The Pros and Cons of CalSavers – California’s Solution to Employee Retirement Savings

California’s mandatory retirement program, CalSavers, is now open for business! Every employer of five or more will be required to enroll its employees in the CalSavers plan if they don’t already maintain a qualified plan or IRA-based program for their employees. The most recent iteration of this requirement is that employers of certain sizes must maintain a retirement program at some point over the next three years as follows:

July 1, 2019 Optional for any employer to join

June 30, 2020 Companies with more than 100 employees

June 30, 2021 Companies with more than 50 employees

June 30, 2022 Companies with 5 or more employees

Steps employers must take:

  • Register your company through the CalSavers website, www.calsavers.com
  • Submit to CalSavers a listing of your employees including:
    • Name, Social Security Number, Birth date, email, mailing address, phone number
  • Begin deductions for all employees 30-days later
    • All are automatically enrolled with an after-tax Roth deferral of 5% of pay unless they elect a different rate or opt-out
    • Deferrals increase by 1% of pay each year up to a maximum of 8% of pay
  • Remit contributions after each pay period to CalSavers in an acceptable file format

CalSavers features:

  • Employees age 18 or over are eligible to participate
  • A Roth IRA is established by CalSavers for each employee
    • IRA contribution limits apply ($6,000 in 2019)
  • Employees who are not eligible for Roth IRA are responsible for opting out of the plan.
    • Single with Modified Adjusted Gross Income (MAGI) under $135,000
    • Married filing joint must have MAGI under $199,000
  • Availability or pre-tax deferrals as of August 2019 is unknown
  • Employees make investment choices among the State Street Global Advisors options available:
    • Target date funds (11 options)
    • Money Market
    • Bond index fund
    • Equity funds (2 options)
    • Balanced fund
  • Employees may opt out or change their contribution rate at any time
  • Fees charged to the employee accounts are less than 1% of the account balance
  • No employer contribution is required
  • No dollar-cost to employer to maintain plan
  • Penalties for failure to comply and/or enroll employees timely are up to $500/employee/yr. for non-compliance over 180 days

Alternative options for employers

CalSavers is only required for employers who do not offer another type of retirement program for their employees. Alternative retirement programs may require administrative fees or mandatory contributions from the employer sponsoring the plan, but they also offer additional flexibility which allows for deliberate program design and, compared to CalSavers, may be easier to maintain and provides a better experience for business owners.

  • Simplified Employer Plans (SEP)
    • Easy to setup- talk to your CPA
    • IRA-based so no centralized trust or options for vesting or distribution
    • No deferrals may be made to a SEP
    • Employees over 21 years old become eligible in their third year of employment
    • No annual funding requirement
    • Contributions come only from the employer and is evenly allocated to all participants based on compensation even if they separate from service that year
    • Maximum contribution to each employee is $56,000 for 2019
    • Overall annual contribution may not exceed 25% of collective participant income
    • Loans are not available
    • At risk for non-compliance determination by CalSavers due to lack of deferral mechanism
  • SIMPLE IRA
    • Easy to setup- talk to your CPA
    • IRA-based so no centralized trust or options for vesting or distribution
    • Not available to companies with over 100 eligible employees
    • Similar to CalSavers, participant deferrals are made each payroll to their IRA
      • Deferral limits to a SIMPLE IRA are $13,000 in 2019
      • Additional catch-up deferrals of $3,000 are available to those 50+ years old
    • Employees over 21 years old become eligible in their third year of employment
    • Employer makes a mandatory contribution to participant IRAs of either:
      • 2% of pay to all eligible employees, or
      • Match employee contributions dollar-for-dollar up to 3% of pay
    • Employer selects investment provider whose fees and fund options vary
    • No annual government filings are required
    • Maximum contribution to each employee is $26,000
    • Loans available
    • Overall annual employer contribution may not exceed 25% of collective participant income
  • 401(k) Plan
    • Easy to setup- talk to your financial advisor or contact Benefit Resources!
    • Third-party administrator will be necessary for annual compliance review, tax return preparation, and plan document maintenance
    • Options available for eligibility, vesting, contribution and distribution types, and more
    • Participant deferrals
      • Roth or pre-tax deferrals available regardless of income
      • Deferral limits are $19,000 in 2019
      • Additional catch-up deferrals of $6,000 are available to those 50+ years old
    • Opt-in/elective or opt-out/automatic enrollment options are available
    • Employer contributions may be discretionary or fixed
      • Match (dependent on participant deferrals)
      • Profit Sharing/Non-elective (not dependent on participant deferrals)
      • Vesting schedules may apply
    • Maximum total individual contribution is $56,000 for 2019 (not including catch-up deferral contributions)
    • Compliance testing is required every year
    • Annual Form 5500 filing is required
      • CPA audit must be attached only if more than 100 eligible employees
    • Employer selects investment provider(s) and funds available
    • Other employer retirement plan alternatives:
      • Profit Sharing plan
      • Defined benefit pension plan

SUMMARY

CalSavers was put in place to expand access to a payroll-deduction mechanism for California employees to more easily save for retirement. The solution improves somewhat on the option to establish an individual IRA already available to Californians since contributions will be made from payroll which has be proven to increase retirement savings. However, this benefit comes at an imposed cost to the employer since they will have to maintain a new payroll process to regularly remit contributions to the State and fails to improve the benefit to Californians since the amount of annual contribution each employee can made to their retirement plan is exactly the same as an IRA.

Alternatives to CalSavers are plentiful and diverse and may offer so much more than a payroll deduction IRA to benefit both employers and their employees. For the few employers of over 100 who don’t already have a plan, CalSavers is essentially free compared to the five-figure fee that comes with the team required to maintain a qualified plan but is a less-than-stellar message to employees that only the bare minimum will be done to provide them with retirement savings. For employers of fewer than 100, at least put a SIMPLE IRA in place so you take control of your company’s retirement program. After you’ve become accustomed to the idea of sponsoring a plan and have dialed-in your payroll process, you may become more interested in the additional benefits of qualified plans which include Roth deferrals $6,000 more than you can to the SIMPLE, the requirement that your staff work 1,000 hours a year instead of 450 to become eligible for the plan, and the amazing ability for contributions from the company to be directed more to the employees you choose. Yes, qualified plans cost thousands of dollars a year to maintain, but the ability for the company to take deductions for providing retirement income to employees and for individuals to offset their personal taxable income can quickly allow the numbers to pencil out!

At Benefit Resources, Inc., we specialize in customized plan design for employers of all sizes and industries and offer a complimentary plan feasibility study to help you decide whether a qualified makes sense for your company. Be deliberate about your retirement program! Contact us and find out if an alternative to CalSavers is right for you; we’re happy to recommend an IRA-based program over a qualified plan if we think it will satisfy your needs.

 

Request a Proposal Today! See what a customized plan can do for you!

 

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