Many states have started to launch “state-run” retirement programs, and California is no exception. The California program is called “CalSavers” and is a state-mandated retirement savings plan with penalties for non-compliance. All employers will eventually be required to participate if they do not have, or do not adopt, an exempted retirement program by the appropriate deadlines (discussed below).
What is CalSavers?
CalSavers is a state-mandated retirement savings plan that is structured as an automatic Roth IRA contribution program. Below are the key characteristics of the program:
- A Roth contribution rate of 5 percent of pay: age 18 and employed at least 30 days.
- The payment automatically escalates by 1 percent per year to a maximum of 8 percent.
- The individual employee may elect a different amount, elect out of auto-escalation, or may completely opt-out of the program.
What if the employer has a retirement plan?
If the employer maintains a retirement program exempted by the state, the employer may elect out of the CalSavers program. Exemptions currently exist for: SEP-IRAs, SIMPLE-IRAs, Payroll Deduction IRA programs with automatic enrollment, 401(k) plans, 403 (a) plans, 403(b) plans, profit-sharing plans, pension plans and participation in a Multiple Employer Plan (MEP). For a complete list of plans that will exempt employers, visit www.calsavers.com.
When do employers have to register for CalSavers?
- By June 30, 2020, for businesses with more than 100 employees
- By June 30, 2021, for businesses with more than 50 employees
- By June 30, 2022, for businesses with less than 50 employees
What steps must all employers take?
To comply with the parameters of the program, all employers must:
- Register their business
- Register for an exemption if they already have a listed retirement program
- Create a payroll list and add employees
- Enroll any W-2 paid employee that is 18 years old or older after 30 days of employment, regardless of part-time or full-time status
- Submit contributions or delegate an approved payroll provider to submit contributions
- Add or remove employees once eligible or terminated
What does this mean for employees?
All employees will:
- Automatically be enrolled by the employer
- Be responsible for opting out, changing investment options, changing contribution rates, and re-enrolling (all done through CalSavers)
- Be responsible for monitoring the Roth IRA limit (2019) $6,000 (catch-up another $1,000)
- Ensure AGI Roth compensation limits apply
- Select investments from listed funds: All funds State Street Target Date, Money Market, Bond, Global
- Comply with estimated Fees: 82.5 – 95 basis points depending on investments (per website, this includes fund and administration fees). The program also has a sustainable balanced fund (ESG) provided by BNY Mellon. For an updated list of investments offered, visit CalSavers
- Savers can also recharacterize their contributions to a traditional IRA
Here’s how it works for the employee:
The eligible employee is automatically enrolled by the employer in a Roth Individual Retirement Account (IRA) unless the employee opts out. The current maximum contribution limit is $6,000 for employees less than 50 years of age and $7,000 for those over age 50. Enrolled employees are free to change their contributions or elect out. The employee will select from an array of investments or default into a target fund based on their estimated retirement date. All monies are always 100 percent vested.
What happens if the employer doesn’t take timely action?
Employers need to be aware that there is no option not to act. Lack of action, whether registering for an exemption or failing to enroll employees, may result in financial penalties for non-compliance. Fines range from $250 per eligible employee after 90 days from a failure notification and an additional $500 per eligible employee after 180 days after a failure notification from the California government.
What’s the alternative?
Employers should consult with their tax CPAs, financial advisors, and business consultants to determine whether they will adopt an exempted plan or to investigate what retirement plan options will best suit their needs. There are many alternatives to the CalSavers mandated program that are beneficial for both employees and employers.
See how CalSavers compares to other private retirement plans, like a 401(k):
|IRA CONTRIBUTION LIMIT||$6,000||$19,000|
|MATCHING CONTRIBUTION OPTION||No||Yes|
|FINANCIAL ADVISOR SUPPORT||No||Yes|
|EMPLOYER ADMINISTRATIVE TASKS||Yes||Yes/No|
|ADDRESSES EMPLOYEE RETENTION||?||Yes|
|CAN ALLOW FOR CREATIVE PLAN DESIGN||No||Yes|
This overview of the CalSavers program is for informational purposes only and should not be construed as tax or legal advice. For more detailed information about the program, visit www.calsavers.com. Or, to speak with a Hall & Company team member, please contact Peter Stephan at 949-398-2478 or via email at firstname.lastname@example.org.
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