On October 9, 2018, the California Secure Choice Retirement Savings Investment Board (Board) posted a Notice of Proposed Emergency Action to issue proposed regulations regarding CalSavers, the California mandated payroll deduction IRA program expected to become effective early next year. However, on October 12, 2018, the Board filed another notice because it modified the proposed regulations in the October 9th notice.
These proposed regulations replaced those that were initially noticed on March 5, 2018 but then not proposed as the Board decided to wait until after summer. See California Secure Choice/CalSavers Retirement Savings Program Proposed Regulations Delayed.
The new proposed regulations shed some important light on the details of the CalSavers program (Program). They provide the last date for covered employers to register for the Program as June 30, 2020 for covered employers employing more than 100 employees; June 30, 2021 for those employing more than 50 employees; and June 30, 2022 for those employing five or more employees. The proposed regulations also provide for the default options under the Program if a participant does not elect otherwise. These include a participant contribution rate of 5% which will automatically escalate 1% per year until reaching 8%. Participants can choose an alternative contribution rate but will still be subject to the automatic escalation unless they opt out of it as well under the proposed regulations. The default account is a Roth IRA, meaning that after-tax dollars will go into the account. This is troublesome as there are qualification requirements for being able to make a Roth IRA contribution under federal law. If the Roth IRA owner makes too much income based on his or her filing status, he or she won’t be eligible to make a Roth IRA contribution.
The first $1,000 in contributions will be invested in a capital preservation investment selected by the Board according to the proposed regulations. Thereafter, contributions will be invested in a Target Date Fund based on the participant’s age. The Target Date Funds each only cover four years at a time. Participants can opt out of the default investment options but the proposed regulations do not state what the other investment options are.
Participants can make non-payroll deduction contributions to the account as well. If they are made on a recurring basis, at least quarterly, they can be as low as $10. If they are less frequent and non-recurring, each contribution must be at least $50. Also, under the proposed regulations, individuals who are not required to be automatically enrolled by their employer may elect to contribute to the program outside of an employment relationship. The recurring and non-recurring minimum contribution rules above apply to such individuals.
It is important to note that these are only proposed regulations at this point. However, the period to make public comments on these proposed regulations ends October 24, 2018.
Also, the Board is going forward with the Program despite a lawsuit filed in May, demanding an injunction that the Program be stopped. See Suit Claims CalSavers is Preempted by ERISA. In July, the Board filed a motion to dismiss. The parties filed replies and now we are awaiting a decision by the court.