Retirement Plans and the Calsavers Program

Retirement Plans for Businesses and the Calsavers Program

California continues implementation of its state-sponsored retirement savings program for businesses to offer employees. With the deadline for businesses with more than 50 employees to register employees recently passed, the focus is now on businesses with 5 or more employees to register for the CalSavers program or establish a similar retirement plan that satisfies the requirement.

What began in 2018 as a pilot program, CalSavers — a state-sponsored retirement savings program that requires certain-sized businesses to offer employees the option of participating in a plan — has just completed its second phase and is now entering its third phase of a three-year tiered approach to registration. Businesses with 5 or more employees have until June 30, 2022, to implement CalSavers or an equivalent qualified retirement program* that satisfies the mandate. Employers do not need to wait for the designated deadline to comply and are encouraged to join sooner rather than later.

The program is designed to help the nearly 7.5 million private-sector employees in the Golden State who work for a business that does not offer a retirement plan.

What is CalSavers?

CalSavers is an individual retirement account (IRA) similar to programs started in Oregon (OregonSaves) and Illinois (Secure Choice), as well as other states. This portable plan will have oversight from a public board of directors. However, California offers either a Roth or a traditional IRA. Roth IRAs invest post-taxed earnings and withdrawals aren't taxed, while traditional IRAs invest pre-tax earnings and withdrawals will be taxed as income.

*A qualified retirement plan includes a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b).

Employer requirements, registration deadlines, and penalties

Eligible employers must first register their business, and then once registered they have one year before the mandated deadline for their size business to implement CalSavers, if the business does not already have a qualified plan in place.

The implementation deadlines are as follows:

Sept. 30, 2020 (passed): Businesses with 100-plus employees
June 30, 2021 (passed): Businesses with 50-plus employees
June 30, 2022: Businesses with five-plus employees (deadline approaching!).

Employers also will:

Not be able to make contributions
Submit employee contributions
Incur no fees to facilitate the program

Even though there is no fee to register for the program, employers could face financial penalties for not having a retirement savings plan available for eligible employees to join. The proposed fines range from $250 per eligible employee if an employer remains noncompliant after 90 days of being served notice, escalating to $500 per eligible employee if noncompliance reaches 180 days or more after the notice.

Employers also must factor in some investment of time on their part once they do register for the program, including setting up an account and then managing the account. Account setup includes such tasks as creating a payroll list to enroll employees, designating a payroll service provider – employers can use the one they have, if applicable – and transmitting payroll to a third-party administrator determined by the board of directors. Account management duties require employers to submit contributions (which means having a detailed list of what each employee’s contribution rate is) and adding new employees when necessary.

Do businesses have to use the state-sponsored program?

No. Registering for the CalSavers program is one way to fulfill the requirement that every qualified employee in California have access to a retirement plan. Businesses can also establish their own employee retirement plan, such as a 401(k) or SIMPLE IRA, to satisfy this requirement. You should consider all available options before deciding. Our team at Lagos Wealth Advisors is available to consult with you on the options available to your company. Our process includes a comprehensive review and quote from the leading 401k providers. Since every business is unique, so should your retirement plan offering.

Employee responsibilities

In CalSavers, employees gain a portable plan that follows them from job to job and enables them to opt out and in at any point. If employees do not act within 30 days of notification once an employer registers for the program, they will be automatically enrolled at the default savings rate.

Employees should know:

Contributions will be made through payroll deduction
The default savings rate is 5 percent of gross pay
They have option to customize their plan and choose a different rate and change that rate at any time
They can opt back in to the program at any time

What are the differences among state-run IRAs, SIMPLE IRAs and 401(k) plans?

A state-sponsored IRA is one way to satisfy requirements and help employees save for retirement. However, it's in businesses’ best interest to compare it with other financial options and decide which option best fits their needs and those of their employees.

The chart below shows key characteristics of a state-run IRA compared to a SIMPLE IRA and 401(k) plan, both of which Paychex offers. The biggest differences are the option for a company to match a portion of savers' contributions, and the maximum amount employees can contribute.

	State IRA - CalSavers	SIMPLE IRA	401(k)
2022 Employee Contribution Max	$6,000	$14,000	$20,500 (plus an additional $6,500 catch-up for those age 50 and older)
Company Match Option	No	Yes, mandatory	Yes, at employer’s discretion. More complex plan designs are possible, including the addition of a Profit Sharing Plan or a cross-tested defined benefit plan (like a Cash Balance Plan). This gives employers more flexibility in their potential tax savings.
Tax Credits for Opening New Plan	No	Up to $5,000 per year, for the first 3 years	Up to $5,000 per year for the first 3 years
Employer Tasks	The employer processes payroll contributions, updates contribution rates, adds newly eligible employees, etc.	Employer processes payroll and makes contributions through regular payroll systems.	We have an option to assist with the management and administration of the plan, including through the inclusion of a 3(16) and 3(38) fiduciary. We already serve as a 3(21) co-fiduciary.

Who is exempt from the California retirement plan mandate ?

As of June 30, 2021, employers exempt from the CalSavers program are those with less than 50 employees, but only temporarily. As of June 30, 2022, employers exempt from the program are those with less than five employees. These requirements and deadlines apply to private-sector businesses only. The CalSavers website includes more details about exemptions, including employees under the age of 18, religious organizations, and more.

Can I withdraw from CalSavers?

Eligible employers cannot withdraw from the program once registered unless they are doing so to establish their own qualified retirement plan. Employees may choose to opt out of the program at any time if they don't want to participate.

Do California employers have to offer a retirement plan?

California employers that meet certain requirements must offer a retirement plan by a specific date — either a plan through the state-sponsored CalSavers program, or by establishing their own qualified retirement plan: 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b).

Is CalSavers a Roth IRA?

The CalSavers program is a Roth IRA, meaning that post-tax earnings are invested and eligible withdrawals aren't taxed. There is an option for employees to convert their contributions to a traditional IRA (pre-tax earnings invested and withdrawals are taxed as income), which they can do on the CalSavers website.

Can I register for CalSavers at any time?

Eligible employers can request to register at any time, as long as they meet the specified deadlines for either beginning to offer their own qualified retirement plan or registering for the CalSavers retirement program.

How much does the CalSavers program cost employers?

There is no fee for employers to participate in the CalSavers program.

How is the size of my business determined?

Eligibility for the program is based on your average number of employees throughout the year. According to the CalSavers website, this number is calculated by averaging the number of employees you report to the Employment Development Department on your previous four DE9C filings.

I would like to know my options

Reach out to our team to discuss the Advantage 401(k) Program, offered and advised by Lagos Wealth Advisors. As a co-fiduciary in our plans, we have a vested interest in our plans' success.

* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.