The California retirement plan requirements have already kicked in for employers with five or more employees, with more requirements for California businesses on the horizon. Are you ready?
Because, under California law, beginning January 1, 2023, for-profit and non-profit employers with at least one eligible employee (who is not the owner of the business) will face those same requirements to offer a retirement savings program or give their employee(s) access to the CalSavers Retirement Savings Program. Employers with more than five employees have been subject to the CalSavers requirements since June 30, 2022.
All these new California retirement savings program requirements are intended to help California workers save for retirement, but can be a source of headaches and confusion for many small businesses. For small businesses who have never had to offer their employees a retirement plan before, and those thinking of hiring their first employees who were just considering small business dental and vision insurance, it can make anyone’s head spin!
But if you’re an eligible employer in California, it’s important to understand the requirements of the CalSavers Plan and make sure your business is compliant. In this blog post, we’ll provide an overview of the CalSavers program requirements and explain everything you need to know about it.
California Retirement Program Rules Explained
The retirement program under the California retirement plan mandate is called CalSavers. The program is administered by the California State Treasurer’s Office and began enrolling employers in July 2019.
Any employer with at least 1 employee who works in California and is not the owner of the business must comply with the CalSavers retirement savings plan requirements beginning January 1, 2023. Currently, California employers with five or more employees are subject to the retirement plan requirements.
The Retirement Savings Crisis in America
CalSavers was started as a response to the the crisis in retirement savings in America. There’s no question that retirement savings are a big problem in the United States. According to the National Institute on Retirement Security, more than 30 million American workers have no retirement savings at all.
Furthermore, 62% of Californians have so little financial security that they don’t have enough saved to cover basic expenses for even three months if they were to suddenly lose their job, according to a study by the Pew Charitable Trusts.
The retirement savings crisis is particularly acute for low- and moderate-income workers. A shocking statistic from the Pew study found that only 18% of workers in households earning less than $30,000 per year have retirement savings.
The hope is that by mandating retirement savings programs like CalSavers, more private sector employees will be able to put away enough money to cover basic expenses in retirement.
What Does the CalSavers Retirement Savings Program Require?
Under the CalSavers retirement savings program, employers are required to offer their employees a “qualified retirement savings plan” or give them access to the CalSavers retirement savings program.
How Does the CalSavers Retirement Plan Work?
The CalSavers retirement savings program for private sector workers in California whose employers do not offer a retirement savings plan. It is, in effect, a state-sponsored IRA.
Employers have a limited role in the CalSavers retirement plan. They facilitate the program by adding and maintaining their employee roster and submitting contributions via simple payroll deduction. CalSavers is administered by third-party, private sector financial firms and supervised by the California State Treasurer’s Office.
CalSavers is an automatic enrollment individual retirement account (IRA) with no employer fees or fiduciary liability. Employees are automatically enrolled in the retirement savings plan with a default contribution rate of 5% of their gross pay, but they can choose to change their own contribution rate or opt out of the program entirely. The retirement savings plan is portable, which means that employees can take their retirement savings with them if they leave their job.
The CalSavers program operates as a Roth IRA. Employees are able to choose their own investments or opt for the CalSavers Target Retirement Fund based on their age and expected date of retirement. CalSavers give employees access to their savings at any time.
Employers are responsible for making the payroll contributions to their employees’ retirement accounts, but they are not required to match employee contributions.
What Are the Benefits of the CalSavers California Retirement Plan?
There are several benefits of the CalSavers retirement savings program:
– The program helps employees save for retirement.
– The program is affordable for employers.
– The program is simple and easy to set up.
– Employer involvement is minimal.
What Are the Disadvantages of the CalSavers Retirement Savings Program?
Although CalSavers may be relatively hassle-free answer for many employers, it may not be the right answer for all small businesses and their eligible employees. Here are some of the disadvantages of the CalSavers retirement savings program:
Employee Fees
Although CalSavers does not charge fees to employers, employees do pay fees on the money in their account. For every $100 in their CalSavers account, participating employees are charged between $0.83 – $0.95 per year.
Limited Investment Options
CalSavers investment options are relatively limited, and the first $1,000 is automatically designated for the CalSavers Money Market Fund. Most 401(k) offer more options for investment.
