In 2019, the state of California put in place the CalSavers Retirement Savings Program, with the goal of enabling California residents to save for retirement.
Right now, almost half of all private-sector employees in the U.S. are employed by small businesses. Of that group, only about 10% have a retirement savings plan at work. Despite this, the benefits of offering a retirement program are wide-ranging for a small business, helping improve employee performance and retention.
In this article, we’ll break down some of the most frequently asked questions regarding CalSavers.
What is CalSavers, and how does it impact me?
CalSavers is the state of California’s retirement savings program. It gives employees whose employers don’t offer a retirement program the ability to contribute to an Individual Retirement Account (IRA) with each paycheck. CalSavers is overseen by a state board and administered by private-sector financial service firms.
So, how does the CalSavers mandate impact you? According to the CalSavers website, employers who meet the following criteria must participate in the program or set up another qualifying retirement program like a 401(k):
- Employer has five or more W-2 employees in California
- At least one employee is 18 years or older
- Employer does not offer a separate, qualified retirement plan
Employees at businesses that meet this criteria are automatically enrolled in the program unless they choose to opt out. Employees of smaller businesses (i.e., fewer than five employees) can also open a CalSavers account, but they need to do so on their own through the self-enrollment process.
How does CalSavers work?
CalSavers is an automatic enrollment Roth IRA program. Employee contributions to the programs are automatically deducted from each paycheck after taxes are taken out, so employees do not have to pay income taxes on this money when withdrawing it for retirement. The program is completely voluntary for employees, and they can opt out at any time.
If an employee doesn’t choose their own percentage of paycheck to be deducted, they will be entered into the standard savings rate for CalSavers: 5% of their gross pay. There is also a feature that automatically increases an employee’s savings rate by 1% each year until it reaches 8%.
Funds contributed to CalSavers grow tax-free, and participants can withdraw their contributions at any time. However, if a participant takes money out of their CalSavers Roth IRA before the age of 59½ by requesting a nonqualified distribution, the IRS charges a 10% penalty on the earnings portion of their distribution.
Also, at any time, participants have the option of transferring their account balance into a traditional IRA.
When is the CalSavers deadline for businesses?
CalSavers deadlines for businesses are based on company size. The CalSavers website breaks down the deadlines by companies with:
- 100+ employees – 9/30/20 (deadline passed)
- 50+ employees – 6/30/21 (deadline passed)
- Companies with 5+ employees – 6/30/22 (deadline passed)
The average number of employees reported to California in the previous calendar year determines deadlines for compliance and eligibility. For businesses with five or more employees, the implementation deadline was June 30, 2022. If your small business already offers a retirement program, you may instead indicate on the state’s website that you are exempt.
CalSavers penalty
Employers who fail to comply must pay a penalty of $250 per eligible employee if noncompliance extends 90 days or more after receiving notice of non-compliance; $500 per eligible employee if non-compliance extends 180 days or more after the notice.
Currently, CalSavers is beginning to enforce non-compliance fines for businesses with more than 100 workers that do not offer an alternate retirement plan.
Which employees can participate in CalSavers?
Any resident of California who is 18 years or older and has a job is eligible to participate in CalSavers. Eligible workers are auto-enrolled by their employers but have a 30-day window to change their contribution rate, investment option, or to opt-out before any payroll contributions begin. Savers can make changes to their accounts or opt-out at any time. Accounts are owned by each individual participant and are portable from job to job.
Participating employers are required to upload their new employees into the portal within 30 days of their hire date. Self-employed individuals and business owners are also eligible and can use the self-enrollment process to open accounts.
Are there any CalSavers program alternatives?
If your business has five or more employees and isn’t sponsoring a plan yet, there are several alternative options of plans to offer. You can set up a:
- 401(k) plan (including multiple employer plans or pooled employer plans)
- 401(a) – Qualified Plan (including profit-sharing plans and defined benefit plans)
- 403(a) – Qualified Annuity Plan or 403(b) Tax-Sheltered Annuity Plan
- 408(k) – Simplified Employee Pension (SEP) plans
- 408(p) – Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA Plan
- Payroll deduction IRAs with automatic enrollment
While CalSavers might be the right decision for many employers in the state, other businesses could be better served by establishing their own employer-sponsored retirement plan, such as a 401(k), to meet CalSavers requirements while also improving their employees’ financial security.
A 401(k) plan offers both traditional and Roth options as well as higher contribution limits and profit-sharing. Because of this, 401(k) plans are an opportunity for business owners and employees to save more for retirement. Importantly, employer contributions to a 401(k) are deductible on the employer’s federal income tax return up to a certain limit, meaning employers can also benefit financially from offering employees a 401(k).
It’s important to consider all available options and research which plan is best for your business.
How can Patriot & Vestwell help?
Patriot and Vestwell have partnered to offer affordable retirement plans for small businesses in California and across the United States. Vestwell’s digital retirement platform directly integrates with Patriot’s payroll software, making it easier for you to offer and administer a company-sponsored 401(k). By combining technology with best-in-class retirement plans, Vestwell has created custom programs for Patriot customers that are incredibly affordable and easy to set up and use.
If you’re a California employer interested in setting up a 401(k) account for your business instead of facilitating CalSavers, you can contact Vestwell to determine if you are eligible to receive up to $16,500 in tax credits, which can help cancel out administration costs.
Interested? Learn more here.
This is not intended as legal advice; for more information, please click here.