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AOL chief cuts 401(k) benefits, blames Obamacare and two “distressed babies”

AOL chief executive Tim Armstrong blames the new health care law for why his company has made a major change to its 401(k) benefits. (Photo by Pete Marovich/Bloomberg)

AOL chief executive Tim Armstrong Thursday offered a number of unusual explanations for why his company pulled back its 401(k) benefits for employees this year. The first reason: Obamacare. The second: two women at the company who had "distressed babies" in 2012.

The stock, which reached $51 on Thursday morning because of a good earnings release by AOL, fell to 47.15 by the end of regular trading. It's down another 2.5 percent Friday.

How did this mess begin? The Washington Post reported Tuesday that AOL quietly made a major change to its 401(k) plan by switching its match to a lump sum at the end of the year, rather than contributing with every paycheck. The benefit is only available to employees who are still active on Dec. 31.

Retirement experts widely agree that the change hurts all employees--not just those who leave mid-year--since savers miss out on the benefits of investing more money throughout the year, a strategy known as “dollar cost averaging.”

When he was asked on CNBC this morning why AOL was making the change, Armstrong said it was to spare employees from what he described as the added costs of Obamacare.

Here's the video:

"As a CEO and as a management team, we have to decide: Do we pass the $7.1 million of Obamacare cost to our employees? Or do we try to eat as much of that as possible and cut benefits?," said Armstrong in the CNBC interview.

He added, "For employees leaving to go to other employers, not matching those programs was probably the last thing on the list for us in terms of employee benefits that we wanted to keep."

Armstrong said he was having a townhall meeting today with employees to talk about the topic more.

During that meeting, Armstrong added another reason: Two women at the company had "distressed babies."

"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," said Armstrong, according to a transcript first obtained by Capital New York. "And those are the things that add up into our benefits cost. So when we had the final decision about what benefits to cut because of the increased healthcare costs, we made the decision, and I made the decision, to basically change the 401(k) plan."

Companies typically move to giving out 401(k) matches in a lump sum because they're cutting costs overall and having trouble raising their profits. But Armstrong said in the CNBC interview that the company’s fourth quarter performance was “Olympian.”

“It’s the best results we’ve put in in the last decade,” said Armstrong. “We had double-digit revenue growth, double-digit profit growth overall, and we announced our sixth consecutive quarter of consumer traffic growth overall.”

AOL said in its quarterly earnings that profits were hurt by $13.2 million in costs associated with layoffs, including at Patch, the struggling local news venture recently sold to investment firm Hale Global. The Patch unit, championed by Armstrong, has lost an estimated $200 million.

Armstrong earned $12.1 million in 2012, $3.2 million in 2011 and $15.2 million in 2010.

As for Armstrong's reasoning: It's not clear why a company with about 4,000 employees would not be able to absorb the expenses of two employees with abnormally high medical bills. And Armstrong's explanation about Obamacare also raises questions.

Armstrong may have been referring to the potential for premiums to go up under the new health care law. Some plans will have to become more expensive to cover benefits now required by Obamacare. But the consulting firm Aon Hewitt did a study and found that the impact should be the least for large employer plans since those usually already cover the newly mandated benefits. The report estimated that for plans at a big company like AOL, premiums should rise by less than one percent.