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AOL backtracks after blaming 'distressed babies' for cuts

The tech company reversed its decision to cut its employees' 401(k) benefits — a move it originally blamed on two workers' "distressed babies."
AOL CEO Tim Armstrong
AOL CEO Tim Armstrong

It's become the guiding ethos for America's biggest corporations to put shareholders and profit margins before their employees and local communities. AOL chief Tim Armstrong just picked a particularly crass way to go about doing it. 

Armstrong, CEO of the tech giant, told employees on Thursday that the company would be cutting their 401(k) plans—and blamed the cuts on the unrelated cost of treating two workers' "distressed babies" who needed intensive care after birth. Under the change, AOL would contribute to their 401(k) plans at the end of the year, rather than to every paycheck, and any employee who left the company earlier would not receive any matching funds.

"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, according a transcript obtained by Capital New York. "So when we had the final decision about what benefits to cut because of the increased health care costs, we made the decision, and I made the decision, to basically change the 401(k) plan." Armstrong also blamed Obamacare for driving up the company's health care costs by $7.1 million, though he did not explain why. 

Despite Armstrong's rationale for belt-tightening, he made the remarks on the same day that AOL reported $36 million in net income and a 13% increase in revenue for the fourth quarter—earnings that Armstrong himself called "the best results we've had in a decade."

The 401(k) cuts immediately prompted a backlash from both AOL employees and outside critics who questioned both the policy rationale for the decision and the blame placed on infants who need intensive medical care. Armstrong said Saturday evening that AOL would be reversing its decision and admitted he had erred.

"On a personal note, I made a mistake and I apologize for my comments last week at the town hall when I mentioned specific health care examples in trying to explain our decision making process around our employee benefit programs," he said in an email to employees obtained by msnbc.

The mother of one of AOL's "distressed babies" penned a searing reply to Armstrong on Sunday, explaining how she had given birth only five months into her pregnancy. "I take issue with how he reduced my daughter to a 'distressed baby' who cost the company too much money. How he blamed the saving of her life for his decision to scale back employee benefits. How he exposed the most searing experience of our lives, one that my husband and I still struggle to discuss with anyone but each other, for no other purpose than an absurd justification for corporate cost-cutting," Deanna Fei wrote on Slate.

Policy experts also questioned Armstrong's purported rationale for making the cuts in the first place. Most likely, AOL is taking on the brunt of its employees' health care costs because, like many large employers, it is a self-insured company: Rather than having employees' premiums go directly to insurers, the employer itself assumes the medical costs and risks, collecting the premiums and contracting with insurers itself. (AOL has declined to answer questions about its employee benefits.)

But Larry Levitt, senior vice-president of the Kaiser Family Foundation, points out that self-insured companies typically have a "reinsurance" program to protect them from such catastrophic events. "With reinsurance, their liability for a high cost case like a premature baby would likely be capped well below $1 million," he says. And if AOL doesn't have such a protection plan, acquiring would seem to be the logical first step in cost-reduction.

It's also unclear how Obamacare is raising AOL's costs by $7.1 million, which the company hasn't explained. While the Affordable Care Act requires insurers to cover maternity care and newborn wellness, among other benefits, a large employer like AOL would have very likely included such benefits already.

"There are some modest additional costs that large employers are seeing as a result of the Affordable Care Act, but covering premature babies is just something that comes with providing health benefits," Levitt said.