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HR Magazine - December 2000: The Doubt About Your Benefits

By Debbie Rodman Sandler  12/1/2000
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HR Magazine, December 2000

Vol. 45, No. 12

New EEOC guidelines help take the guesswork out of employee benefits.

Do you doubt the soundness of your recent benefits decisions? Do you wonder if your recent policies are fully legal? If so, help is on the way.

As part of an ongoing effort to update its Compliance Manual, the Equal Employment Opportunity Commission (EEOC) recently issued detailed guidelines advising employers how to handle a number of issues affecting employee benefits.

To some, the true value of these guidelines may not be readily apparent. After all, most employers already are familiar with federal prohibitions against discrimination and understand that these rules cover both employment and the benefits typically provided in conjunction with employment.

However, such a view ignores the fact that employers routinely face rather difficult benefits-specific issues and that questions of benefits administration and eligibility can be far more complex than run-of-the-mill hiring or firing decisions. This complexity stems, in part, from the fact that benefit plans are frequently designed with or by insurance companies and may contain elements that are neither logical nor clear. In addition, the fact that there may be additional costs associated with employees’ age or health can lead to concerns about illegal discrimination.

Thankfully, the EEOC’s latest guidance highlights some common issues and questions that employers are likely to face and provides relatively clear answers.


Individuals can file a charge with the EEOC when they believe that they have been denied benefits, or received lower benefits, because of their age, disability, race, religion, sex or national origin.

Two important caveats: The EEOC does not handle claims subject to the Employee Retirement Income Security Act (ERISA). Also, beneficiaries and plan participants are not required to go through the EEOC or any other administrative agency to file an action; these individuals can take their claims directly to court, if they wish.

Age-related claims are among the most complicated to deal with, partly because the ADEA (Age Discrimination in Employment Act) permits employers to give lower benefits to older employees, but only in certain specific circumstances.

To a lesser extent, the Americans with Disabilities Act (ADA) permits employers to make certain disability-based distinctions in employee benefits.

By contrast, employers can never legally base benefits decisions on race, color, sex, national origin or religion. Doing so violates Title VII of the Civil Rights Act of 1964.

ADEA Issues

According to the new EEOC guidelines, employers should use the following questions to determine if they are in compliance with the ADEA.

Are all employees provided with equal benefits? Benefits are considered “equal” only when they are the same for older and younger employees in all respects. For clarification, the EEOC provides the following examples of equal and unequal benefits:

  • Unequal benefits. Allowing employees who are 55 years old to choose between lump sum pension payments and annuities, but requiring 65-year-old employees to take an annuity is an example of unequal benefits. The reason: The value of immediate cash is not identical to the value of an annuity.
  • Another example of an unequal benefit is giving a laid-off 55-year-old employee severance pay plus job retraining, while giving a laid off 65-year-old employee severance pay and life insurance. Even if the monetary value of the benefits is the same, the benefits themselves are not identical.
  • Equal benefit s. An example of an equal benefit is when 50- and 70-year-olds each receive severance pay based on years of service; even if the payments are different, the formula applied to both is the same.
  • Similarly, a plan that provides for the same monthly payments until death will be considered equal even though older employees may have a significantly shorter life expectancy. (By contrast, a plan that sets a specific age-based cutoff for the length of time employees can receive payments is unequal.)

If unequal benefits are provided, are they subject to the “equal cost” defense? Employers may legally provide unequal benefits to older and younger workers as long as they incur equal benefits costs for both groups. Put another way, employers are not required to spend extra money to ensure that older and younger workers receive a benefit of identical value.

Employers can use this defense only for benefits that become more costly to provide because of advancing age. Examples include life insurance, health insurance and disability benefits. Benefits that have a cost that does not vary with age—such as severance, vacation and sick leave—would not be protected by this defense.

To use this defense, employers must be able to show that all of the following are true:

The benefit becomes more expensive because of age.
The benefit is part of a bona fide employee benefit plan.
The plan requires the lower benefits (as opposed to providing the employer with the discretion to offer lower benefits).
The actual payment made or cost incurred on behalf of the older employee is no less than that made or incurred on behalf of the younger employee.

The employer also must show that the benefit levels for older employees have been reduced only to the extent necessary to achieve approximate equivalency to the costs incurred for younger employees.

If unequal benefits are provided, are they subject to a permissible “offset”? When older workers receive similar benefits from both their employers and an outside age-based benefit source—such as Medicare or Social Security—employers may be legally entitled to reduce the workers’ benefits by the amount they receive from the outside source.