Contribution Limits
Since CalSavers is a Roth IRA, employees are limited to contributing $6,000 per year ($7,000 for employees who are 50 or older). In contrast, 401(k) plans allow employees to contribute up to $19,500 per year).
Income Limits
Again, since CalSavers is a Roth IRA, if you have high-earning employees, they will not be able to participate in the program.
No ERISA Protections
Unlike other tax-qualified, retirement savings plans, CalSavers is not subject to ERISA, the federal law that requires fiduciary responsibility and oversight of employer retirement plans.
No Employer Matching of Contributions
CalSavers not only doesn’t require employers to match contributions, it does not allow employers to match what employees contribute either. If your business is in a space where employer contributions or an employer match of contributions is a significant tool in recruiting, this can be a major disadvantage to the CalSavers program.
What If We Don’t Want to Join CalSavers? What is a “Qualified Retirement Savings Plan”?
CalSavers is not the only option that employers have, and eligible employers are not required to participate in CalSavers. Employers can also comply with the California retirement savings plan requirements by offering a “qualified retirement savings plan” of their own to their employees and requesting an exemption through the CalSavers website.
“Qualified Retirement Savings Plan” Explained
A “qualified retirement savings plan” is a retirement plan that meets certain requirements set by the Internal Revenue Service (IRS). Qualified retirement savings plans include:
401(a) plans (such as profit-sharing plans),
401(k) plans,
403(b) plans (often called tax-sheltered annuity plans),
Simplified Employee Pension (SEP) plans,
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA plans, and
Individual retirement account (IRA) payroll deductions (with automatic enrollment)
Common Retirement Plans
In some cases, employees already offer retirement plans that may already qualify as a qualified retirement plan. In most cases, this is because they offer a 401(K) plan or an IRA to their California employees.
401(K) Plans
A 401(k) retirement savings plan is a retirement savings plan sponsored by an employer. Under a 401(k) plan, employees can choose to have a portion of their paycheck withheld and put into a retirement account. Many employers always offer their employees a 401(k) plan as an employment benefit.
401(k) plans often offer employer matching contributions, which means that the employer will contribute a certain amount of money to the employee’s retirement account for each dollar that the employee contributes, up to a certain limit.
IRA Payroll Deductions with Automatic Enrollment
Another retirement savings option that may qualify as a qualified retirement plan is an IRA payroll deduction with automatic enrollment.
Under this retirement savings option, employees can choose to have a portion of their paycheck withheld and put into an IRA retirement account. The employer would also be able to make employer contributions to the employee’s IRA account on the employee’s behalf.
There are two types of IRAs that qualify under the CalSavers retirement savings plan mandate: the traditional IRA and Roth IRAs. With a traditional IRA, employees can deduct their employee contributions from their taxes. With a Roth IRA, employees do not get a tax deduction for their contributions, but they can withdraw their money tax-free in retirement.
“Wait! We Already Offer a 401(k) Plan, But I Don’t Know if It’s a Qualified Plan…”
If you already offer a retirement plan like a 401(k), but you’r not sure whether your employee retirement plan qualifies, you can check with the IRS or consult with a retirement plan expert.
The Steps You Need to Take Now
If your CalSavers registration deadline has already passed, contact CalSavers and register through the CalSavers website ASAP! Many small businesses with five or more employees were not even aware of June 30, 2022 deadline, and face be facing stiff penalties. Eligible employers that do not enroll in CalSavers or request an exemption for a qualified plan face a penalty of $250 for each eligible employee if they remain non-compliant for 90 days after receiving a violation notice.
And if you are an employer with one or more employee, your deadline of January 1, 2023 is coming up! You have until them to register on the CalSavers website. If CalSavers is the best option for your business, you can enroll your eligible employees then.
Otherwise, you can request exemption and offer your eligible employees a qualified retirement plan which may offer more flexibility to your employees and tax benefits to you. If you choose to offer a retirement plan, speak to a financial advisor to ensure that your retirement plan meets all of the CalSavers requirements.
If you are considering offering a qualified retirement plan to your employees, Betterment offers low-cost 401(k) solutions for small businesses that are easy to manage. With an all-in-one dashboard, payroll integration, and support, Betterment can provide an excellent solution for many small businesses.
