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California Pilot - CalSavers - Begins for State-Sponsored Retirement Program

Employee Benefits
Article
11/29/2018

Starting in November, employers in California with at least five employees who do not already offer a workplace retirement savings plan have been given the option of joining a pilot program called CalSavers.

Businesses involved in the pilot will be able to provide feedback and shape the program prior to the registration deadline for eligible businesses, a three-year phase-in that has a deadline of July 2019 and continues through July 2021, depending on the number of employees. However, employers do not have to wait for their designated deadline to join.

With CalSavers still being in a pilot phase, there are some facets of the program that are merely proposals, such as penalties for non-compliance.

What is CalSavers?

For now, CalSavers is a Roth individual retirement account (IRA) similar to programs started in Oregon (OregonSaves) and Illinois (Secure Choice) that is designed to give millions of workers in the Golden State who lack access to an employer-sponsored qualified retirement plan* a chance to save for the future. It is a portable plan that will have oversight from a public board of directors. In July 2019, CalSavers also will offer traditional IRAs. The difference between the two: Roth IRAs invest pre-taxed earnings and withdrawals aren't taxed, while traditional IRAs invest pre-tax earnings and withdrawals will be taxed as income.

*A qualified retirement plan includes a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b).

Employer requirements, registration deadlines, and penalties

Eligible employers must first register their business, and then once registered they have one year before the mandated deadline for their size business to implement CalSavers, if the business does not already have a qualified plan in place. The implementation deadlines are as follows:

  • June 30, 2020: Businesses with 100-plus employees
  • June 30, 2021: Businesses with 50-plus employees
  • June 30, 2022: Businesses with five-plus employees.

Employers also will:

  • Not be able to make contributions
  • Submit employee contributions
  • Incur no fees to facilitate the program

Even though there is no fee to register for the program, employers could face financial penalties for not having a retirement savings plan available for eligible employees to join. The proposed fines range from $250 per eligible employee if an employer remains noncompliant after 90 days of being served notice, escalating to $500 per eligible employee if noncompliance reaches 180 days or more after the notice. 

Employers also must factor in some investment of time on their part once they do register for the program, including setting up an account and then managing the account. Account setup includes such tasks as creating a payroll list to enroll employees, designating a payroll service provider – employers can use the one they have, if applicable – and transmitting payroll to a third-party administrator determined by the board of directors. Account management duties require employers to submit contributions (which means having a detailed list of what each employee’s contribution rate is) and adding new employees when necessary.

Employers do have some protection in that they would not to be subject to Employment Retirement Income Security Act (ERISA)-related lawsuits. Congress repealed the ERISA exemption for state-funded retirement plans, which shields small businesses and states from such lawsuits. ERISA sets minimum standards for most voluntarily established pension and health plans in private industry to protect individuals in these plans.

Do businesses have to use the state-sponsored program?

No. Registering for the CalSavers program is one way to fulfill the requirement that every qualified employee in California have access to a retirement plan. Businesses can also establish their own employee retirement plan, such as a 401(k) or SIMPLE IRA, to satisfy this requirement. You should consider all available options before deciding, including researching retirement plan solutions through an industry-leading service provider such as Paychex.

Employee responsibilities

In CalSavers, employees gain a portable plan that follows them from job to job and enables them to opt out and in at any point. If employees do not act within 30 days of notification once an employer registers for the program, they will be automatically enrolled at the default savings rate.

Employees should know:

  • Contributions will be made through payroll deduction
  • The default savings rate is 5 percent of gross pay
  • They have option to customize their plan and choose a different rate and change that rate at any time
  • They can opt back in to the program at any time

Why are California and other states sponsoring their own retirement plan?

America faces a retirement crisis, as many people find themselves financially unprepared for their non-working retirement years. In response, states such as California have begun establishing their own retirement plans.

The National Institute on Retirement Security (NIRS) sponsored a 2015 report that found the average working U.S. household has virtually no retirement savings. Some of the numbers from the NIRS research included a median retirement account balance of $2,500 for all working-age households and $14,500 for near-retirement households. Additionally, 62 percent of households age 55-64 hold less than a year's worth of income. A worker should have between five and eight times their annual salary saved for retirement by age 67, financial experts recommend.

What are the differences among state-run IRAs, SIMPLE IRAs and 401(k) plans?

A state-run sponsored IRA is one way to satisfy requirements and help employees save for retirement. However, it's in businesses’ best interest to compare it with other financial options and decide which option best fits their needs and those of their employees.

The chart below shows key characteristics of a state-run IRA compared to a SIMPLE IRA and 401(k) plan, both of which Paychex offers. The biggest differences are the option for a company to match a portion of savers' contributions, and the maximum amount employees can contribute.

2019

State IRA

SIMPLE IRA
(Offered by Paychex)

401(k)
(Offered by Paychex)

Contribution Max

$6,000

$13,000

$19,000

Company Match Option

No

Yes, mandatory

Yes, at employer’s discretion

Tax Credits for Opening New Plan

No

Up to $500 per year, for the first 3 years

Up to $500 per year for the first 3 years

Employer Tasks

The employer processes payroll contributions, updates contribution rates, adds newly eligible employees, etc.

Paychex is the plan administrator

Paychex is the plan administrator

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.