Advertise

In this Section:
OTHERS

The History of the 401(k)

The 401(k) has become a standard workplace savings feature, but it is actually a fairly new concept.

And one that came about almost by accident after a group of high-earning individuals from Kodak approached Congress to allow a part of their salaries to be invested in the stock market and thus be exempt from income taxes.

Congress followed up by passing the Revenue Act of 1978, which includes a provision that allows employees to avoid being taxed on a portion of income that they decide to receive as deferred compensation, rather than direct pay. The provision becomes Internal Revenue Code Sec. 401(k).

t was attended to allow taxpayers a break on taxes on deferred income. In 1980, a benefits consultant and attorney named Ted Benna took note of the previously obscure provision and figured out that it could be used to create a simple, tax-advantaged way to save for retirement.

The rest, as they say, is all employee benefits growth. Some key developments in 401(k) history since Benna stumbled onto the idea:

1981: The IRS issues rules paving the way for 401(k) plans to be funded through employee salary deductions.

1982: Companies such as Johnson & Johnson and Honeywell begin offering 401(k) plans to their employees. Within a year, nearly half of all large employers are either offering a 401(k) plan or are considering offering one, according to the Employee Benefit Research Institute.

1984: The Tax Reform Act of 1984 mandates “nondiscrimination” testing to prevent 401(k) plans from favoring highly compensated employees over rank-and-file workers. Congress was concerned that executives would take advantage of 401(k) plans more than lower-paid employees.

1992: The Unemployment Compensation Amendment of 1992 imposes a 20 percent mandatory withholding tax on lump-sum distributions that are not rolled over into another qualified retirement plan, annuity, or individual retirement account (IRA).

1996: Assets in 401(k) plans surpass $1 trillion, with more than 30 million participants.

2001: The Economic Growth and Tax Relief Reconciliation Act of 2001 provides for catch-up contributions for participants 50 and older (as of 2018, the max catch-up contribution is $6,000), as well as the creation of Roth 401(k)s, which let after-tax contributions grow tax-free.

2006: The Pension Protection Act of 2006 allows employers to automatically enroll employees in 401(k) plans, and offer target-date funds as a default option.

2016: In a comprehensive survey on retirement plans, the Department of Labor found that 62 percent of all workers had access to a defined contribution plan, most likely a 401(k). Of those, 72 percent participate. Meanwhile, just 18 percent of workers had access to a traditional pension plan.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. Follow him on Twitter @INNJohnH. John may be reached at [email protected].