California’s New Employer Retirement Plan Mandate: CalSavers
California has a new law requiring employers that do not already sponsor an employee-retirement plan to participate in a state-run retirement program called CalSavers. The law compels automatic enrollment in the program for employees, beginning with a 5% salary reduction; however, employees have the ability to opt-out or make changes to the plan.
All employers with five or more employees of any status (full time, part time, seasonal, etc.) must begin participation in the plan by June 30, 2022 – unless they already sponsor, or begin to sponsor, a traditional retirement plan ahead of the deadline. Employers have different deadlines to comply with the mandate, according to the size of their workforce. Employers with 100 or more employees must have registered for the program by September 30, 2020. Employers with 50-99 employees have a June 30, 2021, registration deadline. Employers with 5-49 employees must register by June 30, 2022. All employers are eligible to begin participating in the program now, and do not need to wait until a forthcoming deadline. Additionally, Californians can enroll on their own as individuals if they do not have access to a retirement savings plan through their employer.
The CalSavers program is not intended to be a traditional retirement plan. Rather, it is a state-run program to help employees begin thinking about and saving for retirement. CalSavers will send notices to employers ahead of the deadline with a registration number, so employers can begin registration in the program.
The program aims to – and does – remove many of the complexities involved in sponsoring a traditional retirement plan, which can be especially challenging for smaller employers. Most importantly, the program does not make employers ERISA plan fiduciaries. A caveat to be aware of, however, is that the employer must not advise its employees on where to invest funds, and the employer can neither encourage nor discourage participation in the program. If it does either of these things, ERISA law requires the employer to become the plan fiduciary, which brings additional compliance challenges.
Although the program is completely voluntary for employees, the law requires employers to proactively and automatically enroll all employees in the program, as noted above. Employees must be enrolled in the program by the deadline, or within 30 days after date-of-hire for employees hired after the deadline.
When employees are enrolled, they begin a 30-day decision period when they can leave the plan as-is, make changes to the plan (contribution changes, etc.), or opt-out of the program entirely. During this window, employers must work with their payroll providers to begin providing deduction amounts for employees. At the conclusion of the 30-day period, unless changes are made, employees will be enrolled in the program beginning with a 5% payroll deduction.
If the employee decides to customize his or her enrollment, he or she can change the contribution rate, change investment fund choices, designate beneficiaries, manage personal information, make a withdrawal, or set up additional personal contributions. Employees can contribute anywhere from 0% to 100% of salary, up to the annual IRS maximum contribution allowance, which is $19,500 in 2020. Employees can make changes to their plans at any time throughout the year, including opting out.
The funds withheld from employees’ paychecks are based on gross income, and are withheld on a post-tax basis. The funds are put into a Roth IRA; however, employees have the option of re-characterizing the program into a traditional IRA. Regardless of the employee’s IRA type, the plan will always belong to the employee. The employee’s first $1,000 deduction is put into a traditional money market fund. Additional dollars are put into a target retirement fund, based on the employee’s age and anticipated retirement date.
In order for employers to register, they must adhere to registration deadlines, set up their account on the CalSavers.com website, submit an employee roster/census, and maintain that roster as they retain, hire, and terminate employees.
Employers will not incur fees for participating in the program; however, it’s important to understand that employers cannot contribute to employees’ plans. Doing so would make them the plan’s ERISA fiduciary with compliance responsibilities. If the employer desires to make contributions to employees’ retirement plans, it can do so via a traditional retirement plan – especially ahead of the state deadlines.
CalSavers has registration and enrollment services available throughout the state to aid employers in compliance and enrollment; your clients can get information by sending an email to firstname.lastname@example.org. More information is available on the CalSavers.com website, including an in-depth FAQ section.
As with most mandates from the state, non-compliance penalties for violation of the retirement-program mandate are hefty, and are assessed by the California Franchise Tax Board. Under Government Code Section 100033(b), each eligible employer that, without good cause, fails to allow its eligible employees to participate in CalSavers on or before 90 days after its deadline, will be fined $250 per W-2 employee. If noncompliance extends further, employers will be fined up to an additional $500, for a total of $750 per W-2 employee. Employers can be penalized for missing any step of the process – including not registering employees by the deadline, not adding new-hires to the CalSavers system within 30 days, not submitting contribution amounts, cessation of program facilitation, etc.
Although this mandate is not necessarily related to health insurance, it is one of major importance to employers in California. A health insurance broker who uses this information to keep clients informed of changes in the employment marketplace – inside and outside of health insurance – will surely see continued client retention and business growth.
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