​Workers three-quarters of a century ago would not recognize today's employee benefits. Back then, most private organizations did not offer workers retirement benefits. Those that did provided traditional pension plans that could require decades of work in return for retiree income. Health care had just started to become a common offering; it received a boost during World War II when employers, faced with limits on permissible wage increases, instead began offering "fringe benefits" to attract and keep workers.

But perhaps the biggest changes occurred in the last quarter of the 20th century. Two of the most significant were the creation of 401(k) plans and health savings accounts (HSAs).

Seeing the Potential
in an Obscure Law

Benefits consultant R. Theodore (Ted) Benna is often called the "father of the 401(k)" because he pursued, and received, IRS approval for the first 401(k) savings plan—and then he worked to popularize his innovative concept.

In 1978, after Congress enacted Internal Revenue Code Section 401(k) as part of that year's Revenue Act, Benna took note of its clarification of the tax treatment for year-end profit-­sharing bonuses. Benna says he "saw an opportunity to allow employees to use this provision as a way to save pretax for retirement, and to add employer contributions with a tax break for matching contributions. It wasn't in the legislation, but there was nothing there saying it couldn't be done." 

He adds, "I call it a political fluke." That's because the tax provision that made it possible is only half a page long and was passed for an entirely different reason.

In 1980, Benna created a retirement savings plan for his employer, the Johnson Cos., a Philadelphia-area insurance brokerage. Many people were skeptical whether the creation of the plan was legal, but Benna presented it to the Treasury Department. In November 1981, the department released proposed rules that ratified Benna's interpretation, permitted employees to defer compensation tax-free and allowed employers to make tax-free matching contributions.

'It wasn't in the legislation, but there was nothing there saying it couldn't be done.'

Once the IRS gave its stamp of approval, Benna says, he wasn't surprised when other companies rapidly began offering these newfangled 401(k) savings plans.

"This was a big transformation, because the 401(k) is primarily a benefit for middle-income workers—not for the highest earners" for whom an extra $25,000 to $30,000 in tax-deferred savings may not mean so much, he says. 

Benna helped spread the word to employers and financial services firms that began operating as 401(k) administrators. By 2020, there were about 600,000 employer-sponsored 401(k) plans, with around 60 million active participants and millions of former employees and retirees, according to the Investment Companies Institute, a trade group based in Washington, D.C. As of June 2021, 401(k) plans held an estimated $7.3 trillion in assets. Screen Shot 2023-06-06 at 105153 AM.png

The plans have "helped accumulate around $15 trillion in additional savings since they were founded and have helped to make the mutual fund industry what it is today," Benna says.

He went on to lead his own consultancy, Benna401k, and now lives on a small farm in rural Pennsylvania. Benna says he is mindful that his creation is not perfect and must continue to evolve. He supports revisions such as lowering investment fund fees and providing participants with investment and retirement planning advice.

Benna also favors automatic enrollment as a standard plan feature (which, starting in 2025, must be part of new plans under recently enacted Secure Act 2.0 legislation) and he would like to see greater portability of accounts when employees leave their jobs, with automatic rollovers to their new employers' plans. He says a remaining challenge he would like to see national policies address is that "many workers still don't have the opportunity to save with their employer for retirement."

Allowing Tax-Free Health Care Savings

The growth of HSAs has been another major change in benefits. HSAs let people contribute pretax dollars to savings or investment funds to be used tax-free to pay current or future medical expenses.

HSAs, which must be linked to high-deductible health plans (HDHPs), are now a common part of employer-sponsored health care, according to SHRM's 2022 Employee Benefits survey. Fifty-seven percent of respondents said their organizations offered health savings accounts linked to an HDHP, and most (63 percent) also contributed to employees' HSAs.

That growth has taken place in the two decades since the savings accounts were established under federal law, when President George W. Bush signed the Medicare Prescription Drug, Improvement and Modernization Act in December 2003. A key champion behind HSAs was health policy analyst John C. Goodman.

In the early 1990s, Goodman famously drew a diagram of a possible tax-advantaged medical-expense savings plan for then-House Ways and Means Committee Chairman Bill Archer, R-Texas. Congress ­subsequently codified this in the 2003 statute.

Initially, Goodman points out, the health care and insurance industries widely opposed the idea of HSAs. "We got HSAs because nothing else was working very well" amid soaring health care inflation, Goodman says.Screen Shot 2023-06-06 at 105153 AM.png

Now the president and CEO of the Dallas-based Goodman Institute for Public Policy Research, Goodman believes that the problem behind spiraling health care costs is that most people "never see the real price for health care." One of the key ideas behind HSAs, and one that has been only partly achieved, was to create incentives for individuals to ask about the cost of nonemergency care and to then select high-quality, cost-­competitive doctors and facilities.

Along with HSAs, other innovations taking hold in health care are a result of increased consumerism, Goodman says. "Walk-in clinics all over the country now exist because people are spending their own money on needed care in a timely way," he notes. And what they save, they can keep in their own accounts, so they may be able to benefit directly from taking costs into consideration. But greater transparency is still needed throughout the health care system to promote competition based on price and quality, Goodman says. 

He's also troubled by the complexity of multiple medical-care accounts with separate sets of rules—HSAs, flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs). "What we need is reform," Goodman says, "so we can have one easy-to-use account, rolled over year to year, with no high-deductible requirement and paired with any third-party insurance—taking the good points from each of the three and getting rid of the bad."  

Stephen Miller, CEBS, is a ­freelance writer from Arlington, Va., who ­specializes in compensation and benefits issues.

Illustration by Valerie Chiang.

Witnessing a Sea Change in Employee Benefits

In June 1974, a young finance and public-policy analyst named Dallas Salisbury was working in the Justice Department and was assigned to work on a pending piece of legislation called the Employee Retirement Income Security Act (ERISA). The statute, which Congress approved later that year, spells out employers' fiduciary duties and guarantees protections for participants and beneficiaries in employee benefits plans.

"ERISA changed the landscape like a tidal wave that is still rolling across the sea," says Salisbury, who went on to become founding president and CEO of the nonprofit Employee Benefit Research Institute in Washington, D.C., from 1978 through 2017. "ERISA redefined what it meant to sponsor employee benefits that provide greater life security," he says.

Salisbury notes that in the nearly five decades since ERISA's enactment, the legislation, as modified over the years, has provided a compliance framework that shaped and influenced the employee benefits arena. That includes the evolution of cafeteria-style, or employee-choice, plans that allow "ways for employees to realize their desire for greater control over what benefits they receive."

Another transformative development was the passage of the Affordable Care Act in March 2010, Salisbury says. The law not only increased health insurance access but also, in tandem with rising health care costs, "moved the system ­several leaps further into high-deductible plans" as a cost-controlling measure, he says.

Looking ahead, Salisbury predicts that "the demographic, economic and technological changes that allow for almost unlimited individualization" in the benefits world will drive forward the developments that started with ERISA, with employers "increasingly being a payroll-­deduction agent and less the '­provider' of employee benefits." —S.M.

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