Setting up a Vesting Schedule for your 401K in California 

Employer matching contributions are not only a great way to attract and retain the best talent for your company, but they are also a great way for business owners to save on income taxes as well. 

If you’re considering a matching contribution for your employees who choose to participate in a 401k here are some things you’ll need to think about when it comes to vesting. 

Setting up your vesting schedule.

Setting up your vesting schedule means deciding how long your employees will wait before the matching contributions you make are 100% theirs. This is important from a talent acquisition and retention perspective because, although most people are honest, some would come for the benefits and leave quickly taking your money and their tax-free savings with them leaving you in the lurch twice over. 

What is a vesting schedule?

When you provide a 401k to your employees, you can choose to set up matching contributions.  When the employee contributes the maximum annual contribution amount to their Tax-free retirement savings account in the form of an employer-sponsored 401k.

Overall annual contributions to a 401(k), which includes employer contributions, is $61,000 for 2022. For people 50 and older, the limit goes up to $67,500, which includes the catch-up contributions. for 2022).

With a matching 401k, you, as the employer agree to contribute the same amount or some pre-defined percentage of the employee contribution to that employee’s 401k retirement account. This strategy is often a part of a tax-advantaged plan for both the owners and the employees because the employer writes that contribution off of their taxes, effectively providing a tax-sheltered way to offer an employee added benefits. Everybody wins. 

82% of employers that offer traditional 401(k) plans say they match a portion of their workers’ account contributions.


The money an employee contributes to his or her 401K is always 100% theirs and is a movable asset they can take with them when and if they leave your employ. However, the matching contributions you make as an employer remain your company’s assets until such time as that employee is vested, after which time those assets belong to them and can be taken with them if they leave. 

401k vesting schedules can be set up in three primary ways: 

Immediate, graded, and cliff. As you may imagine these have very different structures. 

Immediate vesting schedules are exactly what they sound like.  The employee has immediate ownership of the employer’s matching funds and can leave at any time with both their contribution and the funds contributed by the employer without restriction.  This type of plan relies on a strong hiring protocol to ensure employees are in it for the long haul 

Graded vesting gives proportions of the total employer contribution to the employee at timed intervals. For example, the employee may get 10% in year one, 40% in year two, and on until the employee is100% vested. 

Cliff vesting requires the employee to remain with the company for a set amount of time before receiving the matching contributions. The cliff, the time at which those matching contributions become the 100% property of the employee, can be set at no greater than 3 years.

As an employer, you must fully explain the vesting schedule in the 401K information packet given to employees upon setup of the retirement savings account. 

With Employer401K we can set your plan up to be tax-advantaged for you, great for your employees, and a tax-free benefit that can attract top talent to your organization. All business owners with greater than 5 employees will have to offer a 401k as of June 2022. 


What Employers in CA need to know about CalSavers

Saving for retirement used to be top of mind for people, it was discussed  in their jobs, it was expected as they started families… But as times have changed and cultural norms have shifted, retirement savings has fallen out of the collective consciousness. 

The result of this culture shift and spending/saving habit shift is that a whole generation of Americans are grossly underprepared for retirement. 

The state of California decided to step in to help ensure that thousands of adults will not be reliant on government programs.  As part of their initiative, they implemented the CalSavers retirement savings plan. 

What is CalSavers?

CalSavers is a law that requires that all California business owners with 5 or more employees provide a qualified retirement plan to their employees. As of 9/2020 Employers with 100+ employees have been required to either sponsor a 401(k) plan or equaled qualified retirement savings plan, or enroll in CalSavers.

Who administers the CalSavers plans?

The state of California runs the CalSavers program and deducts contributions from employees’ payroll checks to fund the CalSavers Roth IRAs of its participants. 

Who can enroll?

