History of 401(k) Plans

August 13, 2010

Highlights include the 1978 approval by Congress of legislation that added Section 401(k) to the Internal Revenue Code.

1978: Congress approves legislation adding Section 401(k) to the Internal Revenue Code to permit cash or deferred pension plan arrangements.

1981: Benefit consultant Johnson Cos. sets up the first 401(k) plan for its employees. Under Internal Revenue Service regulations, employees can make pretax contributions to 401(k) plans.

1985: Nearly 30,000 plans with more than 10 million participants are in operation. (1)

1986: Tax Reform Act slashes maximum annual deferral limit to $7,000 from $30,000, tightens nondiscrimination testing requirements, imposes new excise tax on pre-retirement distributions and bars tax-exempt organizations and state and local governments from setting up new plans.

1990: Plans near 100,000 and participants near 20 million. (1)

1994: President Bill Clinton signs legislation allowing employees called to active military service from the National Guard and other reserve units to make retroactive contributions to 401(k) plans when they return to work.

1995: Number of 401(k) plans exceeds 200,000 with nearly 28 million people enrolled. (1)

1996: New tax law, starting in 1999, exempts plans from nondiscrimination testing if they have generous employer matching contributions. Employers are exempt from the test if they match 100 percent of lower-paid employees’ salary deferrals up to the first 3 percent of compensation and 50 percent of salary deferrals on the next 2 percent of compensation. Alternatively, employers are exempt if they make contributions equal to 3 percent of compensation for each lower-paid employee eligible for the plan. Plan assets top $1 trillion, up more than tenfold since 1984.(1)

2001: Tax law sweetens 401(k) plans’ appeal, including boosting the $10,500 annual deferral limit to $11,000 in 2002 with $1,000 annual increases until a maximum of $15,000 is reached in 2006; allows employees 50 and older to make extra “catch-up” contributions; allows after-tax contributions to Roth 401(k) plans with tax-free interest; and allows employees to resume plan contributions sooner after making a hardship withdrawal.

2002: President George W. Bush signs corporate governance and accounting reform legislation that requires employers to notify 401(k) plan participants 30 days before blackout periods in which transactions cannot be conducted.

2006: Congress approves pension funding reform, removing all obstacles for employers that want to add automatic plan enrollment. 401(k) deferral limit tied to increases in cost of living.

2007: Number of 401(k) plans nears the 500,000 mark and active participants near 60 million. (1)

2009: Assets held by plans rebound sharply after the 2008 equities market meltdown, and total $2.85 trillion at year-end. (2)

Sources: U.S. Department of Labor (1); RG Wuelfing & Associates Inc. (2)

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