice Kennedy’s dissent may accurately mark Kentucky Retirement as a practical decision by Justice Breyer and the majority.
Employer Take-Aways
In rejecting the argument that pension eligibility status was a proxy for age, the Kentucky Retirement majority further discredited the Third Circuit’s controversial decision in Erie County Retirees Ass’n. v. County of Erie, 220 F.3d 193 (3d Cir. 2000), which had held that the ADEA did not permit reduction or termination of retiree health benefits upon Medicare eligibility. Note: EEOC regulations exempting retiree medical benefits from age discrimination rules in the coordination of retiree health benefits with Medicare expressly reversed the result in Erie County. That exemption was upheld in AARP v. EEOC, 489 F.3d 558 (3d Cir. 2007).
The Kentucky Retirement decision also reminds us that age discrimination issues continue to arise in employee benefit plan design and are litigated in several contexts.
For example:
- Preferential health plan benefits for older employees (upheld in General Dynamics Land Systems, Inc. v. Cline, 540 U.S. 581 (2004)); and
- Cash balance pension plans (survived age discrimination claims in Cooper v. IBM Personal Pension Plan, 457 F.3d 636 (7th Cir. 2006) and Register v. PNC Financial Services Group, Inc., 477 F.3d 56 (3d Cir. 2007), but found illegal in In re Citigroup Pension Plan ERISA Litig., 470 F. Supp.2d 323 (S.D.N.Y. 2006) (appeal pending) and In re J.P. Morgan Chase Cash Balance Litig., 460 F. Supp.2d 479 (S.D.N.Y. 2006) (appeal pending)).
For further information or help in analyzing the impact of the Kentucky Retirement decision on your pension and other plans, please contact any member of the McGuireWoods Employee Benefits or Labor & Employment Teams.