By Michael Majors
Every week for the past 15 months there seems to have been a change in the mandates small businesses must follow to stay open and serve customers. From social distancing and mask requirements to piles of paperwork to qualify for business-saving PPP loans, COVID-19 has consumed our focus. However, you must not overlook another critical part of your responsibility as an employer, meeting the new compliance and employment laws. There are a number of complicated requirements for employers to keep up with, and if you are based in California, the CalSavers mandate is one you cannot ignore.
It’s no secret that Americans are facing a retirement crisis. The COVID-19 pandemic has only exacerbated this issue. According to a report from The National Institute on Retirement Security, more than half of Americans (56 percent) are concerned that they won’t be able to achieve a financially secure retirement. The study also reveals that 65 percent of current workers believe it’s likely they will have to work past retirement age to have enough money to retire.
A number of states are putting a focus on retirement by introducing new programs to help increase retirement plan access. California is taking action by rolling out its CalSavers program. The initiative first began as a pilot program in 2018 and is now a state-sponsored retirement savings program that requires certain sized businesses to offer employees the option of participating in a plan. The program is designed to help the nearly 7.5 million private-sector employees in California who work for a business that does not offer a retirement plan.
So what exactly do you need to know ahead of this month’s CalSavers deadline?
When are the deadlines?
Eligible employers must first register their business. If the business does not already have a qualified plan in place, it has to register by its mandated deadline. The deadlines differ by business size and are coming up quickly:
- June 30, 2021: Deadline for businesses with more than 50 employees
- June 30, 2022: Deadline for businesses with five-plus employees
If you’re a business with more than 100 employees, the deadline has already passed (September 30, 2020).
How much will it cost?
The CalSavers program is being offered at no cost to employers given fees will be collected from the participant’s plan assets and not from the employer. While the program is essentially free, as we all know, nothing is ever really free. There is a significant amount of time and resources that it will take to implement the program for your business. Employers can anticipate a time investment needed to set up the account, then manage the account for their business. After you set up the account, you must provide a full payroll list to enroll employees, then keep track of and submit contributions on a regular basis. All of these administrative tasks will take time away from running your business.
And if you do not comply, there are penalties for not having a retirement savings program available for eligible employees. The proposed fines range from $250 per eligible employee if an employer remains non-compliant after 90 days of being served notice, and escalates to $500 per eligible employee if noncompliance reaches 180 days or more after the notice. There are also things like reputational risk and loss of potential talent (we all know it is a competitive job market right now, and you don’t want to lose out on your next star team member because you are avoiding offering such an important benefit to your staff).
What kind of retirement plan is CalSavers?
The CalSavers program is an individual ROTH IRA option and all contributions are entered as a non-deductible Roth IRA. The contributions are made with after-tax dollars, and there is an annual cap of $6,000 (or $7,000 if you are over the age of 50). Employers are not able to make any contributions (or benefit from those tax deductions). Individuals who wish to participate using a Traditional (pre-tax) IRA may recharacterize their contributions as such. CalSavers has online forms to support that process
As an employer, what am I responsible for?
If you do choose to move forward with the CalSavers program, the employer is responsible for registering for the program, providing employee roster information for eligible employees, and facilitating the program by deducting the appropriate contributions each pay cycle. This means, you must maintain all of this information on a regular basis, and it can become quite tedious.
An important note for employers is that CalSavers is integrating with several payroll providers to help lift the administrative burden business owners are facing. Providers are offering varying levels of support, but there are options for business owners to choose what will work best for their company.
What other options do I have?
CalSavers is underscoring a critical need for all Americans – access to retirement benefits to help the workforce save for a secure financial future. While it is a great program, it is not the only option employers have.
Businesses can offer other employee retirement plans such as a 401(k) or Simple IRA to satisfy this government mandate. A newer option to consider is a 401(k) pooled employer plan (PEP). PEPs deliver all of the savings benefits of a 401(k), but provide reduced fiduciary liability for employers, simplified plan management, and reduced plan expenses when compared to single-employer retirement plan offerings.
It is important to consider all options available, as there are significant tax benefits and more customization available when it comes to a 401(k) and PEP. Choosing one of the plan types above can help eliminate much of the administrative responsibilities that you would have to take on by enrolling in the government-sponsored CalSavers program.
Michael Majors is the Senior Director of National Retirement Sales at Paychex.
