CalSavers is a mandatory retirement program in the state of California. Passed into law in 2016, the legislation was intended to reduce the looming retirement crisis by helping workers from all industries have access to retirement planning tools. Companies in California must have an eligible retirement plan in place or sign up with CalSavers before the deadline.
The deadlines are tiered based on number of employees you have, and the second deadline is quickly approaching:
- Businesses with 50 or more employees – June 30, 2021
- Businesses with five or more employees – June 30, 2022
Participation in CalSavers is mandatory for businesses unless you already have an eligible retirement plan in place. If you do not, you have to register with CalSavers. Your employees do not have to participate, but they will be auto-enrolled after 30 days and will begin saving through automatic payroll contribution unless they opt out.
Here are some additional CalSaver facts that you and your workforce need to know:
- CalSavers is a Roth IRA and the account goes with the worker no matter where they work.
- Employees must actively opt out of CalSavers, otherwise they are automatically enrolled.
- The default savings rate is 5% of a worker’s gross pay. If they aren’t prepared, your workers could be surprised to see this money withheld on payday.
- CalSavers contribution rate increases automatically by 1% a year up to a max of 8%.
- Employers cannot contribute any amount to employee’s CalSavers account.
As a business, you should know If your company does not comply with CalSavers, you can face action, including penalties:
“Per Government Code Section 100033(b), each eligible employer that, without good cause, fails to allow its eligible employees to participate in CalSavers, on or before 90 days after service of notice of its failure to comply, shall pay a penalty of $250 per eligible employee if noncompliance extends 90 days or more after the notice, and if found to be in noncompliance 180 days or more after the notice, an additional penalty of $500 per eligible employee (Source)
You can learn about registering your company or begin the CalSavers registration process at anytime. To complete the process, you must have your California payroll tax number, your federal employer identification or tax identification information along with a CalSavers access code. This code should have been sent to your business already, but if you don’t have it you can request it during the registration process.
CalSavers provides minimal retirement tools
CalSavers is an easy option for workers looking to save for retirement. But as a mandatory program, it only provides workers the bare minimum in terms of retirement planning tools. For instance, because CalSavers is similar to a traditional Roth IRA, employees are limited to saving up to $6,000 yearly, or $7,000 for those over 50. They cannot put more in if they wish and there is little control in terms of customizing the account, such as selecting investments.
Unlike Traditional IRAs, however, users don’t have to take minimum distributions (RMDs) when they reach a certain age. Money taken out before age 59 ½ is subject to a 10% penalty tax based on the earnings portion of the distribution. There is also a maintenance fee assessed to manage the account. This is an annual asset-based fee of 0.825% to 0.95%, depending on a few factors. The plan is to drop this fee when the program hits certain growth milestones, but there is no set date for this to happen.
CalSavers isn’t a good option for contractors
CalSalvers is a simple program for companies to participate in because it requires very little work to set up on behalf of the business owner. This doesn’t make it a great choice, however, and for construction companies it is an especially poor route to take. This is because CalSavers does not allow employer contributions. This includes fringe benefits payments and employee matching. This takes away some of your most powerful tools for reducing taxes and maximizing fringe credits.
Construction companies that do prevailing wage work should look into other options that allow them to be compliant and opt out of the CalSavers program.
Alternatives to CalSavers
Fortunately, there are alternatives to CalSavers. For instance, if you have a qualifying retirement program in place before the deadline, you can opt out of the program. This allows your workers to have more options in terms of retirement planning, but also protects your ability to leverage tax and payroll savings. This also keeps you in compliance so that you don’t face penalties.
Qualified retirement plans include:
- 403(a) – Qualified Annuity Plan or 403(b) Tax-Sheltered Annuity Plan
- 408(k) – Simplified Employee Pension (SEP) plans
- 408(p) – Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA Plan
- 401(a) – Qualified Plan (including profit-sharing plans and defined benefit plans)
- 401(k) plans (including multiple employer plans or pooled employer plans)
- Payroll deduction IRAs with automatic enrollment
For construction companies, a 401(k) bona fide trust is one of the quickest, most simple and beneficial alternatives to CalSavers participation. This type of trust satisfies CalSavers requirements, and still allows you to contribute fringe benefits, which maximizes your ability to take credit for fringe payments. When you pay fringe benefits through a trust you also drastically reduce your taxes, workers’ compensation and general liability expenses.
In the past, some prevailing wage construction companies have avoided trusts because their workers were used to seeing fringe dollars on their paycheck every week. Traditional trusts do not allow workers to have regular, ongoing access to their fringe, so it is a legitimate concern. There is an option, however, that will keep you compliant, provide the benefits of a traditional trust while offering workers flexibility – the eBacon Fringe Trust.
This trust is a traditional 401(k), but as a software company and Third-Party Administrator (TPA), we’re able to do things other companies cannot – provide workers easy access to fringe payments placed into the trust. Your workers can still take their fringe payments out every week on payday if they want, or they can save and invest it. This keeps your workers happy while still offering your company tremendous benefits.
Our fringe trust can be set up quickly, typically within a single pay cycle, so you can beat the CalSavers deadline and start saving money right away.
The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.