History of Pension Plans

·       1875 -- The American Express Company established the first private pension plan in the United States.

·       Prior to the 1870s private-sector plans did not exist, primarily because most companies were small family-run enterprises.

·       1921 -- The Revenue Act of 1921 exempted interest income on trusts for stock bonus or profit-sharing plans from current taxation. Trust income was taxed as it was distributed to employees only to the extent that it exceeded employees' own contributions. The act did not authorize deductions for past service contributions.

·       1926 -- The Revenue Act of 1926 exempted income of pension trusts from current taxation.

·       1928 -- The Revenue Act of 1928 allowed employers to take tax deductions for reasonable amounts paid into a qualified trust in excess of the amounts required to fund current liabilities. The act changed the taxation of trust distributions that are attributable to employer contributions and earnings.

·       1875-1929 -- 421 private-sector pension plans were established in the United States and Canada, and 28 were discontinued during that period. By 1929, 397 private-sector plans were in operation in the United States and Canada.

·       Some major U.S companies that established plans prior to 1930 are: Standard Oil of New Jersey (1903); U.S. Steel Corp. (1911); General Electric Co. (1912); American Telephone and Telegraph Co. (1913); Goodyear Tire and Rubber Co., (1915); Bethlehem Steel Co. (1923); American Can Co. (1924); and Eastman Kodak Co. (1929).

·       1935 -- President Franklin D. Roosevelt signed the Social Security Act.

·       1938 -- The Revenue Act of 1938 established the nondiversion rule and made pension trusts irrevocable.

·       1940 -- 4.1 million private-sector workers (15 percent of all private-sector workers) were covered by a pension plan.

·       1940 -- The Investment Advisors Act of 1940 required delegation of investment responsibilities only to an adviser registered under the act or to a bank or an insurance company.

·       1942 -- The Revenue Act of 1942 tightened coverage standard qualifications, limited allowable deductions, and allowed integration with Social Security.

·       1946 -- The United Steelworkers of America made pensions an issue in their strike against Inland Steel. At this time, the National Labor Relations Act did not cover pensions. Steelworkers Local 1010 in Indiana Harbor took the issue to the National Labor Relations Board.

·       1947 -- Labor-Management Relations Act of 1947 (LMRA or "Taft-Hartley" Act) provided fundamental guidelines for the establishment and operation of pension plans administered jointly by an employer and a union.

·       1948 -- The National Labor Relations Board ruled that Congress intended pensions to be part of wages and that they fell under "conditions of employment" mentioned in the act, although this was not specifically defined.

·       1950 -- General Motors (GM) established a pension plan for its employees. GM wanted to self-fund their pension plan because they wanted to invest in stocks. State law prohibited insurance companies from investing pension assets in stocks. The 1950s saw a bull market caused by the release of pent-up demand, due to wartime restrictions and the need to rebuild Europe and Japan.

·       1950 -- 9.8 million private-sector workers (25 percent of all private-sector workers) were covered by a pension plan.

·       1958 -- Welfare and Pension Plan Disclosure Act of 1958 established disclosure requirements to limit fiduciary abuse.

·       1960 -- 18.7 million private-sector workers (41 percent of all private-sector workers) were covered by a pension plan.

·       1962 -- The Welfare and Pension Plan Disclosure Act Amendments of 1962 shifted responsibility for protection of plan assets from participants to the federal government to prevent fraud and poor administration.

·       1962 -- The Self-Employed Individual Retirement Act of 1962, also known as the Keogh Act, made qualified pension plans available to self-employed persons, unincorporated small businesses, farmers, professionals, and their employees.

·       1969 -- The Tax Reform Act of 1969 provided fundamental guidelines for the establishment and operation of pension plans administered jointly by an employer and a union. The act provided that part of a lump-sum distribution received from a qualified employee trust within one taxable year (on account of death or other separation from service) was given ordinary income treatment instead of the capital gains treatment it had been given under prior law. Under this act, the bargain element on the exercise of statutory options is a tax preference item, unless the stock option is disposed of in the same year the option is exercised.

·       1970 -- 26.3 million private-sector workers (45 percent of all private-sector workers) were covered by a pension plan.

