The DEADLINE for companies with 5 or more employees is June 30, 2022.
Introduction
You may think you have to choose CalSavers to meet the retirement plan mandate in California, but you can use other vehicles. We think CalSavers is less than ideal.
As long as you offer some retirement plan to your employees (that meets the state criteria), you are in compliance. For instance, you can offer a 401(k) or a SEP IRA and other variations on a theme in lieu of CalSavers. Some easy-to-use alternatives offer advantages to your employees and more tax benefits to you, the employer.
Deadline Note: Every company with five or more employees must sign their employees up for CalSavers or provide proof that they have another type of retirement plan in place by 6/30/22. The deadlines for organizations with 50 and 100 employees have passed.
Why CalSavers is not ideal
The California Mandatory Retirement program (Cal Savers) states that any company with five or more employees is required to enroll its workers in some kind of retirement plan. It’s a bare-bones offering that does not provide a lot of guidance to your employees, although it’s gotten better since its inception. The official CalSavers website makes it sound simple, and that simplicity is its inherent weakness.
While no employer fees are required, and there is not much work for the employer, “simple” means fewer choices and less flexibility. CalSavers does not offer the opportunity for match or profit-sharing, and participants are limited in the amount they can contribute. The CalSavers plan design is one-size-fits-all, and participation eligibility is based solely on age. Anyone 18 years of age or over is entitled to participate.
What are Alternatives to CalSavers?
Private Plans
Private plans offer the ability to reward employees for their contribution to your company or their length of service. The plans can be designed to help owners enhance their savings and their employees’ too. While CalSavers has a fixed lineup of investments, private plans can tailor the investments hopefully to increase the return. Administrative fees and costs for private plans are tax-deductible.
Any of the following Qualified employer-sponsored plans would be acceptable in place of CalSavers, but you still must register your exemption.
- 408(k) SEP Plan
- 408(p) SIMPLE IRA Plan
- 401(k) Plan
- Payroll deduction IRAs with automatic enrollment
For your convenience, we provide here the link to CalSavers to register your exemption.
Choosing Among Private Plans
Each of the variations on the retirement plans below has advantages, disadvantages, and some limitations. However, we believe you have more flexibility with these programs. And because there may be only a teeny bit more administrative time, we think it’s worth it. Here are some descriptions of the private plans. It’s best to do some of your own research and then check with a CPA or specialist in retirement plans for more information before deciding which to choose.
When would a company set up a 408(k) SEP plan?
You might want to have a SEP (Simplified Employee Pension) plan if you’d like flexibility in your retirement plan. You can create intentional program designs such as requirements for employees’ eligibility and vesting based on their years of service. The IRS does require that anyone aged 21 or over who has worked for you for at least three of the last five years is eligible to contribute. While it’s easy to set up and your CPA can help with it you might want to check the IRS website for this plan. The contribution limit for a SEP is higher than the SIMPLE IRA. The employer is responsible for contribution decisions.
When would a company offer a 408(p) SIMPLE IRA plan?
This is an easy plan to set up but is not available to companies with over 100 eligible employees. In this case, the employers make mandatory contributions to participants’ IRAs of 2% of pay to all eligible employees; or match employees’ contributions up to 3% of compensation. In this plan, the employer selects the investment provider wherein the fees and fund options can vary. In the SIMPLE IRA, the employer and employee share responsibility for their retirement. More details are available online, and your CPA can offer input. The IRS website for the SIMPLE IRA is here.
When to use a 401(k)?
These plans are easy to set up but require a third-party administration for annual compliance reviews, plan document maintenance, and tax-return preparation. You have more control here in terms of vesting, eligibility, contribution and distribution types. The employer contributions can be fixed or discretionary. In the case of employer contributions, you have Profit Sharing/Non-elective (not dependent on participant deferrals) “Match” (which are dependent on participants’ deferrals), and vesting schedules that may apply. These are a little more involved than the other plans. Here’s the 401(k) IRS website.
Would a Payroll Deduction IRA be a good idea?
Another easy solution is the Payroll Deduction IRA. Any sized business can provide this benefit. Its advantage over CalSavers stems from the fact that the employee establishes an IRA (Traditional or Roth) with a financial institution of their choosing. They authorize the payroll deduction. On the employer side, if you offer it to one employee, then you must offer it to everyone. But the program remains pretty simple because no annual filings are required. However, in this plan, there is no deduction for the business. Bottom line, the employees fund their own Payroll Deduction IRA through an after-tax deduction from their paycheck. And because no employer match is available, It’s not the employees’ favorite either. But it’s an option.
The private plans mentioned above are pretty standard, and CPAs can help you dive int o the details of each one and decide which would be best for you, your company, and your employees.
Penalties for non-compliance
If the State thinks they should have heard from your company, they will notify you, stating that you must comply or show proof of exemption. Penalties are assessed ninety (90) days after the date of notification and are based on the number of employees the State thinks should have been offered the CalSavers plan. How much? It’s $250 per eligible employee at first and then an additional $500 per eligible employee if you fail to answer them for another ninety days.
Conclusion
There are other fairly simple ways to give yourself and your team more control over the positive aspects of saving for the future than CalSavers, which was put in place so workers in California would have an easy way to save for retirement. It is designed to make it simple for employers to offer this benefit without their having to contribute to the plan, and there is no cost to the employer to maintain this plan.
We think employers can do better.
If you would like our input for the best choice for your company, please get in touch with us. We feel the private plans are better and we can guide you (without making specific investment decisions, of course) to the correct type of plan for your company, its employees, and the owners or management team.
