As we continue our coverage of state-mandated retirement plans, it’s time for California to shine. Known as CalSavers, California’s retirement savings program is designed to help alleviate the looming retirement crisis impacting private-sector employees.
A state of emergency
Although the impending retirement crisis is a national issue, California is especially vulnerable. Estimates show California has about 40 million residents — which amounts to approximately 12% of the U.S. population — and encompasses around 15% of the total U.S. GDP. Further, around 61% of private-sector employees age 25-64 in California don’t have access to an employer-sponsored retirement plan, according to a report by UC Berkeley Labor Center.
Analysts say that although stagnant wages and high cost of living contribute to the dismal retirement savings rate, the primary culprit is inaccessibility to a job-based retirement savings vehicle. Moreover, a scientific opinion poll found that nearly 73% of small business owners in California support “a state retirement savings program that would help small businesses and their employees save for the future.”
In response to the alarming statistics, California launched CalSavers.
What is CalSavers?
CalSavers is a state-run Roth IRA program for California-based, private-sector workers whose employers do not provide a retirement savings plan. The program, which began as a pilot initiative in November 2018, officially opened for registration in July 2019.
Are employers required to offer retirement plans?
Historically, private-sector employers were not legally mandated to offer retirement plans to their workforce. But a growing number of states — including Connecticut, Oregon, and (as mentioned) California — have passed legislation requiring private-sector employers to provide a qualified retirement savings vehicle. If you’re in any of those states and the mandate applies to your business, then you must sponsor a retirement savings program for your employees.
Who must comply with CalSavers?
Every employer in California — whether for-profit and nonprofit — with at least 5 California-based full- or part-time employees must offer CalSavers if they don’t already provide a qualified employer-sponsored retirement plan, such as a 401(k) plan or SIMPLE IRA.
Who can contribute to CalSavers?
Employees at least 18 years of age who work for a CalSavers-eligible employer can join the program through their employer. Individuals can enroll on their own, but to do so they must:
- Have a source of earned income
- Be at least 18 years of age
- Have a bank account, which will be used to make contributions
- Provide CalSavers with personal information, such as full name, date of birth, SSN or ITIN, and home address
What is the deadline for employers to register in CalSavers?
Registration deadlines is dependant on how many employees your business has:
- If your business has more than 100 employees: June 30, 2020
- More than 50 employees: June 30, 2021
- 5 or more employees: June 30, 2022
Is CalSavers mandatory?
CalSavers is mandatory only if you have at least 5 employees and do not offer a qualified retirement savings plan by the state-mandated registration deadline for your business. If you prefer, you can obtain a qualified retirement plan through the private market. (You do not have to go the CalSavers route.) As long as you offer the plan by your CalSavers registration deadline, you will be in compliance.
Participation in CalSavers is voluntary for employees. They can opt in and opt out of the program at any point.
Here’s what you must do to facilitate CalSavers:
- Register for the program by the state-mandated deadline. You can register through the CalSavers website, by calling the Client Services team, or by mail. To register, you must obtain an access code via the CalSavers website
- Provide the CalSavers program administrator with personal information for each eligible employee, within 30 days of registering in the program. The program administrator will then use the supplied data to contact eligible employees and inform them about CalSavers
- Make sure each eligible employee gets an information packet from CalSavers
- Determine the correct payroll deduction rate for each eligible employee
- Deduct each employee’s Roth IRA contributions from their gross wages
- Send employees’ deducted contributions to the program administrator within 7 days of making the deductions
- Add new employees as they become eligible and remove employees who no longer work for your business
Employers are not allowed to:
- Contribute to employees’ CalSavers accounts
- Encourage or discourage employees from joining the program
- Make investment decisions for employees or give contribution advice
- Remit contributions for employees who have opted out of the program
- Enroll employees in CalSavers
- Manage investment options
- Respond to employee inquiries about investments or deliver tax advice
- Manage employees’ CalSavers account, including making changes to employees’ Contact or Beneficiary information
With CalSavers, you have no fiduciary responsibilities. The program is overseen by the State Treasurer and administered by a private-sector financial services firm. All you have to do is facilitate the program as authorized by California law and perform basic ongoing maintenance, such as processing employees’ payroll contributions, adding newly eligible employees, etc.
What employees should know about CalSavers
- CalSavers is an auto-enrollment IRA program, which means that eligible employees who do not opt out will be automatically enrolled
- Employees contribute to a Roth (after-tax) IRA that belongs to them
- Each employee’s first $1,000 in savings is invested in the CalSavers Money Market Fund. Remaining contributions are invested, based on the employee’s age, in a target-date retirement fund. Employees can keep the target-date retirement fund or select from a menu of other investment choices
- All monies are 100% vested; employees immediately own all of their contributions
- Employees will be subject to a default contribution rate of 5% if they do not opt out of CalSavers within 30 days of being notified about the program
- With the 5% default setting, employees’ contributions will increase by 1% each year, up to the limit of 8%
- Employees can keep the default 5% contribution rate, or choose a different rate. They can also opt out of or customize the automatic 1% increase feature
- Contributions are restricted to the federal maximum for Roth IRAs. For 2020, the limit is $6,000 for savers younger than age 50 and $7,000 for those age 50 or older.
- Employees get to keep their Roth IRA, even if they change employers
How can employees opt out of CalSavers?
What is the cost of CalSavers?
CalSavers is free for employers. According to the CalSavers website, the only administrative cost for CalSavers is an “asset-based fee” of around 0.825%-0.95%, depending on the employee’s investment choice. So, each participating employee can expect to pay $0.83-$0.95 per year for every $100 in their account. This fee is automatically deducted from their CalSavers balance to help pay for the cost of administering the program.
What happens if an employer fails to abide by CalSavers’ rules?
Employers who do not offer a qualified retirement savings plan within 90 days of receiving a failure-to-comply notice will face a penalty of $250 per eligible employee if they’re unable to show good cause. An additional penalty of $500 per eligible employee applies if the employer remains noncompliant 180 days or more after being notified of failure to comply.
Note that the CalSavers retirement program is currently being challenged in court. While the case plays out, you should aim for compliance by your registration deadline.