AOL, ACA, & 401(k)

February 13, 2014

Authored by: Chris Rylands

As was widely reported last week, and subsequently reversed on Friday, America Online’s CEO announced that, due to a $7.1 million cost increase resulting from the Affordable Care Act, AOL was going to change how it made its 401(k) matching contribution in order to offset costs.  In short, AOL would have imposed a requirement that employees be employed on the last day of the plan year to receive the match.  For employees who leave during the year, the match would be $0.  After an employee uproar, AOL reversed course.

AOL was (predictably) being criticized by ACA supporters for blaming the ACA and was (predictably) applauded by ACA opponents as providing further evidence that the ACA is harmful to the economy.  The fact is, AOL is not the first employer to suggest that ACA is increasing costs.  A study done by Deloitte, and reported here, showed that 85 percent of employers said ACA increased costs.  Additionally, a more recent report by the National Small Business Association showed that a third of small businesses surveyed are intentionally not growing due to the increased costs from ACA.

As plan sponsors wrestle with these increased costs, one place they can look to offset these costs (as AOL did) is to retirement plans.  The thinking could be that there are only so many benefit dollars to go around, so it makes sense to rob retirement to pay healthcare.   As a general rule, humans tend to discount risks that are far in the future, so a decrease in retirement contributions will seem to many employees to be less harmful than an increase in health insurance premium contributions.

However, cutting retirement contributions, in a way, could be just trading one problem for another.  As the President’s myRA proposal and Sen. Harkin’s recent legislative proposal show, there is also ample concern in Washington over retirement readiness.   So is cutting retirement contributions the right answer?

As the NSBA report shows, there are other measures that employers can take to avoid the increased ACA costs.  Our point is not to criticize the AOL decision (or its reversal); each company has to make its own decisions about what makes sense.  And money, of course, isn’t free and not everyone can issue billions of dollars of debt to China.  However, before cutting retirement contributions, employers should consider the impact that will have on the long-term retirement health of their employees.