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.
