Over the last decade, the California legislature has been pushing to solve the growing problem of retirement insecurity among private sector workers in the state. The CalSavers Retirement Savings Board was established with the goal to determine how to ensure that all Californians have a way to save for retirement through their employer. On July 1st, 2019, the proposed changes to the California Code of Regulations took effect, which now requires employers with five or more employees to sponsor a tax-qualified retirement plan. Here’s what you need to know if you are an employer:
- Must have been registered by September 30th, 2020 if you have over 100 employees.
- Must be registered by June 30th, 2021 if you have between 50 and 100 employees.
- Must be registered by June 30th, 2022 if you have between 5 and 50 employees.
*Penalties for noncompliance will be $250 per eligible employee after 90 days, which will extend to $500 per eligible employee after 180 days.
In order for this mandate to apply to you, at least one of your five employees must be an “eligible employee,” who is an employee that is at least 18 years old, and receives a W-2 with California wages. If you do not have a qualified retirement plan set up for your employees, here are your options:
A SIMPLE IRA plan is the easiest retirement program to administer and carries low costs to setup if you want professional help with a plan. You can establish the plan so that you can either make nonelective contribution of 2% of employee’s salary, or match an employee’s salary up to 3% of their contribution. The maximum employee contribution limit pre-tax is $13,500 per year, or $19,500 per year for those who are over the age of 50. If the employee does not participate in the plan, then the employer does not need to contribute. An enrollment meeting is required where the employee learns about the plan.
If you want to maximize how much to put into the plan for yourself, then this could be the right plan. It is required to setup this plan with third-party administrator (TPA) and have annual reviews of the plan to make sure that it is compliant with the Department of Labor. The fixed costs of the plan is about $5,000 to setup and $2,500-5,000 to administer per year. An advantage of a 401(k) is that there are various investment options for your employees. The maximum employee contribution limit pre-tax is $19,500 for employees, plus $6,500 if they are over the age of 50. Employees can also contribute post-tax earnings up to a total contribution amount of $58,000. Employers can also contribute to the plan and may be obligated to do so based upon contributions from the owners and highly compensated employees.
CalSavers is a state-run retirement program offered to Californians who do not have a way to save for retirement at their job. It is easy to setup, but investment options are limited and the responsibility of managing the assets and savings amounts is solely put on the employee. The program automatically opts employees into it, unless they say otherwise, and increases the amount saved into the plan by 1% per year until the employee saves 8% per year. There is no professional help with this type of retirement plan. Registration process can be found at their website.
*May also setup 401(a), 403(a), 403(b), 408(k), 408(p), or 457(b).
If you are a small business owner, you may have already received a notice from the state that your registration date is approaching. If you do not already sponsor a retirement plan, it is time to work out which one of these options is best for you and your employees.