·       1974 -- The Employee Retirement Income Security Act of 1974 (ERISA) was enacted. ERISA was designed to secure the benefits of participants in private pension plans through participation, vesting, funding, reporting, and disclosure rules. It established the Pension Benefit Guaranty Corporation (PBGC). ERISA provided added pension incentives for the self-employed (through changes in Keoghs) and for persons not covered by pensions (through individual retirement accounts (IRAs)). It established legal status of employee stock ownership plans (ESOPs) as an employee benefit and codified stock bonus plans under the Internal Revenue Code. It also established requirements for plan implementation and operation.

·       1975 -- The Tax Reduction Act of 1975 established the Tax Reduction Act stock ownership plan (TRASOP) as an employee benefit.

·       1978 -- The Revenue Act of 1978 established qualified deferred compensation plans (sec. 401(k)) under which employees are not taxed on the portion of income they elect to receive as deferred compensation rather than direct cash payments. The act created simplified employee pensions (SEPs) and changed IRA rules.

·       1980 -- The Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA") increased multiemployer pension plan premiums and provided for payment of liability to plans for contributing employers who withdraw during the year in which the plan is less than fully funded, thereby effectively shifting primary risk of underfunding from the PBGC to contributing employers.

·       1980 -- 35.9 million private-sector workers (46 percent of all private-sector workers) were covered by a pension plan.

·       1981 -- The Economic Recovery Tax Act of 1981 (ERTA) raised contribution limits on IRAs and Keogh plans and extended IRA eligibility to persons covered by employer pension plans. It also authorized qualified voluntary employee contributions and permitted a payroll-based tax credit instead of investment-based TRASOPs.

·       1982 -- The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) changed Keogh plan contribution limitations, established a new category of plans known as top-heavy plans, and imposed more stringent sec. 415 funding and benefit limitations. It altered the provisions allowing loans to plan participants, changed rules governing integration with Social Security, reduced estate tax exclusion for proceeds of qualified retirement plans, set age limits for plan distributions, and established various rules aimed at personal service corporations.

·       1984 -- The Deficit Reduction Act of 1984 (DEFRA) made substantial changes to rules governing IRAs, SEPs, ESOPs, incentive stock options (ISOs), top-heavy plans, and golden parachutes. DEFRA froze TEFRA's maximum annual pension benefit and contribution limits through 1987. It modified TEFRA's top-heavy provisions and definition of key employees, and exempted government plans from top-heavy requirements. DEFRA made changes affecting sec. 401(k) plans, including the nondiscrimination test; substantially changed TEFRA's rules on distribution limits from qualified plans; and established additional tax incentives to encourage the formation of ESOPs.

·       1984 -- The Retirement Equity Act of 1984 (REA) enhanced survivor annuity rules. It insulated qualified domestic relations orders (QDROs) from ERISA preemption. REA clarified the effect of ERISA and the Internal Revenue Code's rules prohibiting plan amendments that reduce accrued benefits with respect to early retirement subsidies, lump-sum distributions, and other "ancillary" benefits.

·       1985 -- The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) (included in the Single- Employer Pension Plan Amendments Act of 1986) significantly restricted the definition of insured termination for purposes of PBGC coverage. It raised the employer's annual PBGC premium rate (raised again in OBRA '87, see below).

·       1986 -- The Tax Reform Act of 1986 established faster minimum vesting schedules, changed rules for the integration of private pension plans with Social Security, and mandated broader and more comparable minimum coverage of rank- and file-employees. It also restricted 401(k) salary reduction contributions, tightened nondiscrimination rules, and required inclusion of all after-tax contributions to defined contribution plans as annual additions under sec. 415 limits. It extended the limit on the compensation amount that may be taken into account under all qualified plans, imposed a new excess benefit tax on distributions over a certain amount, and reduced the maximum benefit payable to early retirees under defined benefit plans. It restricted the allowable tax-deductible contributions to IRAs for individuals who participate in an employer-sponsored pension plan and whose income exceeds a specified threshold. It imposed an excise tax on lump-sum distributions received before age 59 1/2, created a SEP salary reduction option for firms with 25 or fewer employees, and subjected loans above a certain amount to current income tax.

·       1986 -- The Omnibus Budget Reconciliation Act of 1986 (OBRA '86) required that employers with pension plans provide pension accruals or allocations for employees working beyond age 64 and for newly hired employees who are within five years of normal retirement age.

