What Are CalSavers?
California legislation requires all private companies to offer a retirement savings plan to employees. Companies can choose any type of retirement savings plan, including variations of 401(k)s, individual retirement accounts (IRAs), or pension plans.
CalSavers is the retirement savings program developed by the State of California to be the default or automatic option for companies. Private companies must offer a different retirement savings plan or enroll workers in CalSavers.
California is one of 16 states that have mandated retirement savings plans. This move aims to address the severe lack of worker retirement savings and financial security by making it easier for private companies to offer a plan to their employees.
How the CalSavers Program Works
Suppose your company chooses to offer CalSavers. It is an easy way to set up an IRA for your employees that comes at no cost. Nonetheless, it is not as flexible as typical retirement savings plans.
CalSavers comes with the following default features:
Automatic Payroll Deductions
When you choose to offer CalSavers as your company's mandated retirement plan, all eligible workers are automatically enrolled, and payroll deductions are set at 5% of each employee's gross annual salary.
Note that your employees can adjust this rate to a higher or lower percentage later, depending on their individual financial goals and risk tolerance. Employees can also opt out of CalSavers anytime.
CalSavers as Roth IRA
Salary deductions for employee CalSavers accounts will be set up like a Roth IRA, meaning the contributions are made with after-tax dollars. Employee distributions during retirement will be received tax-free.
Employees can contribute up to a maximum of $6,500 in 2023, with an additional $1,000 catch-up contribution for those aged 50 and older.
Additionally, single filers below 50 years old and earning over $153,000 are not allowed to participate in CalSavers. Married participants filing jointly can contribute up to the maximum if their combined income is less than $218,000.
Portability
Employees under the CalSavers program can keep their accounts and transfer them to a new job if they change companies. The program is designed to be kept by an employee throughout their professional and working life if they wish.
Investment Options
For the first 30 days of an employee's CalSavers account, all contributions will be invested into the CalSavers Money Market Fund unless the company has chosen an alternative.
Afterward, contributions will be invested into a target-date fund based on employee age and retirement year projection. CalSavers participants may also choose a different fund based on their own financial situation, goals, and risk profile.
CalSavers Employer Requirements
Consider the following factors when offering CalSavers as your company's retirement savings plan:
Eligibility Requirements for Employers
CalSavers is a state-mandated program, meaning all private companies with at least five employees, and do not offer either a 401(a) qualified plan, a 401(k), a SIMPLE IRA, a SEP plan, a qualified or tax-sheltered annuity plan are required to participate in the program.
CalSavers started with a three-year phased rollout for those with five or more employees, which ended on June 30, 2022. All eligible companies must have enrolled their employees in the program or offered their own retirement savings plan.
Starting January 1, 2023, private companies with at least one employee are also included in the state requirement. These companies must offer CalSavers or another retirement plan by the end of December 2025.
Owner-only businesses and government, religious, and tribal organizations are exempted from this state mandate. Noncompliance is penalized with a $250 to $500 fine per eligible employee.
Registration Process
As mentioned above, registration comes at no cost to employers. Qualified businesses would need their Federal Employer Identification Number (EIN) or Tax Identification Number (TIN). They will also be given a CalSavers Access Code upon registration.
Eligible businesses must facilitate employee enrollment by submitting the list of qualified workers and all pertinent information. Employees will be given 30 days to participate in CalSavers or opt-out.
After 30 days, employers must facilitate payroll deductions. The money will be saved in an employee's account and invested to grow tax-free.
Ongoing Responsibilities for Employers
As a state-run program, CalSavers is the responsibility of the State of California. The state shoulders investment management and fiduciary liability.
Businesses incur no administration fees for managing the investments under the CalSavers program. Employers are only responsible for employee enrollment and facilitating payroll deductions.
Lastly, employers cannot make matching or profit-sharing contributions under CalSavers.
CalSavers Pros and Cons for Employers
If you are interested in offering CalSavers as your company's retirement plan, consider the following:
Pros of CalSavers for Employers
CalSavers may be beneficial to your business because it comes at no cost. Managing is simple, and your responsibilities are limited to employee enrollment and contribution submission.
With the default options and Roth IRA set up, you can provide employees with a retirement savings option without incurring start-up costs and investment management fees associated with other retirement plans.
You are also free from fiduciary responsibilities. All investment decisions and results will be the obligation of the State of California.
Your company can also save money because you cannot make matching contributions to employee savings.
Cons of CalSavers for Employers
Generally, a competitive retirement savings plan helps businesses attract and retain top talent. CalSavers comes with low contribution limits – a maximum of $6,500, or $7,500 for employees aged 50 and older, which can be considered subpar by potential employees.
Additionally, the employer match prohibition limits your company's ability to increase employee benefits, which you may want to provide to increase morale and productivity.
Matching and profit-sharing contributions can also qualify your business for certain tax deductions, which are absent in CalSavers.
CalSavers also has limited investment options, which your employees may find restricting. Some employees may be open to taking more risks and investing in other securities not offered by CalSavers.
In many cases, it may make sense to explore sustainable 401(k) options for your company.
Alternative Retirement Plan Options
Remember that CalSavers is only required for private companies that do not offer their own retirement savings plan. If you want to avoid the disadvantages of CalSavers, you may offer any of the following retirement plans instead:
Traditional 401(k) Plans
These are the most common type of employer-sponsored retirement plans. Traditional 401(k) allows employees to contribute a percentage or fixed amount of their pre-tax salary each pay period.
It has significantly higher contribution limits compared to CalSavers. The Internal Revenue Service (IRS) allows employees to save up to $22,500 in their traditional 401(k) accounts. Catch-up contributions are also higher at $7,500.
