02/06/2014 12:41 pm ET Updated Feb 06, 2014

AOL CEO Says Obamacare Forced Company To Reduce 401(k) Benefits

Ilya S. Savenok via Getty Images

AOL is trimming back its employee retirement benefits, a move the media company's chief executive said Thursday was made necessary by new costs incurred by President Barack Obama's health care reform law.

"Obamacare is an additional $7.1 million expense for us as a company, so we have to decide whether or not to pass that expense to employees or whether to cut other benefits," AOL's Chairman and CEO Tim Armstrong told CNBC Thursday morning. AOL is the parent company of The Huffington Post.

At a town hall meeting with AOL employees Thursday, Armstrong blamed Obamacare and other health care costs for the change. "[In 2012] we had two AOL-ers that had distressed babies that were born that we paid a million dollars each to make sure those babies were OK in general. And those are the things that add up into our benefits cost," he said.

Armstrong's explanation, which partially linked the 401(k) changes to childbirth costs, was criticized as insensitive and unclear. "AOL CEO Tim Armstrong, who makes $12m a year, takes away retirement money from employees for cost of sick babies," tweeted Guardian editor Heidi N. Moore to 45,000 followers. Armstrong made $12.1 million in 2012 -- four times his 2011 salary, according to public filings.

The idea that costly pregnancies would increase AOL's future employee benefit costs doesn't make sense, said Gary Claxton, the co-director of the Program for the Study of Health Reform and Private Insurance at the Kaiser Family Foundation. Those expenses shouldn't have any effect on costs. "There should be none. None," he said.

Like most large companies, AOL is likely self-insured -- meaning it bears the financial risk for employee medical costs and contracts with health insurance carriers to administer their health plans. AOL employed about 5,600 people at the end of 2012, according to company filings. That figure included 1,200 employees of Patch, the hyperlocal news service AOL recently sold. An AOL spokesman did not respond to an emailed question about the company's insurance.

A self-insured plan either has money set aside to cover such claims or likely buys stop-loss reinsurance coverage to protect from unexpectedly high costs in a single year, he said. And a health insurance carrier bearing risk for a company that isn't self-insured probably wouldn't raise rates based on a one-time expense, Claxton said.

"Unless those babies are still sick and still extraordinarily expensive, it's irrelevant. I mean, something that happened in 2012 should have no bearing on 2014," Claxton said. Likewise, the $7.1 million excess cost Armstrong attributed to the Affordable Care Act is out of proportion with the size of the company's workforce, he said.

The tech website Recode published a letter from AOL employees upset about the 401(k) policy change. "We strongly object to the new 401(k) matching practice and encourage the company to reverse its policy," reads the letter posted on Recode. "We also object to the manner in which this practice was disclosed to employees."

Armstrong followed up with an email to employees on Thursday afternoon. "This morning, I discussed the increases we and many other companies are seeing in healthcare costs. In that context, I mentioned high-risk pregnancy as just one of many examples of how our company supports families when they are in need. We will continue supporting members of the AOL family," he wrote. (Scroll down to read the full email.)

The change in AOL's retirement benefits comes as the company is becoming increasingly profitable. On Thursday, AOL announced it earned $679 million in the last three months of 2013, up 13 percent from the year before. "2013 was AOL’s most successful year in the last decade," Armstrong said in a statement. Armstrong is widely viewed as engineering a turnaround, and AOL's stock price has climbed 119 percent over the past three years.

Beginning Jan. 1, AOL stopped depositing matching funds into employee 401(k) accounts each pay period. The company will now make one yearly lump-sum deposit of those matching funds into retirement accounts, at the beginning of each year.

The change means employees who leave AOL before the yearly match won't get that additional income -- potentially losing out on hundreds or thousands of dollars they would have added to their retirement accounts otherwise. Current employees also won't benefit from market gains that take place throughout the year.

AOL is not the first company to pare back its employee retirement account funding in this way. In 2012, IBM announced a similar move. At the time, benefits experts predicted more companies would begin to follow IBM's lead. So far, AOL is the only major company known to have done so.

Other companies, though, have eliminated matching funds altogether. AOL offers matching contributions up to 3 percent of an employee's salary.

The policy shift was first reported this week by a Washington Post reporter, who wrote that AOL was making 401(k)s "worse for everyone."

The company had not responded to a request for comment on the policy change as of late Thursday afternoon.

The way Obamacare is affecting U.S. businesses is the subject of a heated debate. A few other executives have used the new law to explain changes in hiring or benefits. Some research attributes a modest rise in health care costs to the new law, but that isn't the case with all employers.

In a 2013 survey, more than half of employers estimated the Affordable Care Act caused marginal increases in health benefits costs of 5 percent or less, or that it reduced their costs, in 2012 and 2013.

The health care law requires companies with at least 50 employees to offer health benefits to anyone working at least 30 hours a week, starting in 2015. Combined with the Affordable Care Act's individual mandate that nearly all Americans obtain health coverage, this provision is expected to increase employers' health care spending when more workers sign on to job-based health insurance. But that part of the law isn't currently in force, after the Obama administration delayed its implementation from Jan. 1, 2014, to one year later.

Read Armstrong's entire email to employees here:

AOLers -

As we discussed at the town hall, we care about you and the company – a lot. This morning, I discussed the increases we and many other companies are seeing in healthcare costs. In that context, I mentioned high-risk pregnancy as just one of many examples of how our company supports families when they are in need. We will continue supporting members of the AOL family.

We provide a wide range of benefits – including our 401k plan – and conduct open information sessions each Fall on all available benefits as well as any changes being made. We will continue to do that.

The spirit of the town hall and the spirit of how we choose benefits are the same – we want to be open and transparent about the choices we make and why we are making them.

As I have said over and over again, our employees are our greatest asset. Let’s move forward together as a team. – TA

This story has been updated throughout from its original version. Jeffrey Young contributed reporting.