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How Obamacare Ate AOL's Employee Retirement Plan


Tim Armstrong's odd logic causes a viral sensation.

Here's yet another reason to love the Internet. These days, when the chief executive of a major public company, like AOL's (NYSE:AOL) Tim Armstrong, tries to reduce employee-benefits costs, the troops do not suffer in silence. They go viral, and we all get to join the debate.

Armstrong announced the change in retirement benefits last Thursday and then reversed the decision on Saturday, with an apology that, inevitably, also went public instantly.

In between, he explained the decision with some truly odd logic in which he blamed Obamacare and two AOL employees' babies for the need to reduce the costs of employee retirement benefits.

Armstrong's logic went like this: The Affordable Care Act, also referred to as Obamacare, is costing the company $7.1 million per year. In addition, two employees had "distressed babies" (his exact term) with unexpected health-care needs that cost $1 million each. Ergo, we must reduce employee benefits by $9.1 million.

Even the facts behind those numbers are still being debated online.

First, will the health care-reform law cost AOL, or any major American company, millions of dollars per year?

Second, did AOL really directly pay the bills for those two million-dollar babies? The company is "self-insured," with a third-party administrator handling the paperwork, but such programs are usually backed up by reinsurance.

And of course there is the larger question. Just how laser-focused on shareholder value must a CEO be these days? So focused that he counts up the medical bills of two babies and then goes looking for a way to slice an equal amount from the employee 401(k) plan?

To top it all off, the explanation came on the day that AOL announced it had just completed its "most successful year in the last decade," according to Armstrong, with "industrial level growth at scale for AOL." He promised double-digit growth in advertising prices going forward.

That news certainly enlivened the online discussion over the attempt to reduce the company's benefits costs.

In its report on earnings for the last quarter of 2013, released on Feb. 6, AOL reported a 13% increase in revenue from the same quarter a year earlier. Advertising revenue, the company's main money-maker, grew 23%, due to the company's increased focus on more lucrative video ad placement.

The company earned $679 million in revenue, and diluted earnings of $0.43 per share for the quarter. Analysts had expected slightly less revenue, at $656 million, and slightly higher profits, at $0.46 per share, according to Bloomberg News' compilation.

On the day of the earnings announcement, Armstrong also announced the change in AOL's method of matching employee contributions to the company's 401(k) retirement savings plan.

With the policy change, the company would pay employees the company's matching amount as a lump sum at year's end, rather than include a payment with each paycheck. That would mean that employees who were fired or quit during the year would lose the matching payment. It also could mean a loss in accrued earnings for employees who stay with the company.

Armstrong blamed the decision on rising employee health-care costs, specifically costs related to the Affordable Care Act and medical coverage for two "distressed babies."

How so, you might well ask?

The federal health insurance-reform law has relatively little direct impact on large employers such as AOL, whether they are self-insured or contract with an insurer. And, despite all the debate, its impact on the real costs of medical care is unknown at this early stage.

Large employers are not eligible to buy health insurance through, the federal exchange, so they can't blame that for forcing them into higher-priced plans.

The law does contain certain consumer protections, such as forbidding health insurers from capping payments or canceling policies when policy-holders get expensive illnesses.

That was unlikely to be a problem for employees covered by a big corporate policy.

A health policy expert, writing for CNN News, explains that large companies that self-insure might be on the hook for two new costs related to Obamacare:
  • A payment of up to $63 per employee per year. A provision of the law adds this charge to offset costs in the individual marketplace.
  • Coverage for maternity costs. Another provision of the law requires employers to include coverage for maternity services.
It appears most likely that Armstrong, like many other American executives these days, is simply blaming Obamacare for any increase or change, real or projected, in its corporate budget for health care.

Armstrong might have gotten away with blaming Obamacare for the company's need to trim millions of dollars from its employee benefits. Plenty of other CEOS are trying it out, though not on the same day that they announce a 13% increase in quarterly revenue, to $679 million.

Really, it was the mention of those "distressed babies" that got him in trouble.

Armstrong did not name either of the million-dollar babies who cost AOL a bundle. But the mother of one of them promptly wrote an article for detailing her family's ordeal after the birth of her premature daughter.

She calls Armstrong's explanation "an absurd justification for corporate cost-cutting."

Other CEOs can take comfort in the fact that Armstrong has a special cross to bear: He's not only a CEO in the Internet age, he's CEO of a media company that employs thousands of journalists, every one of them armed with solid communications skills and a basic knowledge of HTML.

As if it isn't bad enough being chewed out by an employee and new mom, Armstrong also now has TechCrunch on his case. A writer for the site, which is owned by AOL, thanks Armstrong nicely for restoring his 401(k) benefit, but inquires why the shortfall couldn't have been taken out of some other line item. Such as Armstrong's salary, which was $12 million in 2012.
No positions in stocks mentioned.
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