18 • MARTIN H. RUBY
and lush benefits. But when laid-off employees began to collect their pensions, they learned that Studebaker didn’t have enough money to pay the benefits. Howls of protest reached Capitol Hill. Congress was moved to pass the 1974 Employee Retirement Income Security Act (ERISA), which regulated pension plans. The objective of the new legisla- tion was to protect American workers and ensure their pensions were sustainable. However, as so often happens when our govern- ment makes laws, the new demands forced corporations to back away from pensions altogether. Birth of IRAs and 401(k)s One interesting byproduct of ERISA was a new law that al- lowed taxpayers to contribute into something called an “Individ- ual Retirement Account,” or IRA. Companies liked them, because IRAs took the pressure off the company to plan for an employee’s retirement. These new IRAs could grow tax-deferred. The IRS al- lowed workers to reduce their immediate taxes by funding their retirement accounts and they would owe no taxes on the money until they withdrew it! IRAs began popping up like daisies in spring, especially when tax time rolled around. In 1978, the IRS inadvertently created 401(k) plans when it es- tablished a new section of the IRS code that allowed for tax-de- ferred accumulation. The little paragraph went virtually unnoticed until Ted Benna, a young Pennsylvania benefits con- sultant, devised a clever way to apply the new law to corporate benefits. Benna realized this piece of the tax code could potentially provide tax benefits for both employees and employers. From one man’s discovery, an entire industry was born. With 401(k)s, employees didn’t have to pay any taxes on their savings today. It sounds like the IRS wouldn’t like that, but in re- ality, the IRS saw 401(k)s as an opportunity. After all, these savings accounts were not tax- free — they were tax- deferred . At some point, after the accounts grew to fruition, the IRS would get its
Made with FlippingBook - Online Brochure Maker