CalSavers vs 401k Retirement

The CalSavers Retirement Savings Program as of June 30th, 2020 mandates that businesses with over 100 employees must provide a retirement plan for their employees. [1]  Let one of our professionals help navigate what works best for you and your company given your circumstances.  

Employers in California with at least five employees or an employer of providers of in-home services who do not already offer a workplace retirement savings plan were given the option of joining a pilot program called CalSavers. The difference between CalSavers vs 401k is a complex topic we will try to break down.

 

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CalSavers vs 401k

For now, CalSavers is a Roth individual retirement account (IRA) similar to programs started in Oregon (OregonSaves) and Illinois (Secure Choice) that is designed to give millions of workers in the Golden State who lack access to an employer-sponsored qualified retirement plan* a chance to save for the future. It is a portable plan that will have oversight from a public board of directors. In July 2019, CalSavers also will offer traditional IRAs. The difference between CalSavers vs 401k retirement plams: Roth IRAs invest post-taxed earnings and withdrawals aren’t taxed, while traditional IRAs invest pre-tax earnings and withdrawals will be taxed as income.

*A qualified retirement plan includes a 401(a), 401(k), 403(a), 403(b), 408(k), 408(p), or 457(b).

Employer requirements, registration deadlines, and penalties

Eligible employers must first register their business, and then once registered they have one year before the mandated deadline for their size business to implement CalSavers, if the business does not already have a qualified plan in place. The implementation deadlines are as follows:

  • June 30, 2020: Businesses with 100-plus employees

  • June 30, 2021: Businesses with 50-plus employees

  • June 30, 2022: Businesses with five-plus employees.

Employers also will:

  • Not be able to make contributions

  • Submit employee contributions

  • Incur no fees to facilitate the program

Even though there is no fee to register for the program, employers could face financial penalties for not having a retirement savings plan available for eligible employees to join. The proposed fines range from $250 per eligible employee if an employer remains non-compliant after 90 days of being served notice, escalating to $500 per eligible employee if noncompliance reaches 180 days or more after the notice.

Employers also must factor in some investment of time on their part once they do register for the program, including setting up an account and then managing the account. Account setup includes such tasks as creating a payroll list to enroll employees, designating a payroll service provider – employers can use the one they have, if applicable – and transmitting payroll to a third-party administrator determined by the board of directors. Account management duties require employers to submit contributions (which means having a detailed list of what each employee’s contribution rate is) and adding new employees when necessary.

Do businesses have to use the state-sponsored program?

No. Registering for the CalSavers retirement program is one way to fulfill the requirement that every qualified employee in California have access to a retirement plan. Businesses can also establish their own employee retirement plan, such as a 401(k) or SIMPLE IRA, to satisfy this requirement. 

Employee responsibilities

In CalSavers, employees gain a portable plan that follows them from job to job and enables them to opt out and in at any point. If employees do not act within 30 days of notification once an employer registers for the program, they will be automatically enrolled at the default savings rate.

Employees should know:

  • Contributions will be made through payroll deduction

  • The default savings rate is 5 percent of gross pay

  • They have option to customize their plan and choose a different rate and change that rate at any time

  • They can opt back in to the program at any time

What are the differences among state-run IRAs, SIMPLE IRAs and CalSavers vs 401k retirement plans?

A state-run sponsored IRA is one way to satisfy requirements and help employees save for retirement. However, it’s in businesses’ best interest to compare it with other financial options and decide which option best fits their needs and those of their employees.

The chart below shows key characteristics of a state-run IRA compared to a SIMPLE IRA and 401(k) plan. Including CalSavers vs 401k, the differences are the option for a company to match a portion of savers’ contributions, and the maximum amount employees can contribute.

2019

State IRA

SIMPLE IRA

401(k)

Contribution Max

$6,000

$13,000

$19,000

Company Match Option

No

Yes, mandatory

Yes, at employer’s discretion

Tax Credits for Opening New Plan

No

Up to $500 per year, for the first 3 years

Up to $500 per year for the first 3 years

California Business Benefits has a business alliance with a very reputable RIA advisory firm, The Financial Management Network, Inc. All securities transactions are carried out through FMN. Please see disclaimer below. http://www.fmncc.com/

[1] https://edd.ca.gov/employers/calsavers.htm