CalSavers is a law that took effect June 30 mandating all California business owners with five or more employees to provide a retirement plan to their employees or be subject to fines of up to $750 per eligible employee.
CalSavers was created to address retirement insecurity for all workers, as more than half of private-sector workers lack access to a retirement plan at work. It is designed to make it easier to save for retirement. CalSavers has a simple, understandable menu of investment options, portable accounts, and an accessible, multilingual client services team.
The non-compliance penalties of $250 per employee will be levied on employers by the CalSavers Retirement Savings Board in partnership with the Franchise Tax Board, following dozens of notifications sent by letter and email from the program since it launched three years ago.
Non-compliant employers will be penalized $250 per employee upon the first penalty notice and, if noncompliance persists another 90 days, an additional $500 per employee, for a total of $750 per employee for sustained non-compliance.
In 2012, California was the first state in the nation to pass legislation establishing an automatic enrollment retirement policy for private-sector workers who lack access to work-based retirement plans. CalSavers seeks to facilitate the largest expansion of retirement security since the advent of Social Security in the 1930s and is already a model for a growing number of states seeking to establish a similar program. To register, or learn more, visit calsavers.com.
(Q&A with Arthur Q. Johnson (above), CFA, president/CIO of Mundoval Capital Management in La Jolla. A member of the CFA Institute and the CFA Society of San Diego, he founded Mundoval in 2002 to assist family, friends, and clients in managing their wealth.)
Q.HOW DOES THE CALSAVERS PLAN WORK?
A. The CalSavers plan is a payroll-deducted Roth IRA that is run by the state of California. If an employer adopts the CalSavers plan, all of their W-2 employees are eligible to participate (including part-time workers). The program is auto-enrolled at 5%, which means that unless employees proactively opt out they will be automatically enrolled to contribute 5% of after-tax income to the plan.
Q.WHAT FEATURES ARE INCLUDED IN THE CALSAVERS PLAN?
A. The CalSavers plan includes the following features: Auto-enrollment at 5% (i.e. employees will be automatically enrolled to contribute 5% in the plan unless they proactively opt out annually); Auto-escalation (i.e. employee contributions will be automatically increased by 1% annually (up to 8%) unless they proactively opt out annually); Annual contribution maximum of $6,000; Roth only contributions (no pre-tax option); Does not allow loans; Does not allow employer contributions; Limited to employees with annual income < $135,000
Q.WHO CAN PARTICIPATE IN THE CALSAVERS PLAN?
A. Because the CalSavers plan is a Roth IRA, there is an income cap for participation — only employees who make less than $135,000 per year are able to participate. This means any employee (including the owner(s)) who make more than $135,000 per year can’t contribute to the CalSavers plan at all. A 401(k) plan has no income cap for participation, so employees and owners can all participate, regardless of income.
Q. DO EMPLOYERS HAVE TO OFFER THE CALSAVERS PLAN?
A. California business owners do have to offer a retirement plan, but it doesn’t have to be the CalSavers Plan. Business owners who offer a 401(k) (or other qualified retirement plans) are exempt from the mandate. Other qualified retirement plans could include 403(b), SEP IRA, and SIMPLE IRA.
Q. HOW DOES CALSAVERS COMPARE TO OTHER PLAN OPTIONS?
A. A 401(k) plan allows employees and the business owner(s) to save significantly more than the CalSavers plan. A 401(k) also includes a profit sharing option and allows for combined employee and employer contributions up to $57,000 a year or $63,500 if age 50 or older. Meanwhile, the CalSavers plan only allows participants to save up to $6,000 ($7,000 if age 50 or older) per year. This may not be enough to help you and your employees achieve your retirement goals. Furthermore, a 401(k) can have more plan types added on to help you save more when your business is ready.
Q. DOES CALSAVERS APPLY TO ALL BUSINESSES?
A. CalSavers applies to any employer who has 5 or more W-2 employees in California.
This includes non-profits, as well as out-of-state businesses with employees who reside in California.
Q. DO EMPLOYEES HAVE ANY COMPLIANCE RULES TO MANAGE WITH CALSAVERS?
A. Employees themselves may deal with compliance issues with the CalSavers plan. It is up to the individual participant to determine if they make too much to contribute. This means if a participant contributes to their retirement account and then finds out they make too much money to be eligible, they could be subject to penalties and fees.
Q. HOW MUCH DOES CALSAVERS COST?
A. The CalSavers plan cost ranges from 82% to 95% of assets; this fee is deducted from each employee’s account balance. For example, if an employee has $100K in the retirement plan, $820-$950 a year will automatically be deducted out of their balance. There is no direct cost to the employer, but there are many ongoing tasks the employer must perform in order to administer the CalSavers plan.
Q. CAN PARTICIPANTS TAKE A LOAN FROM THEIR CALSAVERS ACCOUNT?
A. The CalSavers plan doesn’t allow loans. When life happens, sometimes it can make sense for a participant to borrow against their retirement savings. If you, the employer, choose, a 401(k) plan can offer a safety net to participants, including owners who participate in the plan, in the form of 401(k) loans. These loans can be used to finance a new business venture, or even provide short-term relief when the unexpected occurs— like the COVID-19 pandemic.