Part-time and full-time W-2 workers are able to enroll in CalSavers and contribute to the post-tax Roth IRA plan.  The Cal Savers plan is an auto-opt-in-enrollment. This means everyone must actively choose NOT to save for retirement as opposed to being required to do something to participate in the plan. This strategy has been shown to be more effective for increasing enrollment in other types of plans.  

Unless an employee actively opts out, they are automatically enrolled in the savings program, contributing 5% of their after-tax earnings to their CalSavers Roth IRA.

Annually, contribution amounts auto-increase by 1% maxing out at 8%. Cal Savers requires a manual opt-out to stop the increase and that opt-out must be submitted but the employer to CAlSavers each year.

How are CalSavers plans structured?

The CalSavers accounts have an annual maximum contribution of $6,000. All contributions are post-tax Roth IRAs. There are no matching or employer contributions with a CalSavers plan. Employees who make more than $135,000 per year are not eligible for the CalSavers plan.

Are there better alternatives to Cal Savers?

There are alternatives to CalSavers.  The only requirement by the state of California is that employers must provide a qualified retirement savings solution to employees by the dates set out by law. As an employer, you can offer a 401k instead of the more limited CalSavers Roth IRA. A 401(k) allows for profit sharing and has a maximum annual contribution of up to $61,000 or $67,500 for employees ages 50 or older whereas the CalSavers plan has a maximum contribution level of $6,000/year and does not offer any profit sharing. 

CalSavers only allows for post-tax (Roth) contributions, but a 401(k) plan allows for pre-tax and Roth contributions. 

Both 401k and CalSavers assets grow tax-differed but, only the 401k offers employers the option to match contributions and to use the retirement savings s a tool not only to attract and retain top talent but also as a tax strategy for themselves. 

What are the advantages of a 401k over CalSavers?

There are a number of advantages to employers and employees.  Among those, a loan can be taken against a 401k but not against the Roth IRA set up through CalSavers. Business owners can make tax-deductible contributions to their plan as an employee to create tax deductions from their personal taxes, They contribute as an employer as well using that as a business expense, to reduce taxable income.

Additionally, there are tax credits for setting up your first 401(k). The credit is 50% of the costs to start a 401(k), from a minimum of $500 per year up to $5,000 per year for the first three years. 

Are there penalties for non-compliance?

Penalties for not setting upCalSavers or a qualified retirement savings plan for employers with 5+ employees in the state of California after June 2022 are $750 per eligible employee. That is structured as $250/eligible full-time or part-time W-2 employee 90 days after a notice of non-compliance and $500 more after 180 days. 

Don’t panic, it’s actually really simple to set up your 401k.  At Employer401k we estimate it will take you all of 2 hours per YEAR to set up and manage your 401k plan. 

What do employees need to know about CalSavers?

Employees must determine their eligibility in terms of salary – if they make over $135k/annually they must opt-out of CalSavers. 

Employees pay the .82% to .95% of asset fees for their CalSavers plan. 

If an employee has $100K in CalSavers, $820-$950 a year will automatically be deducted for fees from the State of CA. 

What do employers need to know about CalSavers?

Annually, employers implementing CalSavers must: 

  • Track opt-outs
  • Set up payroll deductions
  • Manage the 6-month look-back for auto-escalation:
    • Track if the employee has been participating for 6 months with no auto-escalation
    • Provide 60-day notice that they will be auto-escalated on Jan 1st if they do not opt-out again
  • Submit an employee census to CalSavers
  • Track eligibility status for employees
  • Provide enrollment packets to all employees 30 days after hire
  • Hold open enrollment every 2 years
  • Auto-enroll any employee not participating for at least 1 year

As you can see, California’s state-run retirement solution is time-consuming and not the most tax-efficient or optimal plan.  What it does well, however, is inspire employers to find a better option. While it is not explicitly stated, it would seem that the state of California came up with a great strategy to motivate employers to engage in strategic retirement planning that is better for them and better for their employees. Sometimes, it just takes a gentle nudge to get something good going. 

Let’s talk about how to set up a simple, effective, hassle-free 401k for your company in about 2 hours per YEAR. 

