California; We have the beaches, the mountains, the forests, lakes and deserts, which is the reason why most people that live in California do. However we also have to endure the consistent and seemingly endless regulatory change, more so than most states. Surprise, surprise! I'm here to share with you one more extremely large yet relevant change that has actually already been implemented, somewhat. That change is the CalSavers Retirement Savings Program, and yes this is very real.
What is the CalSavers Retirement Savings Program?
CalSavers is a "state-run retirement savings program" that is required to be facilitated by California employers if the employer does not offer their own retirement plan (i.e. 401(k), SIMPLE IRA, SEP, etc.) and they have more than just 5 employees.1 As you have probably figured by now, that is the vast majority of employers in California! This program began in July 2019 and California employers can now start voluntarily participating in the state sponsored plan. But not so fast! Before you roll your eyes and let the stress begin to build, let me go over some important details and alternatives.
The reason I said that it is only "somewhat" implemented is because the there is actually a 3-year phase with deadlines in which some sort of employer provided plan must be implemented (it's required!), and it is based on the number of employees you employ. The deadlines are as follows:
June 30th, 2020: Businesses with 100 or more employees
June 30th, 2021: Businesses with 50 or more employees
June 30th, 2022: Businesses with 5 or more employees
This means that an employer must either register and start facilitating the CalSavers program, or implement their own custom retirement plan from any available plan providers (there are many) by these deadlines. If you are an employer you may be thinking "eh I have time", but I caution you against that train of thought. From my experience, retirement plans can and do take a good amount of time to implement. This is especially true if you fall in the 50+ or 100+ employee camp. These take a lot of time to design effectively and implement, possibly several months! Not to mention, retirement plans are one of the best benefits an employer can offer for themselves and their employees; why not start sooner? If you already offer a retirement plan or choose to implement your own instead with the help of your financial advisor, CalSavers won't apply to you.
How Does CalSavers Work?
As an employee a portion of your pay is automatically contributed to an IRA via salary reduction from your paychecks. This process can be thought of like a 401(k) plan where you select a contribution amount and it is deducted from your check and put into your 401(k) account to be invested. However it is far from a 401(k) plan. In fact it is different in almost every way.
CalSavers only uses IRAs. IRAs have much smaller maximum contribution limits compared to 401(k)s which can limit your retirement and tax planning opportunities significantly. Currently for 2019, the maximum IRA contribution is $6,000 per year with a $1,000 catch-up contribution for those over age 50. For 401(k) plans and the like, the max salary deferral limits for 2019 are $19,000 with a $6,000 catch-up if over age 50. Not to mention, there may be employer profit-sharing contributions too! If you include the max profit sharing amount to the max employee salary deferral amount, you could have $56,000 or $62,000 if over age 50 put into your plan, per year. These numbers are typically (but not always) adjusted year-to-year due to inflation. There is no profit sharing plan in CalSavers since it is IRAs only.
The program currently offers employees Roth IRAs, and is supposed to be adding Traditional IRAs (pre-tax) mid 2019. Not only do they have smaller contribution limits, but Roth IRAs also have different eligibility rules based on your income. This means that if you make over a certain amount, you can't even contribute to one, even if you are in the CalSavers program. Strange, I know. On the flip side, with a Roth 401(k) you can contribute no matter what your income is, that is one of its greatest benefits.
CalSavers currently offers a very basic investment platform. There are a total of seventeen investment options. All but one option are with a single investment company.
How much is taken from employee paychecks?
This is up to the eligible employee to decide, and they can even opt out of participating in the plan entirely. An eligible employee in CalSavers is any employee that is at least age 18, has worked for the company for a mere 30 days, and is paid by W-2. If the employee does not opt-out or select a percentage amount to be deducted from their paycheck, CalSavers will auto-enroll the employee at 5% of gross pay. Not only that but they will auto-escalate the employee's contribution each year up until they hit 8%. If the employee does not make their election within 30 days of hire, the employer is required to have them auto-enrolled for a Roth IRA payroll deduction.
NOTE: The income limits for the Roth IRA and other rules for both Roth and Traditional IRAs still apply even if CalSavers is automatically enrolling and escalating. Therefore, if you do not qualify to contribute to a Roth IRA because of the income limitations, YOU are responsible for opting out of the plan! Go figure.
The employer will have to keep track of all their eligible employees and offer them the CalSavers plan within the first 30-days of being hired. The employer is also responsible for tracking and setting up the eligible employees to have auto-escalation each year. Even if there are employees who initially opted out, the employer will be required to auto-enroll them if the employee does not opt-out again during the Open Enrollment period. In summary the employer has to track new eligible employees, removing employees who have left the company, and submitting contributions.
Fees and penalties
There are no fees to register with CalSavers. The only fees associated with the plan are actually charged to the participants and are based on the investments in the plan they choose.
If a California employer does not comply by implementing CalSavers or starting their own custom retirement plan, there will be proposed penalties. These penalties start at $250 per eligible employee if the employer does not comply within 90 days of being notified. The penalties can get up to $500 per eligible employee if non-compliance surpasses 180 days from date of notice.
The Bottom Line
Retirement plans are a great thing! They can be excellent tax savings vehicles, especially for employers! For this reason alone the CalSavers program isn't necessarily a bad thing, however you have a tremendous amount of options and flexibility available to you when getting your own customized plan started. Many employers don't realize this. It is our opinion that all employers should have some sort of retirement savings vehicle or employer plan in place. Even if you have less than five employees or are a sole-proprietor, Single-member LLC, or the only shareholder and employee of your S-corp, you can still benefit from a retirement plan and implement many tax-savings strategies! For ideas on tax-savings strategies that could be taken advantage of by having your own retirement plan, see my related article on Tax Efficient Retirement Portfolio Strategies.
If you are an employer without a plan in place, work with your advisor to understand how a plan can benefit you and your employees. They should be able to show and advise you on plan designs that fit your company structure as there can be many. If you don't have a trusted advisor, feel free to reach out to us for a consult, we will be happy to answer any questions you may have.
Cameron Valadez is a CFP® Practitioner.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
This article is strictly for educational purposes only and it is not investment/financial advice or a recommendation of any kind. Please consult your financial advisor before making financial decisions. Investing involves risk and the potential to lose principal. (08/19)
Waddell & Reed is not affiliated with the CalSavers Retirement Savings Program.