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CalSavers Retirement Program: Everything You Need To Know

The Golden State is trying to make its residents’ golden years a bit more comfortable.

According to a study by the Census Bureau’s Current Population Survey, more than half of all working-age households in California do not have any retirement savings. The CalSavers Retirement Savings Program (CalSavers) is one way California has responded to the problem, and it carries a number of benefits that can significantly improve the financial health of California’s residents.

In this article, we’ll answer some questions you may have about CalSavers and explain how it works.

What is CalSavers?

If you own a business in California and you aren’t currently offering a workplace retirement plan, you may be legally required to do so.

In 2019, a new program was put in place called the CalSavers Retirement Savings Program, and it enables California residents to save for retirement.

The program is overseen by a state board and administered by private-sector financial service firms. It applies to businesses with five or more employees if they do not already offer a qualified retirement savings program.  Employees contribute to an Individual Retirement Account (IRA) that belongs to them. Employers that don’t offer their own plan must register for CalSavers by the relevant deadline and facilitate their employees’ access to the Program. 

How Does CalSavers Work?

CalSavers is an automatic enrollment Roth IRA program. Contributions are automatically deducted from each paycheck after taxes are taken out, so employees do not have to pay income taxes on this money when withdrawing it for retirement. The program is completely voluntary, so employees are not required to participate if they don't want to and can opt-out at any time.

If an employee doesn't choose their own rate, they will be opted into the standard savings rate for CalSavers: 5% of their gross pay. There is also an automatic increase feature that will increase an employee’s savings rate by 1% each year until it reaches 8%.

The funds contributed to CalSavers grow tax-free, and participants can withdraw their contributions at any time. However, if a participant takes money out of their CalSavers Roth IRA before the age of 59½ by requesting a non-qualified distribution, there is a 10% penalty charged by the IRS on the earnings portion of their distribution.

Participants also have the option of transferring their account balance into a traditional IRA at any time.

Which Businesses Have to Use CalSavers?

According to the CalSavers website, employers who meet the following criteria are required to participate in the program:

  • Have 1 or more employees
  • At least one employee is 18 years or older
  • Does not offer an employer-sponsored retirement plan

Employees at businesses that meet this criteria will be automatically enrolled in the program unless they choose to opt out.  Employees of smaller businesses can also open a CalSavers account, but they need to do so on their own through the self-enrollment process.

What Are the Alternative Options?

If your business has 1 or more employees and isn’t sponsoring a plan yet, you have several alternative options. You can set up a:

  • 401(k) plan (including multiple employer plans or pooled employer plans)
  • 401(a) – Qualified Plan (including profit-sharing plans and defined benefit plans)
  • 403(a) - Qualified Annuity Plan or 403(b) Tax-Sheltered Annuity Plan
  • 408(k) - Simplified Employee Pension (SEP) plans
  • 408(p) - Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA Plan
  • Payroll deduction IRAs with automatic enrollment

It's important to consider all available options and research which plan is best for your business.

What is the Registration Deadline?

Program deadlines for businesses are based on company size. The breakdown provided by the CalSavers website is as follows:

  • Companies with 100+ employees -  9/30/20 (deadline passed)
  • Companies with 50+ employees -  6/30/21 (deadline passed)
  • Companies with 5+ employees - 6/30/22 (deadline passed)
  • Companies with 1+ employee(s) - 12/31/25

The deadlines for compliance and eligibility are determined the average number of employees reported to the state for the previous calendar year.

Who is Eligible to Participate?

Any resident of California who is 18 years or older and has a job is eligible to participate in CalSavers. Eligible workers are auto-enrolled by their employers but have a 30 day window to change their contribution rate, investment option, or to opt-out before any payroll contributions begin. Savers can make changes to their accounts or opt-out at any time. Accounts are owned by each individual participant and are portable from job to job.

Participating employers are required to upload their new employees into the portal within 30 days of their hire date.

Self-employed individuals and business owners are also eligible and can use the self-enrollment process to open accounts.

Registration Deadline, and Penalties

Eligible employers who do not offer a qualified program must register their business which can be done here, and then begin facilitating the program. The implementation deadline is June 30, 2022 for businesses with five or more employees. If your small business already offers a retirement program, you may instead indicate that you are exempt.

Employers that fail to comply must pay a penalty of $250 per eligible employee if noncompliance extends 90 days or more after receiving notice of non-compliance; $500 per eligible employee if non-compliance extends 180 days or more after the notice. Currently, CalSavers is beginning to enforce non-compliance fines for businesses with more than 100 workers that do not offer an alternate retirement plan.

Looking for an alternative to the CalSavers program?

While CalSavers might be the right decision for many employers in the state, other businesses could be better served by establishing their own employer-sponsored retirement plan, such as a 401(k), to meet government requirements while also improving their employees’ financial security.

A 401(k) plan offers both traditional and Roth options as well as higher contribution limits and profit-sharing. Because of this, 401(k) plans are an opportunity for business owners and employees to save more for retirement. Importantly, employer contributions to a 401(k) are deductible on the employer's federal income tax return up to a certain limit, meaning employers can also benefit financially from offering employees a 401(k).

What does Vestwell do?

Vestwell is a digital retirement plan platform that makes it easier for you to offer and administer a company-sponsored 401(k) or 403(b). By combining technology with best-in-class retirement plans, Vestwell has created programs that are more accessible, more efficient, and less expensive.

Conclusion - Tax Breaks for Small Businesses

Though retirement plans are a great way to save money for retirement, many people do not have access to employer-sponsored retirement plans such as 401(k)s. CalSavers aims to help these individuals save for retirement.

If you are a California employer interested in setting up a 401(k) account for your business instead of facilitating CalSavers, you can contact Vestwell to determine if you are eligible to receive up to $16,500 in tax credits, which can help cancel out administration costs. Interested? Learn more here.