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).
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
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.
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.
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
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.