A Small Business Owner’s Guide to CalSavers
Answering your top questions about California’s retirement savings program vs. alternative plans
In an effort to help Californians save for a financially secure future, the state of California is rolling out an initiative requiring all employers with five or more employees offer some type of retirement plan for their workers.
CalSavers—the state-sponsored plan—offers a basic Roth IRA to help employees building their retirement savings. But with low contribution limits, limited investments, and limited tax advantages, is it the best solution for empowering your team’s financial future?
At Ubiquity Retirement + Savings, we’ve been helping small businesses and their employees grow their nest eggs for over two decades with affordable, customized 401(k) solutions. While we believe the state’s program is an important step toward ending the looming retirement crisis in California, a 401(k) might be better alternative for your small business and your employees’ futures.
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Why is the state of California offering a retirement plan?
55 million American workers—more than 40% of full-time private-sector employees—don’t have access to a workplace retirement savings plan.
Why is this such problem?
As very few employers offer pensions and Social Security is drying up —with funds expected to be depleted as soon as 2035, it’s more responsibility is for saving falls more on the individual than ever before.
Since 2012, at least 45 states have implemented or considered establishing state-facilitated retirement savings programs–with the states of Oregon, Illinois, and our home state of California leading the charge.
In July 2019, California began rolling out CalSavers, the state-sponsored IRA program for the 7.4 million private-sector workers in the state who do not have access to an employer-sponsored retirement savings plan. As of April 30, 2021, more than 10,000 employers were registered allowing nearly 140,000 individuals to save for their future.
We are rapidly approaching the next CalSavers deadline on June 30, 2021–employers in California with more than 50 employees will be required to enroll in the state-run Roth IRA or offer a private option.
How does CalSavers work?
CalSavers is an automatic-enrollment, payroll deduction Roth IRA. We know this sounds like a lot of financial jargon–so let’s breakdown what that means.
This means, if your business opts into the state provided IRA, after a 30-day grace period, eligible employees will be automatically start saving for the future through a 5% contribution from their payroll.
How does this work in practice?
Added employees will a notification from CalSavers and will have 30 days to decide to customize their account, opt out of the program, or be automatically enrolled with the standard savings choices.
This means participating employees contribute a portion of their salary into their IRA automatically from each paycheck.
A Roth IRA is an individual retirement account where the saver pays taxes on money going into your account, and (if you meet certain IRS criteria) all future withdrawals are tax-free.
Roth IRAs have a couple important rules and restrictions to keep in mind.
- You can’t contribute to a Roth IRA if you make too much money. The income limit for singles in 2021 is $140,000.
- The amount you can contribute each year changes, based on inflation. In 2021, the contribution limit is $6,000 a year unless you are age 50 or older—in which case, you can deposit up to $7,000.
How much does the state-run plan cost my business?
There are no employer fees in the CalSavers program–nor are you allowed to make tax deductible matching contributions, as you could in a 401(k) plan.
Your employees, on the other hand, will pay annual asset-based administration fee of 0.825% to 0.95%, depending on their investment choices. These fees will be pulled directly from their assets in their account.
What happens if an employer does not register for a qualified plan by the deadline?
If your business does not register for CalSavers, or an alternative qualified private retirement plan, you may be charged a a $250 penalty per employee starting 90 days after the deadline. The fine increases to $500 per employee 180 days after the deadline.
What are the benefits of enrolling in the state-run plan?
There are several advantages for companies to choose the California’s IRA product including:
- No cost to the employer
- No fiduciary risk
- No investment management responsibilities.
What are the potential drawbacks of enrolling in California’s state provided option?
The access to workplace retirement savings plans offered by Calsavers is a big step forward in solving the looming retirement crisis. However, there are significant drawbacks when compared to alternative eligible 401(k) plans from a private provider like Ubiquity Retirement + Savings.
The contribution limit for a 401(k) is more than three times higher than that of an IRA.
Higher contribution rates allow savers to take advantage of the power of compound interest, meaning the more money that is saved, the more it can grow over time.
Missing out on significant tax benefits
Did you know small businesses that sponsor retirement plans for their employees are rewarded by the government? Thanks to the SECURE Act of 2019, small businesses can qualify for up to $16,500 in tax credits over a three-year period by starting a qualified retirement plan, such as a 401(k) plan, with auto-enrollment. Employers choosing the state provided option are not eligible for these benefits.
CalSavers charges your employees asset-based fees.
Currently CalSavers does not offer the choice to select a flat-fee program, which provides more transparency and ultimately lower costs as savings accumulate. By charging an asset-based fee, your employees are increasingly penalized based on how much they save.
What are the alternatives to the CalSavers program?
Businesses can offer a qualified retirement plan from a private provider, which could allow for more savings while providing tax incentives and greater customization.
Let’s see how the state mandate IRA stacks up against Ubiquity’s most popular small business savings vehicle.
Typical State IRA
Maximum employee annual contribution amount
Additional annual employer contribution limit
Yes, up to an additional $40,500¹
Flat fees that don’t increase with your account balance
No, asset-based fees
Yes, flat fees
Tax credit that can total up to $5,500 per year – or $16,500 for the first three years of the new 401(k) plan2
Flexible auto-enrollment and vesting schedules
Investment guidance based on individual risk tolerance
Employee enrollment meetings and education
Auto-enrollment and escalation
Required at mandated levels
Optional and flexible
Customizable investment lineups
This limit is subject to cost-of-living increases for later years (for prior years, refer to this cost-of–living adjustment table.)
Available to eligible employers who have less than 100 employees who received at least $5,000 in compensation in the previous year, had at least one participant who was a non-highly compensated employee, and in the last 3-years did not contribute to a benefit plan for your employees through a plan sponsored by you or a member of a controlled group that includes you.
Choose the better path to savings
If you’re looking for the maximum savings potential and tax benefit, Ubiquity provides customizable 401(k) plans that act as a CalSavers alternative. For over two decades we have pioneered flat-fee retirement plans, designed for small businesses, all delivered online to you and your employees. That means no hidden fees or AUM charges in the fine print. We have helped hundreds of thousands of employees save towards their future.
The content of this blog is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. Be sure to consult a qualified financial adviser or tax professional for official guidance.