An important deadline is on the horizon for California business owners. By June 30, 2022 employers with an average of five or more employees in California for 2021 are required to have a retirement plan in place for workers — either through a private-market option, like a 401(k), or through the state-run CalSavers program.

 

Businesses impacted

Employers with five or more California-based employees, at least one of whom is 18, that don’t sponsor a retirement plan must either start a new qualified retirement plan, like a 401(k) plan, or register with CalSavers.  If you already offer a 401(k) or other qualified retirement plan (403(b), SEP IRA or Simple IRA), your business is exempt from the CalSavers mandate. 

 

Steps to take now

Employers must register or request an exemption through the CalSavers website by June 30, 2022.  After registering, the employer has 30 days to add employees so that CalSavers can contact them to either customize their account and make saving elections, or notify them of what actions to take if they choose to opt out of the program.  For a complete list of steps required, visit the Facilitating CalSavers website.  At this website you will also find a template to notify your employees, as well as a brochure to send to your employees.  Employers who miss the deadline will pay a fine of $250 per eligible employee if noncompliance extends 90 days or more after notification; that increases to an additional $500 per eligible employee if noncompliance extends 180 days or more after the notice.

 

How does CalSavers work for employees?

Employees will receive a notice 30 days before they are automatically enrolled in CalSavers. They can join by doing nothing, or they can opt-out. If they join, a standard deduction of 5% from gross pay will be automatically deducted from their payroll with an annual auto-escalation of 1% until it reaches 8%. However, each employee has the option to select their own contribution rate or opt out of auto-escalation.  Contributions will be invested in a Roth IRA within a target date fund. Participating employees will pay between approximately 0.825% and 0.95% of their balance annually, depending on investment choices, in fees which are taken from the balance as an administration cost; the account belongs to the employee even if they change jobs.

 

CalSavers program ongoing responsibilities for employers

On an ongoing basis, you are responsible for keeping your account up-to-date. This includes updating employee contribution rates with your payroll software/provider; adding new employees as they become eligible or marking employees as inactive when they leave or are terminated; and processing payroll contributions for participating employees.

As employees make changes – like changing their savings rate or opting out – notifications will be posted in the portal and sent to you by email prior to each pay period so that you can adjust the payroll deduction.

This content is for educational purposes only and is not intended to be construed as tax or investment advice.  Please contact us if you would like to discuss your business’ situation in more detail.

 

Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.