On August 26, 2022, Governor Newsome signed legislation that amends the statute governing CalSavers, California’s mandatory payroll reduction IRA savings plan to lower the threshold number of employees required to subject a California employer to the law from five to one on December 31, 2025. Currently, employers with five or more employees that do not offer a retirement plan to their employees, must register for CalSavers and withhold and pay over to CalSavers a percentage of pay from those employee’s that enroll in CalSavers. Under the new law, the threshold drops from five or more employees to one or more employees. This change will allow employees of employers with one to four employees that do not offer a retirement plan, to save for retirement through CalSavers.
Excluded from participation in CalSavers are sole proprietorships, self-employed individuals, and other business entities that only employ the owners of the business.
What It Means.
Effected small businesses must decide upon a compliance strategy. On the one hand, they can just register with CalSavers when the new threshold becomes effective. This is the simplest compliance strategy with minimal administration.
However, between now and then they should consider whether adopting a private retirement plan, such as a 401(k) plan that will exempt them from CalSavers, may be more advantageous. CalSavers operates Roth-IRAs on behalf of the enrolled employees. The maximum amount that can be saved in an IRA is $6,000 annually, those over age 50 can save another $1,000. On the other hand, an employee can save $20,500 in a 401(k) plan and those over age 50 can save another $6,500 for a total of $27,000. Safe harbor plans, requiring an employer contribution, can allow owners to save the maximum without having to worry about discrimination testing. Also, private retirement plans can have minimum age and service requirements before employees participate in the plan. They can also reward loyalty by providing employer contributions are subject to a vesting schedule whereby employees will forfeit some benefit if they don’t stay with the employer long enough. Private plans can also allow employees to borrow against their account balance which can’t be done with a CalSavers account. Finally, there is a federal tax credit for employers that adopt private retirement plans.
All California employers, not just those with between one and four employees, should consider whether a private plan can be designed to better meet their goals than the state run CalSavers. Those with under 5 employees, in particular, have time to meet with retirement plan professionals to discuss private plan designs that may be a better option before being subject to CalSavers. This author recommends they take advantage of the time to do so.