Last Updated: July 17, 2023

The Golden State is making its residents’ golden years a bit more comfortable.

California was the first state to pass legislation to establish a state-run retirement savings program for private-sector workers. The result of this legislation is the CalSavers Retirement Savings Program (CalSavers), a program designed to improve the financial health of California’s workers.

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

How Does CalSavers Work?

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 one 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. 

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 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 savers can withdraw their contributions at any time. However, if a saver 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.

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

Which Businesses Are Affected?

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 a qualified, employer-sponsored retirement plan

Employees at eligible businesses will be automatically enrolled in the program unless they choose to opt out.

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 based on the average number of employees reported to the state for the previous calendar year. If your business already offers a retirement program, you may instead indicate that you are exempt.

Penalties

The penalties for noncompliance are $250 per eligible employee after 90 days and an additional fee of $500 per eligible employee after 180 days.

Who is Eligible to Save With CalSavers?

Any resident of California who is 18 years or older and is employed 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 saver 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.

Conclusion

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.