PHILADELPHIA--The U.S. Equal Employment Opportunity Commission can put into effect a final rule allowing employers to provide richer benefits to younger retirees than to Medicare-eligible retirees without facing age discrimination charges, a federal appeals court has ruled.

In a unanimous ruling Monday, a three-judge panel of the 3rd U.S. Circuit Court of Appeals in Philadelphia said the EEOC has the authority to implement a rule that would exempt from the Age Discrimination in Employment Act health plan changes that affect retired workers when they become eligible for Medicare.

The practical effect of the rule--first proposed in 2003 but never implemented because of a legal challenge by the AARP--would allow employers to continue providing a two-tiered system of retiree health care coverage.

The appeals court, which affirmed a 2005 federal court ruling, said Section 9 of the ADEA "clearly and unambiguously" gives the EEOC the authority to issue ADEA exemptions so long as those exemptions are reasonable and "necessary and proper in the public interest."

In this case, the EEOC met those tests, the appeals court said, noting that if employers had to continue providing the same level of benefits to older retirees as younger retirees, employers would reduce health care benefits provided to all retirees.

By contrast, providing an ADEA exemption "will likely benefit all retirees" with the "proper purpose of encouraging employers to provide the greatest possible health benefits for all retirees," the appeals court ruled.

As a result, the regulation is both consistent with ADEA and a reasonable exercise of authority Congress has given the EEOC, the appeals court ruled.

The ruling could end litigation going back to 2000, when the appeals court ruled, in an Erie County, Pa., case, that retiree health care plans are subject to ADEA.

American Association of Retired Persons vs. Equal Employment Opportunity Commission, 3rd U.S. Circuit Court of Appeals, No. 05-4594. June 4, 2007.