Such an offset will be lawful only if both of the following are true:

The offset is specifically authorized by the ADEA.
Older employees are eligible to receive benefits that are no less favorable than those the employer provides to similarly situated younger employees.

The EEOC’s new guidelines offer many detailed examples of which types of benefits are subject to the offset rule and under what circumstances. Because the list covers a number of specialized cases, it doesn’t lend itself to any sort of general treatment in this article. HR professionals interested in viewing the list should see the end of this article for information on accessing the guidelines online.

Are the benefits part of a valid early retirement plan? Determining if a plan qualifies as a valid early retirement plan is an extremely complex process—one that exceeds the scope of this article. To answer this question with confidence, your best bet is to contact your attorney.

ADA Issues

As a general rule, the ADA prohibits employers from discriminating on the basis of disability with respect to fringe benefits. Congress recognized, however, that some types of benefit plans are based on an assessment of risks and costs associated with various medical conditions.

As a result, the ADA allows employers to make disability-based distinctions in employee benefit plans where those distinctions are based on sound actuarial principles, or are related to actual or reasonably anticipated experience.

According to the EEOC’s recent guidelines, here are the questions employers should ask to determine if they are in compliance with the law.

Are disabled and non-disabled employees covered by the benefits plan given equal benefits? Examples of unequal benefits include the following:

A lifetime cap applicable to only one or a few conditions (such as AIDS).
Higher deductibles for mental health treatment than for other treatment.

Further, plans are suspect if they single out:

A particular disability (such as depression or AIDS).
A group of disabilities (such as cancer).
Disability in general (such as requiring employees who are unable to work because of a physical or medical condition to retire under a disability retirement plan even if they are also eligible under a service retirement plan).

By contrast, a plan is in compliance if it makes a broad-based distinction that applies to a variety of dissimilar conditions and constrains employees with or without disabilities. For example, a plan that provides only secondary coverage for any work-related condition does not discriminate based on disability. Similarly, a plan that limits employees to two magnetic resonance imaging (MRI) tests per year affects both disabled and non-disabled employees equally and does not target any particular condition.

If the benefits offered are not equal, is the difference the result of a disability-based distinction in the plan? If so, can the employer show that the benefit plan is bona fide (i.e., it exists, it pays benefits and its terms have been accurately conveyed to eligible employees) and that the disability-based distinction is not a “subterfuge” to evade the purposes of the ADA?

For the first question, it is important to note that the EEOC has concluded that employers can cover physical conditions differently than mental conditions because “mental health treatment” presumably covers conditions that do not rise to the level of a disability, such as grief counseling, marital counseling, etc.

The second question is usually the most difficult to tackle and is handled on a case-by-case basis.

In general, however, employers can defend a charge of discrimination by showing that their benefits decisions were based on criteria other than the disability (such as the existence of a consistently applied pre-existing condition rule), or by identifying actuarial data that justifies the distinction. Employers must show that they are not basing distinctions on outdated information, myths, speculation or stereotypes; they also must show that they have been consistent in their analysis.

If an employer can show that covering the disability in question would threaten the fiscal soundness of the plan and that there is no other way to limit this financial impact, it may have a valid defense. Similarly, an employer may be able to show that denying the benefit is necessary to avoid increasing the cost to other employees so substantially that the benefit would be unavailable to a significant number of them, or would render the employer unable to compete for employees.

Obviously, proving the elements of these defenses will be a complex, expensive and potentially intrusive process.

Title VII Issues

Title VII states—and the EEOC guidelines emphasize—that employers are legally barred from ever considering a person’s race, color, sex (or pregnancy, which is a function of gender), national origin or religion in determining eligibility for, amount of, or charges for employee benefits. The cost of benefits is never a defense. Thus, even though women as a class live longer than men, employers cannot use sex-based actuarial tables to calculate either the amount that the employer will pay in benefits or the amount that it will charge for those benefits.

With regard to pregnancy issues, an employer who offers medical benefits to its employees must cover pregnancy and related conditions in the same way, and to the same extent, that it treats other medical conditions. Thus, if employees on medical leaves are permitted to accrue seniority while on leave, employees on pregnancy-related leaves must be treated the same.


The EEOC’s newest guidance provides a useful resource for employers facing any of the myriad issues concerning employee benefit plans. It is likely that courts will find the guidance persuasive and may well defer to the EEOC’s analysis in these complex situations. Employers and their counsel would be well advised to take the time to review the guidance in detail before making benefits-related decisions.

Editor’s note: To access the complete EEOC guidelines referenced in this article, visit

Debbie Rodman Sandler is a partner in the labor and employment practice group at White and Williams, a Philadelphia-based civil practice law firm. She can be reached via e-mail at

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