March 29, 2021
State of California Mandates Employer Retirement Plans
In 2016, the State of California passed legislation requiring all employers with five or more employees and who do not have a company retirement plan, to offer a state-run program to their employees. The law became effective in 2020 and this program is known as CalSavers. The program operates like a ROTH IRA, but the difference is that the employee has less decision-making in their investment choices.
CalSavers only provides for employee payroll deductions and no employer contributions are allowed. Employers must enroll employees at an amount of 5% of their pay, but employees can opt-out online with the State of California.
Employee contributions are placed into a pre-tax account with no current tax deductions and investment choices are limited. The first $1000 goes to a money market account and subsequent contributions go to a Target Fund. This type of fund invests employee contributions based on the employee’s age and younger people are invested more aggressively than older individuals. There is also a bond fund, equity fund, and a balanced fund. An employee will need to go online to the State of California website to make investment changes or otherwise opt-out of the program.
The cost is to the employee ranges from .825% to .95% and these fees are deducted from the employee’s account and with no employer fees. The maximum annual contribution is $6000 and $7000, if an employee is age 50 or older.
An employer is not required to participate in CalSavers if they sponsor or participate in a retirement plan, such as a 401(k) plan or other company sponsored pension plan.
CALSavers has mandated the following effective dates base on the number of employees, if an employer has any of the following scenarios:
100 or more employees, no later than September 30, 2020, (past due) or
50 or more employees, no later than June 30, 2021 or
Five or more employees, no later than June 30, 2022
Employers must start making payroll deductions 30 days after the plan start date and must make new employee contributions within 30 days.
Employers who fail to comply with the requirements of the California mandate may be fined by the California Franchise Tax Board. As such, it is important for employers with employees in California to adopt a retirement plan and file an exemption with the state or register with CalSavers, to ensure they comply by the applicable deadline. BEI highly recommends employers begin this process prior to the final date.
How We Can Help
Benefit Equity Inc. is in the business of creating all types of retirement plans for businesses in many diverse industries. If you do not have a retirement plan and fall under this mandate, please reach out to your plan financial advisor, and if you do not currently have a financial advisor, we will be happy to refer one. BEI will also do an analysis to help you make the best choice for your company and your employees.
Our fees are very reasonable and the government is currently offering a tax credit for employers starting new plans of up to $15,000. Please reach out to us at PlanServices@BenefitEquity.com or call us at 714-480-1364, Ext 0.
Author: Robert Gorelick, APA, Founder Benefit Equity Inc.