Building retirement savings is a top priority for many adults; however, not all employees have access to these benefits through their employers. According to the AARP Public Policy Institute, 57 percent of California’s private sector employees (roughly 7,514,000) are not offered retirement benefits.
However, CalSavers, California’s new retirement savings program, can assist those employees and employers alike. While most California business owners have probably heard of California’s new retirement savings program they may not know exactly how it works. Learn more about California state employee retirement benefits and what this new program means for California businesses.
What Is CalSavers?
CalSavers is a retirement program available in California that applies to private sector employees whose employers do not provide a retirement plan. It is now mandatory for all California businesses to offer either a state-sponsored or qualified retirement plan by June 2022 or risk fines. CalSavers provides employers with an easy way to help employees save for retirement without fiduciary liability or employer fees, and with minimal employer responsibilities.
Employers that have five or more employees must participate in the CalSavers program if they do not already have an employer-sponsored retirement plan in place. Formally known as “Secure Choice,” CalSavers focuses on helping small businesses provide the necessary retirement benefits to employees. California is one of 46 states that have passed or considered legislation regarding state-run retirement savings programs. The program aims to help nearly 7.5 million private-sector employees save for retirement.
CalSavers began in 2018 as a pilot program and is now entering its third phase of a three-year tiered approach to employer registration. The program is similar to state-sponsored retirement savings programs established in other states, such as Secure Choice in Illinois and OregonSaves in Oregon.
CalSavers will receive oversight from a public board of directors. It is a Roth IRA, meaning post-tax, and individuals with higher incomes may not be eligible to contribute. If a person earns more than the Roth IRA income limits established by the federal government, he or she may need to opt out of CalSavers. Alternatively, a person may have the option to recharacterize to a traditional IRA.
Are Business Owners Required To Offer It?
California state law requires employers to either offer their own retirement plan or to register to begin participation in the CalSavers retirement program. If a California employer does not sponsor a qualified retirement plan and has at least five California-based employees (with whom at least one is age eighteen), the business is required to offer CalSavers. Examples of qualified retirement plans include 401(a)s, 401(k)s, 403(a)s, 408(k)s, 408(p)s, or payroll deduction IRAs with automatic enrollment.
Eligible employees can begin facilitating CalSavers at any time but there are deadlines that vary depending on the size of the business. The deadline for eligible employees:
- With more than 100 employees – September 30, 2020 (Passed)
- With more than 50 employees – June 30, 2021 (Passed)
- With five or more employees – effective June 30, 2022
There is no fee for employers to register with the CalSavers program; however, there is some investment in time once registered. Employers are responsible for starting and managing the account. Setting up an account involves several tasks, such as creating a payroll list to enroll employees, designating a payroll service provider, and transmitting payroll to a third-party administrator. Account management duties may consist of submitting contributions and adding new employees to the program as necessary.
How Does CalSavers Work?
CalSavers enables employers to set up an IRA for each eligible employee. This plan has several default features, including the following:
- Employee payroll deductions are automatic. All eligible and participating employees will have automatic deductions set at 5 percent of the employee’s gross pay. Employees have the option to adjust their contributions to a lower or higher percentage of their pay or can choose to opt out of CalSavers altogether.
- CalSavers is a portable retirement account. If an employee changes jobs, they have the option to keep their CalSavers account. The retirement savings plan can move with them throughout their working life.
- The plan is a Roth IRA program. This means that the IRA has income limits that may change from year to year. All employee deductions are placed into a Roth IRA which comes with an annual contribution limit. The annual limit for tax year year 2022 is $6,000 for employees under age 50 and up to $7,000 for ages 50 and up. High-earning employees are subject to a lower contribution limit.
- Several employee investment options are available. CalSavers has a default investment option for the first $1,000 in payroll contributions to the program which is a money market fund. All subsequent contributions are deposited into a target-date fund based on birth dates. In addition to target retirement funds, other investment strategies include sustainable balance funds, core bond funds and global equity funds.
