An important deadline is on the horizon for California business owners. By June 30, 2022 employers with five or more employees are required to have a retirement plan in place for workers — either through a private-market option, like a 401(k), or through the state-run CalSavers program.
If you’re a business owner, don’t worry — getting onboard with the mandate will only take a few minutes if you’re enrolling in CalSavers. For small businesses that choose to start a new 401(k), with providers like Guideline, it’s straightforward to get started and employers may be eligible for startup tax credits in addition to a $500 credit per year for three years when they include certain automatic enrollment provisions.
What is CalSaver?
If you’re new to the topic, California has been working to get affordable retirement savings tools to all workers for several years. Research showed more than 7.5 million Golden State workers — disproportionately women and people of color who work for smaller businesses — had no access to workplace retirement savings tools.
California is not alone in tackling the retirement savings crisis — nearly all states (46) have either passed some kind of legislation or are exploring potential legislation to offer automatic IRAs or provide a marketplace of savings. Read more about state-sponsored retirement programs.
CalSavers, California’s new retirement savings program, closes the gap with a portable, low-cost way to save and enables employers to automatically help workers save in a Roth IRA. Employees enrolled in the plan can choose their own contribution rate, stick with the default contribution or opt out; they can also select investment funds from a simplified investment menu or use the default target date fund.
For California businesses with 5+ employees, at least one of whom is 18, they must comply with the mandate and offer a retirement plan by June 30, 2022. This is the final part of CalSavers’ phased rollout. If you’re an employer with 50+ employees and missed a previous deadline, enforcement actions are pending.
According to Katie Selenski, the Executive Director of CalSavers, as many as 240,000 small businesses are subject to the California mandate to either start a new 401(k) or use the CalSavers auto IRA program. To date, CalSavers has registered more than 23,000 employers since the statewide launch in July of 2019. Participants had already saved more than $173 million.
Here’s What Employers Need to Know About the Coming Deadline
Who needs to take action by June 30?
Employers, including non-profits, with five or more California-based employees, at least one of whom is 18, that don’t sponsor a retirement plan must either start a new qualified retirement plan, like a 401(k) plan, or register with CalSavers by June 30, 2022. However, companies of any size can register now.
What do employers need to do?
Employers can register through the CalSavers website or, if they are offering a qualified private-market alternative like a 401(k), file an exemption on the same site. After registering, the employer is required to add employees within 30 days of completing the registration. There is some light maintenance required after registration.
What if an employer already offers a retirement plan?
Remember to file an exemption on the CalSavers site. Many exempt employers have been pre-cleared, however, if you receive a notification from CalSavers and believe you are exempt, report your exemption on the site.
Some of the qualified private-market alternatives include 401(k) plans; 408(k) SEP plans; 408(p) SIMPLE IRA Plan; 401(a) Qualified Plan (including profit-sharing plans and defined benefit plans); and 403(a) or 403(b) Annuity Plan. (See complete list in the CalSavers FAQ.)
How much will it cost employers to sign up for CalSavers?
There are no fees or other costs for employers who enroll in CalSavers. Employees who enroll do pay a percentage of their balance as an annual fee.
How will CalSavers work for employees?
Employees will receive a notice 30 days before they are automatically enrolled in CalSavers. They can join by doing nothing or opt-out. If they join, a standard deduction of 5% from gross pay will be automatically deducted from their payroll with an annual auto-escalation of 1% until it reaches 8%. However, each employee has the option to select their own contribution rate or opt out of auto-escalation.
Contributions will be invested in a Roth IRA within a simple target date fund. Savers will pay between approximately 0.825% and 0.95% of their balance annually, depending on investment choices, in AUM fees which is taken from the balance as an administration cost; the account belongs to the employee even if they change jobs.
What happens if an employer misses the registration deadline?
Employers who miss the deadline will pay a fine of $250 per eligible employee if noncompliance extends 90 days or more after the notice; that increases to an additional $500 per eligible employee if noncompliance extends 180 days or more after the notice.
What are other options besides CalSavers?
CalSavers is a good place to start, especially for businesses that cannot afford to extend worker benefits. Other options include offering employees a 401(k) plan that is designed for small business, such as Guideline.
With CalSavers, the account offered is a Roth IRA which has a maximum contribution of $6,000 for workers under age 50 in 2022. Participants can recharacterize to a Traditional IRA at tax time. A 401(k) plan, such as those offered by Guideline, have substantially higher contribution limits, allowing for an individual contribution of $20,500 under 2022 limits for workers under age 50.