- Most Viewed
- By Topic
- EBRI Bibliography By Topic
- Data Book
- Facts from EBRI
- Fast Facts
- Issue Briefs
- Policy Books
- President’s Reports
- Press Releases
- Special Reports
- Benefit Bibliography
- Benefit FAQs
- Links to Other Internet Resources
- Reference Shelf
- Special Issues of Periodicals
- What’s New in Employee Benefits
History of 401(k) Plans
A 401(k) plan is a cash or deferred arrangement under which a covered employee can elect to have a portion of his or her compensation (otherwise payable in cash) contributed to a qualified retirement plan as a pre-tax reduction in salary (however, some plans also accept after-tax contributions from employees). Assets are invested in stocks, bonds, guaranteed investment contracts (GICs), cash-equivalents, or a diversified portfolio of these investments. The pre-tax contributions as well as earnings on an account are taxed only when withdrawn. Employers generally have the discretion whether or not to make matching contributions to their workers' 401(k) plan. Currently (as of December 2000), the maximum annual contribution that an individual can make to his or her 401(k) account is $10,500, indexed for inflation.
In recent years, 401(k) plans have become the fastest-growing type of retirement plan in the United States. This brief history tracks key events in the development of 401(k) plans.
1978--The Revenue Act of 1978 included a provision that became Internal Revenue Code (IRC) Sec. 401(k) (for which the plans are named), under which employees are not taxed on the portion of income they elect to receive as deferred compensation rather than as direct cash payments. Prior to 1978, the Internal Revenue Service (IRS) had issued a series of Revenue Rulings (Rev. Rul. 56-497, Rev. Rul. 63-180, and Rev. Rul. 68-89) that allowed eligible employees to elect to receive a portion of their profit-sharing contributions in cash and defer the noncash portion in a profit-sharing plan on a pre-tax basis. The Revenue Act of 1978 added permanent provisions to the IRC, sanctioning the use of salary reductions as a source of plan contributions. The law went into effect on Jan. 1, 1980. Dow Jones Industrial Average (at year-end 1978): 805.01.
1981--The IRS issued proposed regulations on Sec. 401(k) that sanctioned the use of employee salary reductions as a source of retirement plan contributions. Dow Jones Industrial Average at year-end: 875.00.
1984--The Tax Reform Act of 1984 (TRA '84) modified the rules for 401(k) plans by, among other things, requiring nondiscrimination testing to ensure that contributions or benefits under tax-qualified plans do not discriminate in favor of highly compensated employees by more than an allowable amount.
Number of plans with a 401(k) feature (according to U.S. Department of Labor Form 5500 reports): 17,303. Number of active participants in these plans: 7,540,000. Total assets in these plans: $91.75 billion. Dow Jones Industrial Average at year-end: 1,211.57.
1986--The Tax Reform Act of 1986 (TRA '86) tightened up on the nondiscrimination rules, reduced the maximum annual 401(k) salary deferrals by employees (under IRC Sec. 402(g)), and required inclusion of all after-tax contributions to defined contribution plans as annual additions under IRC Sec. 415 limits (which set the maximum annual contribution that can be made by both a worker and his or her employer).
1990--Number of plans with a 401(k) feature: 97,614. Number of active participants in these plans: 19,548,000. Total assets in these plans: $384.85 billion. Dow Jones Industrial Average (at year-end): 2,633.66.
1992--The Unemployment Compensation Amendments of 1992 imposed 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); liberalized rollover rules; and required plan sponsors to transfer eligible distributions directly to an eligible plan if requested by the participant.
1996--The Small Business Job Protection Act of 1996 (SBJPA) provided design-based "safe harbor" methods for satisfying the nondiscrimination tests applicable to 401(k) plans, introduced SIMPLE plans (savings incentive match plans for employees) for employers with no more than 100 employees, repealed Sec. 415(e) limits (maximum defined benefit plan promised benefits and defined contribution plan contributions made to the same employee), and created a new definition of "highly compensated employees."
Number of plans with a 401(k) feature: 230,808. Number of active participants: 30,843,000. Total assets: $1.06 trillion. Dow Jones Industrial Average (at year-end): 6,448.27.
1998--IRS Notice 98-52, issued as part of the pension simplification provisions of the SBJPA, provided guidance on "alternative" or "safe harbor" methods of satisfying the 401(k) nondiscrimination requirements in IRC Sec. 401(k)(12). The IRS also issued Rev. Rul. 98-30, which gave a stamp of approval for employers to make "negative elections" (i.e., automatic enrollment) into 401(k) plans for newly eligible employees ("negative election" allows workers to be automatically enrolled in their employer's retirement savings plan if they take no action).
1999--IRS Notice 99-1 issued guidance concerning the use of electronic technologies, including computer media, in retirement plans. This was done in response to the Taxpayer Relief Act of 1997, in which Congress specifically instructed both the IRS and the Department of Labor to develop guidance and regulations relating to retirement plan notification, consent, and other employee communications in light of new technologies.
2000--IRS Rev. Rul. 2000-8 provided additional guidance on "negative elections" by allowing negative (or automatic) enrollment in 401(k) plans for already-eligible employees who are deferring at a rate that is less than the automatic enrollment rate. The IRS also issued IRS Notice 2000-3 on 401(k) "safe harbor" rules, which modified Notice 98-52 and provided additional guidance on how to satisfy the rules.
Number of plans with a 401(k) feature: 327,364. Number of active participants in these plans: 42,135,000. Total assets in these plans: $1.83 trillion. Dow Jones Industrial Average (as of Nov. 16, 2000): 10,656.03.
For more information, contact Ken McDonnell, (202) 775-6342, or see EBRI's Web site at www.ebri.org.
Source: EBRI Databook on Employee Benefits.
EBRI Research and Education Centers
- 401(k) Valuations Published: March 31, 2014 401(k) Balances and Changes Due to Market Volatility
- Data Book Last Updated: February 2013 A comprehensive collection of the most up-to-date benefit information available