What If Employers Don’t Comply?
California businesses are mandated to comply with requirements outlined in the CalSavers program. Employers that do not comply by the deadline may face financial penalties.
According to California Government Code Section 100033(b), eligible employers that do not comply with guidelines published in the CalSavers program by failing to allow eligible employees to participate may first receive a notice of failure to comply. If the employer does not comply within 90 days of receiving the notice, the employer will be charged with a penalty of $250 per eligible employee. Employers that still do not comply after 180 days or more after receiving the notice will be charged an additional $500 per eligible employee.
Pros And Cons of CalSavers For Employers
The primary goal of the CalSavers program in California is to increase employee access to retirement savings plans. While state-mandated retirement plans like CalSavers can be highly advantageous to employees who do not have access to an employer-sponsored retirement plan, there are some downsides that employers should consider.
Here is a look at some of the top pros and cons of CalSavers for employers.
- No employer fees – Employers are not required to pay any fees or make any contributions to employee accounts. This can be highly beneficial to startups or small businesses that have a restricted budget.
- Easy facilitation – California employers have a limited role in the facilitation of the CalSavers program. Employers are responsible for just a few tasks, including adding and maintaining their employer roster and submitting employee contributions via payroll deduction.
- Ongoing support – Registered employers are provided access with ongoing support, including a detailed description of their role, along with tips and templates that make it easy to manage the program while running a business.
- Income limits – CalSavers is a Roth IRA, meaning it has income limits. Employees that earn above a specified threshold are not able to participate in the program.
- No ERISA protection – Many types of retirement plans are subject to the Employee Retirement Income Security Act of 1974 (ERISA), a federal law that mandates fiduciary management of retirement plans. Employees are not subject to worker protections under ERISA with a CalSavers plan. CalSavers is established and maintained by the state, not employers, meaning employers are not required to operate their own ERISA plans. In addition, employees do not receive the same level of protection offered by ERISA plans which set minimum standards for participation.
- Limited investment options – The CalSavers program offers a limited selection of investment options, unlike traditional 401(k) plans that provide investors with a much broader range of options. CalSavers currently offers five investment options, including money market funds, target date series, one bond funds, one ESG fund and two stock funds.
- No employer matching contribution – Many employers offer employer matching contributions as an incentive for employees to save for their future. CalSavers does not require employer matching contributions or any type of profit-sharing contribution.
Is CalSavers The Only Option For Employers?
CalSavers provides California employers with a convenient and affordable way to offer a retirement savings plan to employees; however, it is not the only option. Some employers may choose to offer other retirement savings products, such as 401(k)s, IRAs, or defined benefit pension plans. When choosing a retirement plan for employees, consider the needs of a small-to-medium business and weigh different options for employees.
IRAs are widely available through a variety of resources, such as banks and other financial institutions. Compared to a traditional IRA, a 401(k) offers contributions that can reduce taxable income and allow employees to save more money each year. There are also no eligibility restrictions in regard to household income. Both employers and employees may also benefit from tax benefits.
While CalSavers is now a California retirement plan mandate, some businesses may be exempt from having to comply. As of January 2022, employers with less than 50 employees were exempt from the CalSavers program. By June 30, 2022, employers exempt from the program will be only those with less than five employees. There are also additional exemptions, including employees under age 18, religious organizations, and others.
Contact New City For More Information
Up to 40 percent of Americans are concerned that they will not be able to retire due to financial setbacks related to the pandemic, according to the May 2020 Simplywise Retirement Confidence Index. Saving for retirement is a lifelong journey and the amount that a person needs to save depends on many factors, such as age, desired income in retirement, current income, inflation, and more.
California state employee retirement benefits provide workers in California with an opportunity to save for their future. To learn more about the CalSavers program or to speak with an experienced employee benefits consultant about other employee retirement benefits, contact the experienced team at New City Insurance.