California recently launched the CalSavers Retirement Savings Program, which is mandated for all private employers in the state with more than five employees and don’t have a qualified retirement or IRA-based plan in place.
As employers consider this program, or whether to implement a different retirement plan, here are five important things you need to know about CalSavers.
1. Why was CalSavers started?
According to the State Treasurer's Office, CalSavers was launched to provide an estimated 7.5 million private-sector workers in California with “access to a retirement savings program without the administrative complexity, fees, or fiduciary liability of existing options for employers”. The program offers participants “a completely voluntary, low cost, portable retirement savings vehicle with professionally managed investments and oversight from a public, transparent board of directors, chaired by the State Treasurer.” Employers subject to CalSavers are those with at least five full- or part-time employees who are over the age of 18, with at least one employee working in California.
2. When does CalSavers go into effect and what are employers required to do?
CalSavers is being phased in annually, on June 30th, over the next three years based on employer size. The first deadline is 2020 for employers with more than 100 employees, 2021 for those with more than 50 employees, and 2022 for employers with five or more employees. Employers who choose to participate in CalSavers must do so by the above effective dates or risk fines of $250 per eligible employee if they aren’t compliant within 90 days of the noted deadline. An additional fine of $500 is imposed if they are not compliant after 180 days, for a total of $750 per employee. While there is no cost to register for the program, there are a number of additional administrative tasks required of employers including management of employee enrollment and tracking of account details.
3. How does CalSavers work?
CalSavers is structured as a Roth IRA. Employees will have tax free earnings and distributions in retirement. Employees are automatically enrolled with a default contribution rate of 5 percent of gross pay, which will automatically escalate by 1 percent a year, up to a maximum contribution of 8 percent. The maximum contribution is $6,000 per year, or $7,000 for ages 50 or older. CalSavers offers only six investment funds and if an employee does not choose an option, the default investment will be the CalSavers Money Market Fund for the first $1,000, and subsequent contributions will be invested in the CalSavers Target Retirement Fund. Employees can change their contributions at any point and can also opt out of CalSavers altogether. Employers participating in CalSavers are not eligible to contribute or match employee contributions.
4. What are the employer responsibilities under CalSavers?
Employers must register to set up their CalSavers account by a specific deadline based on company size (see #2 above). CalSavers employers must also take on additional responsibilities including creating a payroll list in order to enroll employees, selecting a payroll service provider, submitting participating employee contributions via payroll deduction (to be managed by a third-party administrator), updating contribution rates including auto-increases, adding new/eligible employees, and unenrolling employees if they opt out or leave the company.
5. Is CalSavers the only retirement plan option for California employers?
No. There are several retirement plan options for employers that, unlike CalSavers, provide full administrative support as well as tax benefits. Working with a qualified 401(k) provider to offer a retirement plan that meets the needs of employers and employees provides significant benefits including:
Higher Contribution Rates Help Employees Save Faster: In 2019, annual contribution rates for employees are up to $19,000 for a 401(k) or $13,000 for a Simple IRA -- significantly higher than CalSavers’ $6,000 annual contribution maximum. Rates for employees over 50 are also higher with 401(k)s and Simple IRAs ($25,000 and $16,000, respectively) compared to CalSavers’ maximum of $7,000.
Employer Tax Benefits: When an employer sets up a Simple IRA or 401(k) plan, they are eligible for a tax credit of up to $500 per year for the first three years. CalSavers’ employers receive no tax benefit for opting into the plan. Also, under CalSavers, employers cannot contribute to or match employee contributions and therefore receive no tax deductions accordingly. However, since Simple IRAs and 401(k)s allow for employers to contribute or match, they can claim tax deductions pursuant to IRS guidelines.
Administrative support: When working with a Simple IRA or 401(k) plan provider, many administrative tasks are handled for you. With CalSavers, you are responsible for oversight of enrollment and ongoing participant management.
Is CalSavers best for you? Or should you consider a retirement plan that is designed for your company and employees? Don’t wait! Contact FMN today to learn about your options.