Small Business Guide to California Retirement Savings Plans

As many California business owners know, changes to retirement plan requirements have been on the docket for many years, and have come to fruition in recent years. In 2016, California passed state legislation to begin mandating businesses to provide their employees with retirement plan options. 

Now, in 2021, these requirements will begin going into effect for businesses statewide, with rolling deadlines based on a company’s number of employees. 

As a California business owner, are you prepared for how these changes will impact your business? Do you currently offer your employees a 401(k) plan? If not, do you know what options are available and the best fit for your employees? (and you) 

Let’s dive into the 401(k) requirements in the state of California, from the current situation to a breakdown of the legislation, and everything you’ll need to know as a business owner to remain compliant (and competitive) in the state.

• Why is California Mandating Retirement Plans?
• A Look at State-Mandated Programs
• What do the California State Requirements Look Like?
• Comparing Retirement Savings Plan Options

Why is California Mandating Retirement Plans?

California’s Retirement Plan Crisis

The United States is experiencing a drastic saving crisis; looking at the nation as a whole, nearly ⅓ of Americans, or 55 million, have NO retirement savings, while 22% of Americans have less than $5,000 total saved for retirement. 

In California, the situation is not much better. Half of California private-sector workers have no retirement assets, and about 7.4 million California private-sector employees age 25-64 (61% of this segment) do not have access to an employer-sponsored retirement plan. 

According to experts, we need to prepare to have 70-80% of our current wages annually saved up per year for our retirement years. And, counting all household assets, most working-age California families are under-prepared for retirement. 

This concerning situation is due to a gap in coverage for small businesses with retirement plan options that make sense for them. And yet, studies show that employees are more likely to save when given access to a retirement plan at work, and are more likely to accept a job when a company provides retirement benefits. 

A Look at State-Mandated Programs

With these staggering national statistics on the current retirement plan situation, states are taking it upon themselves to ensure employees have access to savings programs. State-run plans are providing private workers with access to retirement plans via their employers. 

These plans are sponsored by the state, facilitated by employers, and funded by employee investments via payroll deductions. While the plan has a default contribution of 5% of gross pay, this contribution level can be adjusted by the employee. 

Nationally, these plans have the potential to provide retirement plan access for as many as 55 million U.S. workers who previously did not have access to an employer-provided plan. The potential impact is huge, and you can expect to see legislation enacted in additional states in the coming years. 

Other State-Mandated Retirement Programs

In response to the national savings crisis, 30 states have considered legislation for state-mandated retirement programs. And, as of January 2020, 10 states have enacted legislation to put these plans into action. 

States that have a state-sponsored retirement plan:

• California
• Connecticut
• Illinois
• Maryland
• Massachusetts
• New Jersey
• New York
• Oregon
• Vermont
• Washington

As of June 2020, five states have officially implemented a mandated retirement savings programs for employers: California, Oregon, Illinois, Washington, and Massachusetts.

What do the California State Requirements Look Like? 

Background on California Legislation

In 2016, Governor Brown signed legislation requiring the State of California to begin development of a workplace retirement savings program for private-sector workers who are not offered a retirement plan by their company. The California State program, CalSavers, would ensure that an estimated 7.5 million California workers would soon have access to workplace retirement savings. 

In November 2018, a pilot program of CalSavers was launched with a small group of participating employers, and, effective July 2019, all employers in the state of California are now able to sign up on their own accord. 

What are the requirements for employers?

The new legislation mandates that any employer in the State of California with 5 or more employees will have to offer an employer-sponsored retirement plan (also known as a 401(k) Plan) to their staff. Your plan can take shape in a number of ways, but to be compliant with the state’s requirements, it simply must give employees the ability to defer money from their paycheck into their retirement plan. Deadlines are staggered based on a company’s number of employees.

What are the options for employers?

By each deadline, businesses must certify that they have a retirement plan in place, or they have two options to comply with the state mandate:

1. Start a retirement plan on their own 
2. Register with the state program and start an IRA plan (also known as CalSavers)

Would a profit-sharing plan meet the guidelines of this legislation?

No, on its own, a profit-sharing plan would not meet the requirements, as it does not give employees the ability to defer money from their paychecks. 

Deadlines

What is the 401(k) deadline in California? California is using a three-year tiered rollout schedule with staggered deadlines. Registration deadlines have been established based on the number of employees a business has.

• More than 100 employees: September 30, 2020- Passed
• More than 50 employees: June 30, 2021
• Five or more employees: June 30, 2022

How long does it take to start making contributions to a new plan?

