A California employer with 5 or more employees that does not provide a retirement plan must register with CalSavers, the state’s mandated payroll deduction IRA program by June 30, 2022.  Additionally, a bill has passed the California Senate, SB 1126, and is being considered by the Assembly that would lower the threshold number of employees to 1 non-owner employee.  I have written extensively on CalSavers.  See for example:   “CalSavers Is Here To Stay As Supreme Court Refuses To Hear ERISA Challenge”;  “Inflation Adjusted Plan Limits Reiterate Advantages of Employer Plan Over CalSAVERS; Supremes May Accept Preemption Challenge”;  “Ninth Circuit Holds CalSavers Is Not Preempted By ERISA. . . 6/30 Deadline Approaching”; etc.  This blog article will discuss a couple of nightmare scenarios of the effect of the mandated CalSavers on employers.

Take Care Of Your Qualified Plan.   An employer that maintains a qualified retirement plan such as a pension, profit sharing or 401(k) plan for its employees is exempt from registering for CalSavers.  Likewise, maintaining a SEP-IRA or SIMPLE plan also exempts the employer.  So an employer maintaining one of these plans doesn’t have to worry about CalSavers, or does it?  Employers maintaining such plans are exempt from registering for CalSavers.  On the other hand, employers that don’t maintain another plan and don’t register for CalSavers are subject to penalties.  The penalties are $250 per employee and will be levied in partnership with the California Franchise Tax Board.  Once receiving the first notice of penalties, if the employer doesn’t comply within 90 days the penalty increases another $500 (for at total of $750) per employee.  CalSavers has indicated that it is serious about levying such penalties.  See CalSavers Begins Assessing Penalties-Threshold Number Of Employees Drops To 5 on June 30.

The CalSavers law says nothing about the terms of the retirement plan maintained by the employer that exempts it from registering.  For example, a profit sharing plan can have contributions in the complete discretion of the employer.  Presumably, the employer can contribute in the first plan year and then not contribute for subsequent years but it would still be exempt from registering for CalSavers.  However, failing to contribute for 3 or more  years could cause the IRS to maintain that the plan is not a qualified plan because it was not intended to be permanent as evidenced by the lack of contributions.

I often help clients in correcting failures in the required plan provisions or operation of their qualified plans, such as 401(k) plans.  Failures can be anything from failing to timely amend the plan for required changes in the law for a number of years to failing to include otherwise eligible employees.  I have helped employers restore the qualified status of their plan through the Employee Plans Correction Resolution System (EPCRS) or, when the failure is not eligible for EPCRS through a Voluntary Closing Agreement.  However, sometimes the failure is so egregious that the IRS will not enter into a closing agreement or the amount involved in correcting the plan is prohibitive for the employer to do it.

Imagine this worst case scenario.  In 2012, an individual with a significant account balance in the 401(k) plan of his former employer wishes to purchase his own business but doesn’t have enough wealth outside his retirement plan.  Searching the Internet he finds “ROBS R US.com”, a provider that helps people use the technique the IRS has named “Rollover for Business Startup” or ROBS.  Under this technique he incorporates a C corporation, has it establish a 401(k) plan, rolls over his account balance from his former employer’s plan and directs the investment of his account into employer stock of the new corporation.  The corporation now has capital, and purchases an existing business with more than 5 employees.   However, the owner never tells any of the employees about the plan, never makes any employer contributions to the plan, never values the stock in the plan, doesn’t file Forms 5500, and never amends the plan.  Essentially, once the corporation is capitalized, the owner forgets about the plan.   In 2023, the IRS audits the plan and determines that the corporation’s total disregard for the law means it will disqualify the plan and it is not eligible for the Audit Closing Agreement Program under EPCRS.  Therefore, the employer loses tax deductions for the past three years, and the owner will be taxed on the value of the stock.

That is certainly, bad enough.  However, since the employer didn’t maintain a qualified plan, it was required to register for CalSavers and failed to do so, now it is subject to penalties.

Misclassified Workers.

Another nightmare scenario involves misclassified workers.  Even though it is very difficult to be an independent contractor in California as a result of AB 5, it still happens. See California Rideshare Companies At The Intersection Of AB5 and Proposition 22So imagine an employer has 3 full time employees and a 25 person sales force classified as independent contractors.    The employer does not provide its workers a retirement plan and does not register with CalSavers.  The employer operates this way from 2021 to 2025 when it is audited by both the IRS and California that determine the sales force should be classified as employees.  Now the employer has 28 employees and has been subject to CalSavers since 2021.  It would be subject to penalties.

It’s important to note that had the employer adopted a 401(k) plan for the 3 full time employees, it wouldn’t have such penalties  and also would likely not have to cover the misclassified sales force retroactively.  The plan document probably contains “Microsoft” language that says if an independent contractor is reclassified as an employee by a government agency, they will not be retroactively eligible to participate in the plan.   This language was approved by the United States Court of Appeals for the Ninth Circuit in the case of Vizcaino v. Microsoft, 120 F.3d 1006 (9th Cir. 1997).  Therefore, the 401(k) plan would not lose its qualified status provided it covered the salesforce prospectively.


These situations demonstrate how noncompliance with one law can trigger a prior obligation to comply with CalSavers.  It is unclear how CalSavers will handle penalties in these situations.  However, the CalSavers penalties could be an add-on cost to an already bad situation for the employer.