What California Employers Need to Know About the 2022 Retirement Plan Deadline Mandate

To help California employees save for retirement, the state of California passed legislation requiring private sector employers in California to offer a qualified retirement plan. The deadline for employers with 5 or more employees is June 30, 2022.

Keep reading to learn about the upcoming deadline, and what options and obligations employers have.

California’s retirement plan mandate: Background

UC Berkeley Labor Center reports that “Half of California Private Sector Workers Have No Retirement Assets.” Moreover, 61% of private sector employees in California age 25-64 lack access to an employer-sponsored retirement plan. These statistics are based on the Census Bureau’s Current Population Survey and 2014 Survey on Income and Program Participation.

Consequently, the state of California passed legislation in 2016, creating a state-sponsored Roth Individual Retirement Account (IRA) program called “CalSavers.” The program is designed for the millions of private sector Californians who do not have access to an employer-sponsored retirement plan.

The legislation requires California employers that do not offer a retirement plan to start doing so by a specific date. These employers can offer the retirement plan through CalSavers or through a private retirement plan provider.

Notably, in 2018, California’s retirement plan mandate encountered a legal challenge from Howard Jarvis Taxpayers Association (HJTA) — which filed a lawsuit looking to halt the CalSavers program. After the lower courts upheld CalSavers, HJTA took the case to the United States Supreme Court. However, the high court refused to hear the case, effectively keeping CalSavers intact.

CalSavers deadline

The deadline varies by employer size if you have:

• 5 or more California-based employees: Whether you have full time, part-time, or seasonal employees, you must enroll them in CalSavers, offer a qualified retirement plan through the private market, or prove that you already have a retirement plan in place by June 30, 2022.
• Over 100 California-based employees: The deadline was September 30, 2020.
• Over 50 California-based employees: The deadline was June 30, 2021.

If you’re in either of the latter 2 groups, you should already be complying with California’s retirement plan mandate.

CalSavers: Employer obligations

California’s retirement plan mandate is mandatory only for employers. Employees do not have to participate if they don’t want to.

California’s retirement plan mandate is mandatory only for employers. Employees do not have to participate if they don’t want to.

If you decide to offer CalSavers instead of a private-market retirement plan, here are some of your responsibilities:

• Register with CalSavers. The fastest way is through the CalSavers website.
• Give CalSavers the required information for each eligible employee.
• Follow up with your employees to verify whether they received their CalSavers information packet.
• Deduct employees’ CalSavers contributions from their wages, on an after-tax basis.
• Do not make any contributions to your employees’ CalSavers accounts. Only employees can contribute.
• Do not deduct more than the Internal Revenue Service’s annual Roth IRA limit from participating employees’ wages.
• Submit all CalSavers payroll deductions to the program’s administrator.
• Make sure your employees know what they need to do to opt out of CalSavers.

CalSavers is free for employers, but the same cannot be said for employees. It charges participating employees a yearly asset-based fee of 0.825% to 0.95%, depending on their investment selection. CalSavers will deduct this annual fee from participating employees’ account balances.

For more information on employers’ CalSavers responsibilities, see “What Is CalSavers? Everything You Need to Know.”

CalSavers penalties

California’s Franchise Tax Board (FTB) has partnered with the CalSavers Retirement Savings Board to issue penalty notices to employers who are noncompliant with CalSavers. These penalty notices started in January 2022.

According to the FTB’s website, noncompliant employers can expect a penalty notice of $250 per eligible employee. If the employer continues to be noncompliant, they will be subject to another penalty notice, of $750 per eligible employee.

CalSavers alternatives

If you already offer a qualified retirement plan, you do not have to do anything. But if you’re not already doing so, then you must choose between the CalSavers program or a private-market retirement plan. It’s important to remember that although CalSavers is the path of least resistance, that doesn’t mean it’s the most suitable choice for your business.

Potential drawbacks of CalSavers include the following:

• It lacks flexibility. Employers have fewer options when it comes to plan design. CalSavers also does not allow employer matching or profit sharing contributions.
• Potentially higher asset-based fees. These can gradually erode the employee’s retirement savings.
• Limited investment choices. This is not ideal for employees seeking a vast array of investment options.
• Loans are not allowed. Employees cannot borrow from their CalSavers account.
• Low employee contribution limits. For 2022, individuals under age 50 can put only up to $6,000 into their Roth IRA, compared to the maximum 401(k) contribution of $19,500.
• Subject to income limits. Employees cannot earn more than $135,000 per year. Those who make more than that, including the business owner, cannot participate in CalSavers.
• Contributions are made with after-tax dollars, and they are not tax-deductible. In other words, employees do not get any tax savings on their contributions.
• No payroll integration. This means more manual administration and paperwork, which increases the risk of errors.

Advantages of using a private 401(k) provider

These issues can be avoided by going with a private 401(k) provider. Below are some of the advantages of a 401(k) plan:

• Higher maximum contribution. As stated, in 2022, employees under age 50 can put as much as $19,500 into their 401(k).
• No income limits. All employees, including business owners, can contribute to a 401(k) plan, no matter how much money they make.
• A broad range of investment fund options. Along with offering a wide selection of investment options, 401(k) plans typically provide additional services like managed accounts and personalized financial advice.
• Employers can contribute to their employees’ 401(k) accounts, such as via employer match, profit sharing contributions, or nonelective contributions.
• Tax savings for employees. A 401(k) plan can be pretax or after-tax. With a pretax 401(k) plan, employees do not pay any federal (and often state) income tax on their contributions at the time of payroll withholding.
• Tax credits for small employers. The Setting Every Community Up For Retirement Enhancement (SECURE) Act provides tax credits for small employers offering a 401(k) plan for the first time.
• Loans are allowed. Employers can borrow from their 401(k) for qualified expenses.
• Exclusions are permitted. For example, an employer can exclude certain part-time or seasonal employees from the 401(k) plan.
• Potentially lower fees for employees. Ultimately, 401(k) plan fees differ by provider, but some plans have significantly lower fees than others.
• Enables payroll integration. This is key to minimizing administrative burdens and mistakes. Among other things, payroll integration helps with 401(k) calculations, plan documents, summary plan descriptions, non-discrimination testing, participant statements, Form 5500 filing, and loan and hardship distributions.

Along with offering a wide selection of investment options, 401(k) plans typically provide additional services like managed accounts and personalized financial advice.

What to look for in a 401(k) provider

When choosing a 401(k) plan to offer your employees, it’s crucial to look for certain qualifications. Full integration, transparent pricing, and intelligent investments are a few of the offerings that you’ll find with strong 401(k) platforms.

Guideline is a platform that focuses on making it attainable for small businesses to offer a 401(k).

They offer affordable monthly pricing and no transaction fees, and also take care of:

• Plan administration
• Recordkeeping
• Employee onboarding

With Guideline, employees can choose from over 40 mutual funds from Vanguard and other low-cost providers or create a custom portfolio. They’re also fully integrated with Zenefits, so it’s easy to set up. Learn more here.

Remember the deadline

For employers with 5 or more California-based employees, it’s time to enroll them in CalSavers, or offer a qualified retirement plan through the private market (if you haven’t done either already).

Regardless of whether you choose to go with CalSavers or a private-market 401(k) plan, be sure to do so by June 30, 2022.