California implemented a new mandatory law requiring all companies with more than five employees to offer a retirement plan to their workers by June 30, 2022. Companies that don’t will be required to enroll in CalSavers, the state-sponsored individual retirement account (IRA), or face fines.
Although California was the first state to pass legislation related to mandatory retirement plans, it’s not the only state to do so. Similar laws exist or are being put into effect in several places, including in CO, CT, IL, MD, MA, ME, NJ, NY, and OR. Many other states are actively exploring a state-sponsored retirement option.
To help make sense of it all, we break down why the California law came about, who it applies to, and some retirement programs businesses can consider offering.
Why Is California Mandating Retirement Plans? A Quick History of the Program
In 2011, a series of UC Berkeley Labor Center studies revealed that nearly half of California workers weren’t prepared for retirement. To help improve this retirement-readiness gap, the state legislature prepared a bill to create a simple way for nearly every employee in California to save for retirement.
When the bill passed in 2012, the state of California became the first state to establish a state-run retirement savings plan for workers in the private sector. Then in 2016, Governor Jerry Brown signed another bill into law, officially approving the California mandatory retirement plan.
While there have been many challenges in court, the 9th Circuit Court of Appeals upheld the CalSavers retirement savings program in 2021. This means the state law remains, and affected businesses must implement a retirement program by the June 30th deadline to avoid non-compliance penalties.
What Is the Law on California’s Mandatory Retirement Plan?
California Government Code §§100000-100050 establishes the CalSavers Retirement Savings Trust Act. It requires California businesses with five or more California-based employees (one of whom is at least 18 years old), to offer either an employer-sponsored retirement plan or the state-sponsored retirement plan to their workers. Participating employees would elect an amount to save as part of their payroll deductions in both instances.
Whether your business classifies as having the minimum number of employees is based on the average number of employees you reported to the Employment Development Department on your DE9C filings for the previous year.
Eligible companies providing employer-sponsored retirement plans must file an exemption on the CalSavers website. Those that don’t have an approved retirement option available, must register for CalSavers to avoid penalties. Under the law, eligible employees are defined as people employed by an eligible employer, except for employees:
- Covered under the federal Railway Labor Act
- Who aren’t California-based
- Have their employer contribute to their employee pension trust funds through the Taft-Hartley Act
The state created a three-year rollout period of implementation, with staggered deadlines based on company size. All of the deadlines have passed.The final one was June 30, 2022. All employers required to participate must have either signed up for CalSavers or exempted themselves if they offer a different retirement plan.
Businesses that don't comply will get a notice from the state giving them 90 days to adhere to the new law. If the business still doesn't comply, they'll be fined $250 per employee. That penalty goes up by $500 per employee after 180 days,meaning you'd owe $750 per employee at that point.
What Are the Pros and Cons of CalSavers?
A perfect retirement plan doesn’t exist. To find the one that’s right for your business, you’ll need to weigh the pros and cons of your options. Below are a few things to consider about CalSavers.
Pros
- Low costs: There are no start-up or administrative costs to enroll in CalSavers.
- Easy to use: CalSavers is designed to be easy for both employers and employees. It offers automatic enrollment and investment options, allowing employees to change their standard contribution rate to a percentage that works for them.
- No fiduciary responsibility: The law removes fiduciary responsibility from employers, making it more simple to manage.
Cons
- Income limits: As a Roth IRA plan, the IRS sets income limits based on the employee’s tax filing status. If your employee is above the limit, they aren’t eligible.
- Contribution limits: Roth IRAs have relatively low contribution limits ($6,000 a year or $7,000 for people over 50).
- Fees for employees: The cost employees pay is currently between $0.83 and $0.95 for every $100 in the savings account.
Can California Employers Opt Out of CalSavers?
If you don’t want to enroll your California employees in the state-sponsored IRA, you can set up a different type of retirement plan that works better for you and your employees.
Here are some common qualified retirement plans to consider:
401(k): This is an employer-sponsored savings account, tax-advantaged and funded by employer and employee contributions. Businesses can either set up their own 401(k) or use a third-party provider to administer it for them.
408(p): Also known as a SIMPLE IRA, this plan lets both employers and employees contribute a certain percentage of gross pay to a traditional IRA.
408(k): Also known as a Simplified Employee Pension (SEP) plan, this retirement savings account allows employers to make payroll contributions on behalf of their employees.
Here’s how these retirement options stack up against CalSavers.
Retirement Plan Options
| Criteria | CalSavers | 401(k) | SIMPLE IRA | SEP Plan |
|---|---|---|---|---|
| Annual Contribution Limit | $6,000 | $20,500 | $14,000 | The lesser of 25% of employee salary OR $61,000 |
| Annual Contribution Limit Age 50+ | $7,000 | $27,000 | $17,000 | No catch-up contributions allowed |
| Employer Match Allowed? | No | Yes | Yes | No, only the employer contributes |
| Pre-Tax Contributions? | No | Yes | Yes | Yes |
| After-Tax Contributions? | Yes, with income limits | Yes, with no income limits | No | No |
| Allows Loans? | No | Yes | No | No |
| Allows Profit Sharing? | No | Yes | No | No |
Simple IRAs are the most common for small businesses because they're economical and easy to manage. While 401(k)s are also a popular option, they require a yearly nondiscrimination test to ensure large discrepancies don’t exist between the savings of non-highly compensated employees and highly compensated ones.
Something called a Safe Harbor 401k plan exists, which does away with the IRS test and instead implements maximum annual contribution limits. The catch is employers must make fixed contributions to employee 401(k) accounts, with the money being vested immediately.
The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) and the IRS worked together to create a guide to help small business owners pick the right retirement plan to offer. If you decide not to go with CalSavers, this is a good resource to help you sort through your alternative options. No matter which type of retirement plan you go with, you’ll be helping your employees save for their future.
If YouMissed theDeadline,It's Not Too Late
Whether you go with CalSavers or pick a different retirement plan, it’s essential to implement something quickly if you missed the June 30 deadline. California will grant you 90 days to comply from when they serve you a failure-to-comply notice. After that, you'll start racking up fines for each eligible employee.
Make sure to review the pros and cons of the CalSavers program. Then you can decide if you’re going to use it or a different type of retirement plan for your employees. If you choose to create an employer-sponsored retirement plan, don’t forget to report an exemption on the CalSavers website.
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