What is CalSavers?
7 things California employers need to know about finding the right retirement savings plan for their business
Given the upcoming registration deadlines, you may be hearing more and more about CalSavers. But, what is it and is it mandatory? Read on to find out everything you need to know about CalSavers.
Finding the best retirement savings plan for your employees isn’t easy. As an employer, you want to offer your employees tools that help them save for their future. The guide below provides an overview of the CalSavers program and how it compares to other retirement savings options.
- What is CalSavers?
CalSavers, formerly known as Secure Choice, is California’s retirement savings program for the 7.4 million private sector workers who do not currently have a way to save for retirement at work. CalSavers, established through the passing of Senate Bill 1234 in late 2016, stipulates that employers must offer a retirement savings plan AND, if they fail to offer one of their own, then they must offer their employees CalSavers, the state-operated retirement savings plan (or else face fines). The plan has a strong focus on small businesses, focusing on employers with five or more employees.
- How does CalSavers work?
CalSavers gives employers a way to set up an Individual Retirement Account, or IRA, for each eligible employee. While many retirement savings plans offer more flexibility, CalSavers mandates that plans use default features, unless otherwise specified:
- Employee payroll deductions are automatic, but adjustable — even opt-outable. Employee deductions are automatically set to 5% of an employee’s gross pay (similar to other state retirement plans). Employees can adjust their contributions setting to a higher or lower percentage of their pay.Employees can opt out of the program (though they have to re-opt out every two years).
- It’s a Roth IRA program. Employee deductions are placed into a Roth IRA. A Roth IRA comes with an annual contribution limit: in 2020, this is $6,000 if under age 50 or $7,000 if age 50 or older. High-earning employees are subject to a reduced contribution limit.
- CalSavers is portable. If an employee changes jobs, they keep their CalSavers account. It’s a portable plan designed to move with the employee throughout their working life.
- Employee investment options. The default investment option for the first $1,000 payroll contributions to CalSavers is a money market fund and the subsequent contributions will be deposited in a target-date fund consistent with your birth date. A few other investment options exist, as well.
- Why did the state pass this legislation?
California is one of more than 20 states to have considered – or passed – some type of law regarding state-run retirement savings programs. Why do we need it in California? In short, because so many people in California – 7.4 million workers aged 25-64 – don’t have access to the most common tools to help them save for retirement. Put another way, 61% of private sector workers have no way to save for retirement through their employer, according to data from the University of California, Berkeley’s Labor Center:
- Is CalSavers mandatory?
Enrolling in CalSavers is NOT mandatory. However, what is mandatory is that all employers in the state with at least five W-2 employees MUST offer a qualified retirement savings plan* to their employees. If employers fail to offer a plan, they will face fines.
*A qualified retirement plan includes a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b).
- What’s the deadline?
Registration deadlines depend on company size:
- June 30, 2020 – employers with >100 employees
- June 30, 2021 – employers with >50 employees
- June 30, 2022 – employers with 5+ employees
- What if an employer doesn’t comply?
Employers who don’t offer a plan by the deadline may face financial penalties: The CalSavers website indicates that, per Unemployment Code Section 1088.9(b), each eligible employer that, without good cause, fails to allow its eligible employees to participate in CalSavers, on or before 90 days after service of notice of its failure to comply, shall pay a penalty of $250 per eligible employee if noncompliance extends 90 days or more after the notice, and if found to be in noncompliance 180 days or more after the notice, an additional penalty of $500 per eligible employee.
- What other retirement savings plans are available, or is CalSavers the only option?
CalSavers isn’t your only choice for a retirement savings plan. There are many retirement providers out there, new and old, who offer a range of products, including retirement savings plans such as IRAs, 401(k)s, defined benefit pensions, and more. Only a few are custom-built for the needs of small-to-medium businesses. So, how do you choose one?
What retirement plan is right for my company?
Many employers prioritize offering a competitive retirement plan. Not only can starting an employer-sponsored retirement plan come with tax benefits, but it’s also attractive to employees. Offering a retirement benefit can increase recruitment and retention rates as well as employee loyalty. In fact, 88% of workers say a 401(k) is a must-have when looking for a new job.
Choosing the right retirement plan
Start by identifying what is most important to you and your employees. It might be…
- The total amount that you and employees can save each year, as well as whether those contributions will come with any tax benefits.
- The time and manual effort that it takes to set up and administer the plan day-to-day. Note that some providers offer integration with payroll providers to automate employee contributions.
- The cost to you, or to your employees, and how those compare to the rest of the industry.
- The level of support you and your employees will have, including help with setup and day-to-day administration or compliance; ongoing support by phone or email; or help with choosing investments.
- The specific features of the plan, like whether investment advice is included, the type of investment options you’ll be able to access, or whether you can offer perks like an employer match, vesting, etc.
Read more about how to choose the best 401(k) provider.
Two of the most common plans are IRAs and 401(k)s. To date, IRAs have been available to anyone through a bank or financial institution, but increasingly, through programs like CalSavers, they’re being offered through employers.
Though you may already be familiar with them, here is a side-by-side comparison of the major differences between the state-run IRA offered by CalSavers and a typical 401(k).
(offered by CalSavers)
Typical 401(k) Tax benefits (for employers starting a new plan) None Yes, up to $15,000 over three yearsYes Pre-tax benefits (for employees) None (contributions are post-tax) YesYes Annual contribution limit* Under age 50: $6,000
Age 50+: $7,000
Under age 50: $19,500
Age 50+: $25,500
Contributions are... Post-tax
(i.e. you pay taxes today)
(i.e. you pay taxes in retirement)
Income eligibility** To make the maximum contribution, employees must have a modified Adjusted Gross Income no higher than... ***
$124,000 for single filers
$196,000 for married/joint filers
**See more about how the IRS calculates modified Adjusted Gross Income (mAGI)
***Employees may be eligible to make a partial contribution if their mAGI is, for example, between $124,000-$139,000 for single files. See more here.
In summary, compared to CalSavers, a typical 401(k):
- can let you save more money each year
- offers contributions that could reduce your taxable income (since contributions are made pre-tax)
- has no eligibility restrictions in terms of household income and
- may incur tax benefits for both employees and employers
Read more about the differences between an IRA and 401(k).
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