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