What Is CalSavers?
In 2016, legislation was passed in California that requires all employers with at least five employees to either sponsor their own qualified retirement plan or enroll in CalSavers. CalSavers is a program that gives employers a relatively easy and inexpensive way to provide a retirement plan for their employees. The objective of the law is to give more Californians the opportunity to save for retirement through their employer at a time when traditional pension plans have all but disappeared, and the future of social security is unclear.
CalSavers has been a topic of conversation among many small business owners lately because the deadline to comply is rapidly approaching. Every California employer with at least five W-2 employees must be in compliance by June 30, 2022 or they may be fined.
How Does CalSavers Work?
To start with, the CalSavers plan uses Roth IRAs. This means that the same restrictions and limitations that apply to a standalone Roth IRA also apply to a CalSavers account. Most noteworthy, you cannot contribute more than the annual contribution limit and you may be unable to contribute at all if you earn too much.
Employees at participating businesses are automatically enrolled in CalSavers with a contribution rate set to 5% of their gross pay. The contribution rate increases by 1% each year until it reaches 8%. Employees may adjust their deferral rate or even opt out of the program completely.
Participants in CalSavers will have their default investment set to a target-date retirement fund. Other investment options are limited to a sustainable balanced fund, a core bond fund, a global equity fund, and a money market fund.
What Do Employers Need to Do to Be in Compliance?
Employers must either enroll in CalSavers or have a qualified retirement plan by June 30, 2022. The program is meant to be easy for employers to use, but there are still some tasks for which they will be responsible. These include registering and enrolling eligible employees, submitting payroll contributions, manually adjusting deferral rates, and tracking employees who wish to opt out.
What Are the Penalties?
Employers who do not join CalSavers or have their own qualified retirement plan by their applicable deadline may be served failure-to-comply notices by the State of California. The employer will then have 90 business days to get in compliance. If the employer fails to do so, they will be fined $250 per employee. If the employer is still out of compliance after 180 days, they will be fined $500 per employee.
How Does CalSavers Differ from a 401(k) Plan?
CalSavers is designed to be a cost effective and easy to implement solution for small businesses. Conversely, employer-sponsored plans can be costly and more administratively time consuming to establish. However, they offer greater benefits for both employers and employees. In electing to enroll in CalSavers over starting a 401(k), employers forego additional benefits such as higher contribution limits, additional tax deductions and more investment options.
Below is quick comparison of benefits offered by CalSavers vs. an Employer-Sponsored Plan:
| CalSavers – Roth IRA Plan | Employer 401(k) Plan | |
|---|---|---|
| Contribution Limits 2022 | $6,000 $7,000 ages 50+ | $20,500 $27,000 ages 50+ |
| Allows for Tax- Deductible and/or Roth Contributions? | No, only Roth | Yes |
| Can highly compensated employees participate? | No. Those who exceed $144,000/yr. (single) or $214,000/yr. (married) modified adjusted gross income can’t participate | Yes |
| Option for Employer Match | No | Yes |
| Eligible for Employer Tax Credit | No | Yes |
| Employer Responsible for Plan Management | Limited responsibility | Yes |
| Customizable Investment Options | No | Yes |
| Employer Costs | No | Yes |
How to Determine the “Best” Option for Your Business
Employers Who Will Benefit from CalSavers:
- Business owners with five to 50 employees that do not have a need for additional tax deductions
- Business owners with supplemental owner retirement savings
- Business owners with attraction/retention of highly compensated employees
- Business owners that cannot support the additional cost of a retirement plan
Employers will be able to comply with the program requirements at minimal cost and administrative burden.
Employers Who Will Benefit from an Employer-Sponsored Retirement Plan:
Personal service corporations of five to 50 employees, such as medical groups, law offices, accounting firms, etc., will benefit the most from establishing an employer-sponsored plan. Employers who are looking to attract and retain the most sought-after employees will need to set themselves apart with stellar benefit offerings. Now that every employer who has over five employees must provide a retirement plan, it’s no longer ‘enough’ to provide a basic retirement savings plan. The highly compensated employee pool that is attracted to these lines of work will be looking for additional tax deductions. Lastly, company owners will be able to benefit from an employer-sponsored plan, whereas CalSavers is likely to leave this group without a retirement savings vehicle.
The Bottom Line
CalSavers is a great way to introduce a retirement benefit with minimal administrative burden and for zero direct cost to the employer. If, however, the employer has more sophisticated needs, an employer sponsored retirement plan is likely the best option.
At Whelan Financial we specialize in providing services for employer-sponsored plans for local business owners. If you’re interested in creating a retirement plan for your business, or would like to learn more about Whelan Financial and our services offered, please contact us here or call 559.228.8002.
Authored by Michael J. Ryan, CFP®, Taylor J. Whelan, CFP® & Kasandra Silva
