California law currently requires most employers to offer a qualified employee retirement plan (such as a 401(k)) or enroll their employees in the state-sponsored CalSavers program. For employers who do not otherwise offer a qualified retirement plan option, the June 30 CalSavers deadline for businesses with five to 50 employees to enroll is fast approaching. The deadline for privately held companies with 50 or more employees is already past. The state-provided Roth IRA can be an excellent opportunity for employees, better providing financial security when they retire.
Employers with five or more employees must be proactive if they wish to be compliant and avoid fines, which are $250 per eligible employee 90 days after the deadline and triple to $750 per eligible employee if the non-compliance exceeds 180 days.
How the plan works
Formerly known as Secure Choice, CalSavers provides retirement saving opportunities to an estimated 7.4 million California workers between the ages of 25 and 64 in the private sector who don’t currently have a retirement plan at work. Covered employers (those with at least 5 full-time or part-time employees) must offer a retirement plan, which can be either the state-run CalSavers retirement plan or another qualified retirement savings plan of their choosing (including a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b)) to their employees.
Employers who use the state’s program must be mindful of the state’s default features. These include:
- Employee deductions are set by default at 5% of gross pay to start, with increases of 1% per year up to a maximum of 8% unless the employee opts out.
- Employees can change their contribution levels higher or lower or opt-out.
- The annual contribution limit is $6,000, but it goes up to $7,000 for workers over age 50 and high earning employees.
- CalSavers follows the employee from job to job.
The initial contribution goes into CalSavers Market Fund for 30 days. All subsequent contributions and any earnings in the Money Market Fund will be re-allocated to a CalSavers Target Retirement Fund, which is based on the worker’s age and the year closest to when employees their age typically expect to retire. Or employees may choose to customize their investments from among CalSavers’ available investment options.
Why is it so important?
According to the UC Berkeley Labor Center, 61% of workers in the private sector between the ages of 25 and 64 do not have the opportunity to take advantage of a retirement plan. Those numbers have climbed in the last 25 years, prompting the state to roll out this new initiative.
Employers may not be happy with the additional accounting necessary, nor the oversight and enforcement penalties, but retirement plans and other benefits can help businesses attract and retain top-tier talent.