What is a Co-Fiduciary 3(21) and or 3(38)?

Fiduciaries and ERISA

The laws governing compliance and responsibilities of plan administrators are outlined in the ERISA law of 1974. As defined by the DOL, “The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.”

What is a Co-Fiduciary?

A co-fiduciary is anyone who is contractually bound to act on behalf of anyone else.  The relationship consists of a Fiduciary and a Beneficiary. In the case of employee benefits administration, that’s the benefits broker or administrator (the fiduciary) and the company owners (the beneficiaries). Being a fiduciary comes with a very strict duty of care which requires that a fiduciary avoid conflicts of interest and not use their position of confidence to further their own interests. It’s a law that is attempting to govern intent and align that intent with the good of the client.

What do 3(21) and 3(38) reference?

Section 3 is the section of the ERISA law that governs fiduciaries and each parenthetical number refers to a subsection of that part of the law. Section 3(21) defines an ERISA fiduciary as someone who “exercises any discretionary authority or control regarding the management of an employee benefit plan or the disposition of its assets”. 3(21) also refers specifically to those benefits administrators who offer investment advice in exchange for compensation.

What is Section 3(38)

Section 3(38) addresses anyone with the power to “manage, acquire, or dispose of any asset of the plan”. Essentially, this section says that while 3(21) allows advice to be given, 3(38) allows that advice to be implemented. Any Benefits plan administrator with this designation is also a registered investment adviser affiliated and or registered with a bank or an insurance company.

Why choose a 3(21) Advisor?

By choosing a 3(21) investment advisor, the plan administrator or trustee shares fiduciary responsibilities with the advisor. Some call this creating a co-fiduciary relationship. However, a plan administrator or trustee may generally rely on an investment advisor for advice or recommendations, and thereby avoid fiduciary liability for those investment recommendations.

Who needs a 3(38) advisor?

If your client needs someone to control the investment of some or all of the plan assets, then your client would look to engage an investment advisor under 3(38). A 3(38) investment manager makes investment decisions. In contrast, a 3(21) advisor provides investment recommendations. In the context of a participant-directed plan such as a 401(k) plan, this means recommending or selecting the plan’s investment menu.  In selecting the investment menu, however, a  3(38) investment manager must follow an Investment Policy Statement that is prepared by the plan administrator or trustee in consultation with the investment manager. Take heed though, a client cannot hire a 3(38) manager and wash their hands of involvement in the plan: ERISA requires that the plan administrator or trustee exercise prudence and judgment in choosing the 3(38) manager.

What else is covered under section 3?

If your client needs someone to actually handle some or all of the plan administrative functions, including meeting ERISA reporting requirements, disclosure requirements, filing the correct paperwork with ERISA, and making the required disclosures to plan participants, then your client would need a third-party plan administrator that would fit the 3(16) definition. That person also has responsibilities to the plan participants as beneficiaries of the administrator’s efforts, making them fit into that general concept of fiduciary. The plan administrator under 3(16) would make some or all of the day-to-day decisions for the plan, including distributions and interpreting documents. This can reduce the administrative burden on the person named as fiduciary under the plan, and shift liability for the delegated administrative functions to the outside plan administrator. Those who do the record-keeping for the plan are generally not considered 3(16) plan administrators because they work for the 3(16) administrator and do not have the discretion to act on their own.

Compliance, in conclusion:

Finally, a client with a complex plan, or a plan with specialized needs, may want to ensure proper compliance with ERISA’s reporting and disclosure requirements by looking to engage a plan administrator, but also need to improve plan performance or mitigate investment risk by engaging an investment advisor or investment manager. In terms of understanding the various definitions under ERISA, your client should keep close to the general concept of a fiduciary, in terms of what degree of involvement and direction your client needs over the retirement plan, as well as the requirements to disclose, act with loyalty, invest and manage assets prudently and avoid conflicts of interest.