In May the United States Court of Appeals for the Ninth Circuit ruled that California’s automatic enrollment IRA program known as CalSavers was not preempted by the federal law, ERISA. See, Ninth Circuit Holds CalSavers Is Not Preempted By ERISA. . . 6/30 Deadline Approaching. CalSavers mandates that California employers of a certain size must automatically deduct 5% of an employee’s pay and contribute it to CalSavers unless the employer maintains a retirement plan. Failure to do so results in penalties to the employer. The automatic contribution automatically escalates 1% per year up to 8% unless the employee opts out of the escalation. CalSavers invests the contributions in Roth IRAs for the employee unless the employee opts out of the program or elects a traditional IRA. The reason for the law was that not enough California employers offer retirement plans. Currently, employers with 50 or more employees without a retirement plan must register with CalSavers. That threshold goes down to 5 employees next June.
Contained in the Biden 3.5 trillion dollar budget proposal is a provision to enact a similar federal mandated program to be effective in 2023. The House Ways & Means Committee approved the proposal on September 9. It now goes to the Budget Committee to see if it will make the final version that goes to the House floor. The provision requires employers with 5 or more employees that do not offer a retirement plan to pay a penalty of $10/day per employee. Employers would have to deduct 6% of the employee’s pay unless the employee opts out. The contribution escalates 1% per year until it reaches 10%.
A key difference in the federal proposal is that unlike CalSavers that is run by the state of California with limited employer involvement, the proposal requires the employer to adopt a plan which could be a deferral only 401(k) plan or an IRA based plan. State mandated programs like CalSavers would also qualify.
The major reason for the proposal is that Americans are simply not saving enough for retirement. Nearly half of people aged 55 or older have nothing saved for when they stop working, according to a 2019 U.S. Government Accountability Office report. Of course, the fate of the budget proposal is uncertain with the politics on Capitol Hill. Stay tuned for further developments.