California law requires that employers offer an employer-sponsored retirement plan if you have at least 5 employees. Otherwise, the company must use the CalSavers Retirement Savings Program, a rudimentary state-run retirement savings program for those working for a privately-owned business. Choosing between a retirement plan of your own and the state’s CalSavers program is an important decision that can have consequences for you and your employees.
CalSavers was designed for small business who cannot afford the costs of offering retirement programs to their employees and is supposed to give employers an option to help their employees save for retirement without any employer fees or fiduciary responsibility. However, CalSavers is a basic plan and it does have employer requirements.
Here is what SMALL BUSINESS OWNERS need to know about the program:
- CalSavers is a state-run Roth IRA program. Employers will not contribute to funds, manage funds, or have any responsibility for financial advice.
- Employers of five or more employees will be required to provide a retirement option, or enable their employees to make an automatic contribution from their paycheck into their CalSavers account.
- Small businesses are phased into the CalSavers program over a 3-year period
- Employers with over 100 employees are required to participate by September 30, 2020 (deadline passed)
- Employers with over 50 employees are required to participate by June 30, 2021 (deadline passed)
- Employers with over 5 employees are required to participate by June 30, 2022
- If an eligible employer fails to participate in the CalSavers program within 90 days of the applicable deadline, they will receive a penalty of $250 per employee. If the employer fails to comply 180 days or more after the deadline, they will be penalized an additional $500 per employee.
- Small businesses with fewer than 5 employees, or businesses that already offer retirement savings program options will not be required to offer CalSavers.
Here is what SMALL BUSINESS EMPLOYEES need to know about the program:
- The program allows employees to contribute a percentage of their paycheck to a personally owned Roth IRA account.
- Default contribution rate is 5% of gross pay.
- Savings rate will automatically increase by 1% each year until your savings rate reaches 8%.
- Employee can change rate at any time.
- Employees will be auto-enrolled after 30 days and will begin saving through payroll contribution.
- Employees can opt out and back in to the program at any time.
- The CalSavers account is portable, moving with the employee if they change jobs.
- Employees can keep the standard options for savings rates and investments, or choose their own
While the CalSavers program is convenient, it doesn’t necessarily mean it is the best retirement plan option for yourself and your employees. A carefully selected retirement plan of your choosing could offer valuable incentive for attracting and retaining key employees. You could also give your employees more investment options as well as potential tax benefits by setting up your own retirement saving plan rather than using CalSavers.
Some potential drawbacks of CalSavers:
- Employees are limited to after-tax contributions
- Roth IRA income limits could restrict participation
- Limited investment options
- No ability for financial advisor guidance
- Potential tedious documents to maintain and manage as an employer
ACCESS A PLAN WITH MORE OPTIONS
Have our advisors walk you through your options to select a plan that fits your business and employees.