Soon nearly all employers in California will need to offer a retirement plan or default to the state-run program. The CalSavers deadline is fast approaching on June 30, 2022—meaning all businesses with five or more California employees aged 18 or older must comply or face penalties.
Employees can opt out of the program at any time, but eligible employers cannot withdraw unless they are establishing their own qualified retirement plan. Now is a good time to explore alternatives like 401(k) retirement plans for your small business in California.
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Who Must Register Employees for the CalSavers Program?
Your business will need to register for the CalSavers program by June 30, 2022, if:
- You have five or more California-based employees over age 18
- You do not offer your own company pension or 401(k) retirement plan
You will need to visit the CalSavers website to either register for the state-sponsored IRA program or file an exemption if you are offering a private-market alternative like a 401(k). If you are participating in CalSavers, you’ll have up to 30 days after registration to add employees to the roster. Some light ongoing maintenance may be required.
What Were the Previous CalSavers Retirement Plan Deadlines?
The CalSavers retirement plan has been a couple years in the making:
- September 30, 2020, was the first deadline for companies with over 100 employees
- June 30, 2021, was the second deadline for companies with 51 to 100 employees
- June 30, 2022, is the third deadline for companies with five to 50 employees
What Happens If Companies Miss the CalSavers Deadline?
Close to 400 companies in the first wave missed the 2020 deadline. The state began penalizing these companies as of January 2022.
The Franchise Tax Board will assess a penalty of $250 per eligible worker on companies with more than 100 employees. The penalty will triple for companies that fail to comply within 90 days.
Businesses Don’t Have to Wait Until June to Get Started with a Retirement Savings Plan
Many businesses are foregoing the CalSavers program, instead taking this opportunity to offer their workers a company-sponsored 401(k) retirement plan that they own and control. After all, the CalSavers account doesn’t serve as an incentive for employee retention, as it transfers in the event of a job change.
How Does CalSavers Work?
Employees receive 30-day notice of auto-enrollment, at which point they can accept or change the standard deduction or opt out of the plan entirely. CalSavers Roth IRAs auto-enroll starting at 5% the first year, increasing 1% annually until reaching 8% in the fourth year, though workers can adjust the number up or down.
The maximum contribution is $6,000 for workers under 50 or $7,000 for workers age 50 and older. Investments are made into a simple target date fund with 0.825% to 0.95% AUM fees. Employees pay tax on the money up front, but do not owe taxes when the money is withdrawn in retirement.
Why Isn’t There a CalSavers 401(k)?
Even though 401(k)s are popular retirement savings vehicles, the government cannot order private enterprises to offer a CalSavers 401(k), as per the federal Employee Retirement Income Security Act of 1974 (ERISA). CalSavers IRAs were challenged as a violation of ERISA, but the 9th Circuit Court of Appeals ruled in May 2021 that CalSavers was a “state-run program,” not a mandatory employer-provided benefit.
Why Choose a 401(k) Plan Instead of CalSavers?
A privately sponsored 401(k) plan allows workers younger than 50 the ability to save up to $20,500 in 2022. If you’re age 50 or older, you can sock away an extra $6,500. While not every worker will be able to hit the maximum contribution limit, business owners and top executives can maximize their retirement assets this way.
It’s a common misconception that 401(k)s are too costly for small enterprises. Ubiquity is a plan administrator focusing exclusively on affordable, easy-to-manage small business 401(k)s.
Contact us for details on how you can set up a new program for one low monthly flat fee.
