Participating in CalSavers is Not a Choice
December 3, 2021
At a glance
- Main takeaway: California’s state retirement savings program, CalSavers, is now in effect and will require businesses who do not offer a retirement plan to their employees to register.
- Impact on your business: Ignoring CalSavers is not an option. If your business does not have a retirement savings program for your employees, now is the time to set one up.
- Next steps: Aprio’s Retirement Plan Services team can help take control over your retirement savings program and explore which options fit your needs best.
The full story:
The State of California is mandating that all employers who do not have their own company-sponsored retirement plan must participate in CalSavers, a state-run retirement savings program. Starting June 30, 2022, this requirement will impact businesses with over 50 employees and will cover organizations with at least five employees.
Information for employers and registration links are available online directly from CalSavers. The law, states that all non-governmental businesses, including not-for-profits that are not religious organizations, must participate in the CalSavers program. The program requires that after registering and enrolling their workers, businesses withhold money for retirement savings and send the funds to the state.
Who is exempt?
This potentially burdensome paperwork must be completed by all organizations, except for those that offer their own qualified retirement programs. Although the registration rules for larger businesses have been in place since 2019, there has been no enforcement. Be aware that the authorities plan to start issuing non-compliance notices in January 2022.
Failure to comply can result in a penalty of $500 per employee. Smaller employers with five or more workers have until June 2022 to register. Thus, if your business has over 50 employees residing in California, does not have its own retirement plan and has not yet registered with CalSavers, the time to act is now.
401(k) Plan vs CalSavers
There are excellent alternatives to the CalSavers program, such as a 401(K) plan that complies with the law and provides a valuable benefit for employees. A 401(k) plan eliminates the ongoing manual paperwork required by CalSavers, comes with a compliance guarantee and is customizable to suit your business needs. It also offers the following benefits:
- 401(k) plans annual savings are capped at $19,500 compared to CalSavers $6,000
- Under a 401(k) plan, company matching is allowed, whereas CalSavers does not give the option to match employee contributions.
- 401(k) plan contributions are tax deductible for employees
Perhaps, the biggest downside of the CalSavers program is that the business owners are responsible for much of the plan administration, such as promptly informing the program of every new hire, keeping track of who opted out, recording those who customized their savings rates and updating payroll with every change. The manual process of CalSavers is outdated. Human error happens, however, the penalties and fines of the CalSavers program can be severe.
To make matters worse, business owners and senior employees who earn more than $140,000 per year ($208,000 if married) may not contribute to the program. Additionally, the program offers no tax credit to the business owner, compared to the maximum $15,000 tax credit employers can receive with a 401(k) plan.
The bottom line
Ignoring CalSavers is not an option. But optimizing your retirement savings program is in your control. Aprio’s Retirement Plan Services team can help you explore how you can best participate or opt out of the CalSavers program.
Schedule a complimentary plan review with our Retirement Plan Services team today.