·       1987 -- The Omnibus Budget Reconciliation Act of 1987 (OBRA '87) changed funding rules governing underfunded and overfunded pension plans and PBGC premium levels and structure. It increased per participant premiums for single-employer defined benefit plans and established variable rate surcharge for underfunded plans. It established maximum funding limit of 150 percent of current liability, beyond which employer contributions are not deductible. It tightened minimum funding requirements for underfunded plans and required a quarterly premium payment for single-employer plans. It amended the Age Discrimination in Employment Act (ADEA) and ERISA to require full pension service credits for participants employed beyond normal retirement age.

·       1988 -- The Technical and Miscellaneous Revenue Act of 1988 increased the excise tax on excess pension assets on termination.

·       1989 -- The Omnibus Budget Reconciliation Act of 1989 (OBRA '89) partially repealed the interest exclusion on ESOP loans. It imposed mandatory Labor Department civil penalties on violations by qualified plan fiduciaries and created a tax penalty for substantial overstatement of pension liabilities in determining deductibility. In addition, it required that various forms of deferred compensation be included in the determination of average compensation and, in turn, the Social Security taxable wage base.

·       1990 -- 39.5 million private-sector workers (43 percent of all private sector workers) are covered by a pension plan.

·       1990 -- The Omnibus Budget Reconciliation Act of 1990 (OBRA '90) increased the excise tax on asset reversions from 15 percent to 20 percent in certain cases. It increased the excise tax to 50 percent if the employer does not maintain a qualified replacement plan or provide certain pro rata increases. It allowed the limited use of qualified transfers of excess pension assets to a 401(h) account to fund current retiree health benefits. And, it raised the PBGC flat premium and increased the variable premium.

·       1990 -- The Older Workers Benefit Protection Act of 1990 amended the Age Discrimination in Employment Act (ADEA) to apply to employee benefits. It restored and codified the equal-benefit-for-equal-cost principal, and set a series of minimum standards for waivers of rights under ADEA in early retirement situations.

·       1991 -- The Comprehensive Deposit Insurance Reform and Taxpayer Protection Act of 1991 included provisions to eliminate pass-through coverage for benefit-responsive bank investment contracts (BICs) and to limit federal deposit insurance to $100,000 per individual per institution.

·       1992 -- The Unemployment Compensation Amendments of 1992 imposed a 20 percent mandatory withholding tax on lump-sum distributions that are not rolled over into qualified retirement accounts; liberalized rollover rules; and required plan sponsors to transfer eligible distributions directly to an eligible plan if requested by the participant.

·       1993 -- The Pension Annuitants Protection Act of 1993 clarified that, in cases where a pension plan fiduciary purchases insurance annuities in violation of ERISA rules, a court may award appropriate relief, including the purchase of backup annuities, to remedy the breach.

·       1994 -- The Uruguay Round Agreements Act of 1994 included provisions from the Retirement Protection Act of 1993 to require greater contributions to underfunded plans. It limited the range of interest rate and mortality assumptions used to establish funding targets, phased out the variable rate premium cap, modified certain rules relating to participant protections, and required private companies with underfunded pension plans to notify PBGC before engaging in a large corporate transaction. It slowed pension cost-of-living adjustments and extended through the year 2000 a tax provision that allows excess pension plan assets in certain defined benefit plans to be transferred into a 401(h) retiree health benefits account.

·       1996 -- The Small Business Job Protection Act of 1996 created the savings incentive match plan for employees (SIMPLE) for small establishments. It created a new nondiscrimination safe harbor, repealed sec. 415(e) limits, created a new definition of highly compensated employees, modified plan distribution rules, repealed family aggregation rules, made USERRA technical changes, and required that sec. 457 plan assets be held in trust.

·       1996 -- The "Source Tax" Repeal of 1996 amended the Internal Revenue Code to eliminate state taxation of pension income received by individuals who no longer reside in the state where they earned their pensions.

For more information, contact Ken McDonnell, (202) 775-6342, e-mail: mcdonnell@ebri.org, or see EBRI online site at www.ebri.org. Source: EBRI Databook on Employee Benefits, fourth edition, 1997; Barry B. Burr, "World War," Pensions and Investments (August 7, 1995); and Dan J. Beller et al., Trends in Pensions (Washington, DC: U.S. Government Printing Office, 1992).
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Norb Leahy, Dunwoody GA Tea Party Leader