Traditional 401(k) also lets you provide matching contributions up to a combined employee-and-employer limit of $66,000 for 2023. It is a substantial boost that can reward your company with increased worker loyalty and productivity.
You may also qualify for tax deductions as matching contributions are part of business expenses. Potential drawbacks of traditional 401(k) plans include higher administrative costs, start-up fees, annual maintenance fees, and termination charges.
You also carry fiduciary responsibility for the traditional 401(k) plan you offer.
Simplified Employee Pension (SEP) Plans
A SEP Plan is an employer-provided retirement plan that allows you to contribute a certain amount of money each year for your employees' retirement. Your workers do not make contributions.
It is relatively easy to set up and maintain, making it an attractive option for small businesses. The main benefit of a SEP plan is that employers are allowed to contribute more than CalSavers. Employees can save for retirement at no cost to their own money.
The maximum annual contribution for 2023 is the lesser of 25% of each employee’s annual compensation up to a maximum of $66,000. Your contributions are deductible from your business tax returns.
Remember that you can contribute as much or as little as you want to your employees' accounts in any given year. SEP plans have lower administrative costs than traditional 401(k)s.
SIMPLE IRA Plans
The Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan maintained by small businesses with 100 or fewer employees. It is available if your employees earn $5,000 or more yearly compensation.
SIMPLE IRA is flexible. Your employees can contribute to the account, and you can make up to a 3% matching contribution based on an employee's annual salary. If your employees elect not to contribute, you must still make a 2% contribution to their accounts.
The total yearly contribution (employee contributions plus employer matching or nonelective contributions) is limited to a maximum of $15,500 for 2023. Catch-up contributions can also be made up to $3,500.
The maximum contribution limit for SIMPLE IRA plans is lower than other retirement savings plans such as 401(k)s but higher than CalSavers. As with traditional 401(k)s, your matching contributions can be deducted from your annual business tax returns.
Individual Retirement Accounts (IRAs)
IRAs are long-term investments that allow individuals to set aside money for retirement. They can be opened and managed by a person without employer involvement since they are designed mainly for self-employed individuals.
There are two main types of IRAs: Traditional IRA, which is tax-deferred, and Roth IRA, in which contributions are made with post-tax dollars, but withdrawals in retirement are tax-free. Contributions to both accounts are limited to a maximum of $6,500 in 2023.
A catch-up contribution of up to an additional $1,000 is also allowed for participants aged 50 or older. IRAs provide flexibility and control as participants take ownership of their retirement savings. However, the contribution limits are lower than other plans, such as 401(k).
Employees can set up an IRA through a financial institution such as a bank, brokerage firm, or credit union.
Companies and small businesses cannot make matching contributions to an employee’s IRA. The employer may, however, help to facilitate contributions by offering payroll deduction or through automatic enrollment.
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How to Choose the Best Retirement Plan Option
There are plenty of options beyond CalSavers to offer your employees retirement savings plans. When deciding what is best for your business, consider the size of your business and what you want to achieve with the plan.
If you want a basic plan and to just comply with California state mandate, you may go with CalSavers. But if you want to take advantage of attracting top talent, retaining workers, access to more investment options for employees, and tax benefits, consider other plans.
If you want more flexibility regarding higher contribution limits and the ability to match employee contributions and are ready to carry the additional financial burden on your business, you may choose other plans.
Remember that offering other plans, like traditional 401(k), SEP, and SIMPLE IRAs will incur costs, from setting up the plan to administering it. Consider your company's bottom line and compare which plan best fits your budget and goals.
Consider the investment options and tax benefits you and your employees can access with the different retirement savings options.
Final Thoughts
The CalSavers program is a state-mandated retirement plan that California requires eligible employers to offer if they do not yet have their retirement plan. It is part of an effort to increase retirement savings options for citizens.
CalSavers covers all private businesses with five or more employees since June 30, 2022. By the end of 2025, the program will include businesses with 1 to 4 employees.
It is set up as a Roth IRA. Its main features include automatic enrollment, portability, and limited investment options. Employees can opt out of participating in the CalSavers program.
Companies can offer CalSavers or select other retirement plans like traditional 401(k), SEP, and SIMPLE IRAs. Businesses that fail to provide any retirement plan for their employees face fines of $250 to $500 per eligible employee.
In choosing which plan to offer, you must consider your business size and what you want to achieve with the plan, along with costs associated, flexibility, investment options, and potential tax benefits to you and your employees.
Consult a financial expert for the best advice on choosing the right retirement savings plan that fits you and your employees. Research your options to determine what will work best for your business and its goals.
CalSavers Employer Requirements and the Best Alternatives FAQs
When are employers required to register for CalSavers?
The CalSavers three-year rollout phase ended on June 30, 2022. All private businesses in California with five or more employees must offer CalSavers or any retirement plan. Additionally, new legislation has included companies with 1 to 4 employees starting January 1, 2023. Such companies must comply with the law by the end of December 2025.
Are there penalties for non-compliance with CalSavers?
Yes. Eligible companies must provide any retirement plan to their employees or face a $250 to $500 fine per employee.
Can an employer make contributions to CalSavers on behalf of their employees?
No. CalSavers does not provide for matching or profit-sharing contributions. Employers who want to make such contributions should offer other retirement plans, such as 401(k)s, SIMPLE IRAs, or SEP plans.
Can your payroll service provider facilitate CalSavers for your company?
Yes. It is up to you to include your payroll service provider to facilitate CalSavers.
What is the deadline for employers to register with CalSavers?
Employers who do not offer a retirement plan will be given an official notice and must comply within 90 days or face a $250 fine per employee. After an additional 180 days, noncompliance will require businesses to pay a $500 fine per employee.
