AOL CEO Tim Armstrong has stirred a hornet's nest and angered employees by cutting their 401(k) benefits.

On Tuesday, February 4, AOL employees learnt that the company was switching its 401(k) benefits to an annual sum. Going forward, AOL would not distribute the money over the year with each paycheck, but instead give it annually at one go. This move basically means that only employees who stay with AOL through December 31 would be eligible for the benefits and anyone who quit the company in between would not get the money.

From January 1, 2014, AOL stopped depositing the matching funds into employee 401(k) accounts each month. AOL will now pay lump-sum deposits into retirement accounts at the start of each year.

On Thursday, February 6, Armstrong landed himself in troubled waters after he held the costs arising from two employees' "distressed babies" as one of the reasons, along with other healthcare costs, that was responsible for the pension cut.

"Two things that happened in 2012," he said. "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. 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."

Armstrong also blamed Obamacare for being instrumental in fueling the change in AOL's policy.

"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," Armstrong told CNBC.

Armstrong's "distressed babies" remark angered employees and generated severe criticism online. The notion that expensive pregnancies will increase AOL's future employee benefit costs didn't cut ice as Valleywag made a chart that shows off Armstrong's $12 million salary in 2012 measured in "distressed babies."

Re/code also published a letter from AOL employees, who were unhappy about the 401(k) plan policy change.

"We strongly object to the new 401(k) matching practice and encourage the company to reverse its policy," notes the letter posted on Re/code. "We also object to the manner in which this practice was disclosed to employees."

Armstrong has responded with an e-mail to employees clarifying his stance.

"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," wrote Armstrong, per the leaked memo which Business Insider got hold of.

The change in policy of AOL's retirement benefits comes despite profits. Recently, the company announced its earnings of $679 million in the last three months of 2013, which is a 13 percent increase from the same period in 2012.

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