On June 19, 2008, in Kentucky Retirement Systems v. Equal Employment Opportunity Commission, No. 06-1037, the United States Supreme Court held 5-4 that Kentucky’s disability retirement program does not violate the Age Discrimination in Employment Act (ADEA) even though age was a determining factor in calculating the amount of employees’ pension benefits. The Court’s decision may adversely affect the ability of plaintiffs to succeed in challenging pension programs under the ADEA because some of the factors on which the Court relied are present in many pension programs. A full text of the opinion is available here.

Although the ADEA explicitly allows pension eligibility to turn on the attainment of a minimum age, it otherwise prohibits discrimination on the basis of age in providing employee benefits. At issue in this case was whether the ADEA permits differential treatment based on pension status, where pension status itself turns in part on age. The Court held that decisions made because of pension status and not age, even where pension status is itself based on age, are not age discrimination because such decisions are not “actually motivated” by age.

In Kentucky, a worker in a hazardous position is eligible for pension benefits under the state retirement system after 20 years of service, or upon attaining age 55 and five years of service. For those who become disabled before becoming pension eligible, the amount of the disability benefits is determined by adding an employee’s actual years of service to the number of years that the employee would be required to work in order to become eligible for normal retirement benefits.

In Kentucky Retirement Systems, a 61-year-old individual with 18 years of service retired after becoming disabled. Because he became disabled after satisfying the eligibility requirements for normal retirement benefits, the state based his pension on his actual years of service without imputing any additional years to the calculation. If the individual had been age 51 with 18 years of service when he became disabled, he would have received two years of imputed service (to bring him to 20 years of service). The EEOC filed suit against the state and others, arguing that the state’s plan impermissibly considered the individual’s age when determining that it would not impute additional years for purposes of calculating his pension.

The Court’s opinion relied heavily on a prior Supreme Court opinion issued in 1993 in Hazen Paper Co. v. Biggins, which held that discrimination based on pension status would not violate the ADEA unless pension status was used merely as a proxy for age. The Court found in the Kentucky Retirement Systems case that the circumstances collectively showed that the disparate treatment was not actually motivated by age, both because age and pension status remain analytically distinct concepts and because there was a clear, non-age-related rationale for the disparity. Thus, it found that the disparity turns on pension eligibility and not age.

Although an older worker was disadvantaged in this case, the Court noted that the rules would often favor older workers, who could get a bigger boost of imputed years than younger workers, depending on their years of service. In addition, the design of the state’s system did not turn on stereotypical assumptions, such as the relative capacities of older or younger workers, which the ADEA sought to eradicate. The final factor referenced by the Court was the difficulty in finding a remedy that could correct the disparity while also achieving the plan’s legitimate objective of providing disabled workers with sufficient retirement benefits.

This decision is a victory for Kentucky and the many states with similar public employee retirement systems, but it also has far-reaching implications for the design and construction of private sector pension plans. For more information on how this opinion could impact your pension plan, please feel free to contact any of the Arent Fox authors.