Key Takeaways
- State law mandates that all California employers with five (5) or more employees either offer a retirement plan, such as a 401k, or sign up for CalSavers;
- The deadline to register for CalSavers depends on the employer size, with the first deadline beginning June 30, 2020 for employers with more than 100 employees;
- The penalty for noncompliance can be $250 or $500 per employee depending on timing.
What is CalSavers?
Americans face a retirement crisis as many find themselves financially unprepared for their non-working retirement years. In fact, the National Institute of Retirement Security (NIRS) found that the average working American household has almost no retirement savings. The research found that the median retirement account balance of working Americans is $2,500 and $14,500 for those nearing retirement.
CalSavers is a new state-run individual retirement account (IRA) program designed to help Californians prepare for a healthier financial future. When an employer signs up for the program, they will deduct a default rate of five percent (5%) of pay from each employee’s check and deposit it into the employee’s CalSavers IRA account. This deduction will auto escalate one percent (1%) annually to a maximum of eight percent (8%). Of course, an employee may elect a different amount, or completely opt out of the program. Other states that offer similar plans are Connecticut, Illinois, Maryland, and Oregon.
Must businesses use the state-sponsored program?
No. CalSavers is one way to satisfy the requirement that every qualified employee in California have access to a retirement plan. Businesses can sponsor their own employer-sponsored retirement plan, such as a 401k, to fulfill this requirement. We recommend employers weigh all available options, including researching retirement plan solutions through an experienced service provider like Nesa Plan Consultants, prior to making a decision.
If you’re a California employer, you must take part in the program if you:
- Do not currently offer a retirement plan; and
- Have five (5) or more employees whether full or part-time.
What is the registration deadline and are there any penalties for failing to comply?
It depends on your company size.
Employer Size | Registration Deadline | Noncompliance Penalty |
More than 100 employees | June 30, 2020 | $250 per employee if the employer does not comply within 90 days of receiving a notice requiring registration and $500 per employee if not compliant within 180 days of receiving the notice. |
More than 50 employees | June 30, 2021 | |
5 or more employees | June 30, 2022 |
How does CalSavers compare with a 401k?
While CalSavers has some advantages, such ease of administration and less fiduciary liability, a 401k provides employers with the opportunity to maximize their contribution and tax savings while helping employees prepare for a meaningful financial future.
CalSavers IRA | 401k | |
Employee contribution maximum | $6,0001 | $19,0001 |
Employee age 50 catch-up contribution | $1,0001 | $6,0001 |
Employer match option | No | Yes |
Tax credit for opening new plan | No | Up to $500 per year for first three years |
Employee enrollment meetings and education | No | Yes |
Automatic enrollment & escalation | Required by law | Varies, depends on the plan |
Customizable investment lineups | No | Yes |
1. This contribution is subject to cost-of-living adjustments and may change in future years | ||
Next step
It is critical that California businesses and organizations plan ahead. More specifically, determine if participating in CalSavers IRA or offering a 401k is more viable for their firms, as each option has its advantages and disadvantages.
Have questions? Not sure if CalSavers or a 401k is better suited for your organization? Nesa Plan Consultants can help. Send us an e-mail at mrahman@nesa401k.com or call us at 818-275-1556.
A 12-year veteran in all aspects of workplace retirement plan benefits program, Mizan Rahman specializes in the compliance, administration, design, and legal documentation of 401(k), 403(b), and 457(b) plans. Mizan provides high-level, personalized consulting to small and medium-sized businesses and not-for-profit organizations. One of the select few to have been awarded Enrolled Retirement Plan Agent (“ERPA”) by the Internal Revenue Service, Mizan regularly represents clients in front of DOL and IRS during audits.