Contributions can start within 60 days. So, if you’re looking to be up and running by June 30, 2021, you should decide which option is best for your business no later than April 30, 2020. 

What counts as an Employer-Sponsored Retirement Plan?

An employer-sponsored retirement plan could look like a number of things:

• 401(k) Plan
• Qualified Annuity Plan
• Tax-sheltered Annuity Plan
• Simplified Employee Pension
• Simple IRA Plan 
• Governmental deferred compensation plan

• Note - does NOT include payroll deduction IRAs

If an employer does not select an external source, the default plan is CalSavers -- a Roth IRA with automated enrollment, and a default savings rate starting at 5% of gross pay (but employees can specify a different rate at any time). In the future, CalSavers will offer a traditional IRA as well.

What happens if a business does not register by the deadlines?

If a business does not register by the deadline, they will receive noncompliance penalties based on their employee count.

Proposed penalty fines range from $250 per eligible employee if an employer remains non-compliant after 90 days of being served notice, and increases to $500 per eligible employee if noncompliance reaches 180 days. For businesses with more than 100 employees, missing these deadlines could result in hefty fines for employers. 

What designates an eligible employee? 

Right now, the legislation isn’t specifying eligibility within your employee count (i.e. part-time transient employees vs. full-time salaried employees), it is strictly focusing on the number of people you employ. 

When it comes to part-time employees, you can set up exclusions so that they aren’t included in your retirement plan offering. However, once a part-time employee exceeds 1,000 hours in a year, they are considered a full-time employee and must be included in the program.

What is the Secure Act? 

California’s recently passed Secure Act has further changed how the state designates part-time employees. The new law signed into effect in December 2019 designates that if an employee works at least 500 hours for three consecutive years, now they are eligible to participate in the plan. No matter how many, or how few, hours they work in future years, they will continue to be eligible for your plan. 

Comparing Retirement Savings Plan Options

Now that you understand the legal background and what is required of employers, let’s take a deeper look at the different retirement savings plan options available to employers.

CalSavers Retirement Savings Plan

CalSavers is a state-run automatic enrollment program that allows employees to contribute up to $6,000 per year to a Roth IRA. Employees 50 years of age and older are allowed to contribute up to $7,000 annually.

While CalSavers has the potential to provide a positive impact for employees statewide, in some ways, it’s a less-than-ideal option for California employers. 

Here are some considerations and pitfalls of CalSavers for employers:

• Employees will be auto-enrolled after 30 days. 
• The default contribution amount is 5% and there is an automatic escalation provision, meaning the rate will increase by 1% each year but will be capped at 8%. 
  • Note that an employee can adjust and decrease their contribution rate after it is set up, but they must do so on the CalSavers website directly (can’t be integrated with your workforce management tool). 
• CalSavers account holders (employees) will have to pay management and record-keeping fees of between 0.85% - 0.92% of their account balances annually. For employers with large employee accounts, this can quickly become a substantial cost.
• Contributions are limited to $7,000 annually, limiting employees who want to save more.
• The program is overseen by a state board, and funds are managed by Boston firm State Street Global Advisors.
• There is a limited investment menu available to employees. They can choose from a money-market fund, a bond fund, two stock funds and target-date funds. 
• As an employer using CalSavers, you physically have to import each new employee’s data to the CalSavers website when you hire them, and must physically take money out of their paycheck then submit it over to CalSavers’ ACH. This is a hugely time-consuming administrative burden for the employer.  

Read More: What is CalSavers?

Starting Your Own Plan

If you’d like, you can work with a provider to develop your own “startup plan” that is created individually for your company. 

Startup plans can be a great option for large organizations with complex retirement plan structures. For instance, say you have 3,000 employees and would like to offer two drastically different 401(k) plans, one level for executives and one for the rest of your employees. To achieve this, it would be worth the investment for you to work with an outsourced advisor to create a Startup Plan that is unique to your company.

For the majority of employers who are looking for some plan flexibility, but not to incur high fees for 401(k) plan management and administration, startup plans do not make the most sense.

Here are some considerations and pitfalls of startup plans for employers: 

• High fees incurred by employers.
• Private plans require an annual audit, and this can cost up to $12,500 if you have 100+ employees. 
• Ongoing administrative burden, including processing contributions, as well as the tedious process of downloading and uploading remittance files every payroll. 
• Additional liability, with your organization responsible for signing an annual 5500 and audit report, as well as undergoing annual compliance testing and employee notification process.
• Hiring a third-party administrator and broker.
• Quarterly documented committee meetings regarding the plan.
• Limited investment choices with high expense ratios.