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Answers to Employer Questions about CalSavers Compliance

February 17, 2020 Published by

After numerous studies showed that workers weren’t saving enough for retirement, California was one of 10 states to have implemented a mandatory state retirement plan. The California plan, known as CalSavers, requires that employers with no retirement plan and five or more employees register by the time it is fully phased-in on June 30, 2022.

The phase-in is gradual for employers and the state has laid out the following deadlines based on company size:

  • June 30, 2020 for companies with at least 100 employees;
  • June 30, 2021 for companies with between 50 and 99 employees; and
  • June 30, 2022 for all companies with more than five employees.

A pilot program launched in 2018 for employers who wanted to get a jump-start on participation.

CalSavers was initially called California Secure Choice when it was approved by the state legislature in 2016. The goal of the program is to provide employees working for companies without retirement plans access to a retirement savings program that does not impose an administrative burden on employers.

How do Employers Participate in CalSavers?

An employer participating in CalSavers will deduct at 5% (the default rate) from the paychecks of employees who are 18 or older and deposit those funds in the employees’ CalSavers accounts. Each year the deduction amount increases by 1% until it has reached a maximum of 8%.

Employees have the option of electing their own deduction amounts, opting out of automatic escalation or opting out of the program entirely. CalSavers accounts are personal individual retirement accounts (IRAs) that are overseen by an investment board.

CalSavers Accounts are Roth IRAs

Roth IRAs are retirement accounts where contributions are made after the employee has been taxed, so CalSavers contributions will be taxed and will not result in a deduction from income. However, any qualified distributions from a Roth IRA will not be subject to tax.

One issue some employees may face when participating in CalSavers is that, if your income is too high, you are not eligible to contribute to a Roth IRA. The rule essentially means that for 2020 an employee’s ability to contribute to CalSavers starts being phased out when a single employee’s modified gross income is $124,000 and he or she cannot contribute if it tops $139,000. For married couples filing jointly, the phase-out begins at $196,000 and is capped at $206,000.

Employer Registration for CalSavers

CalSavers has a website to register employers which will require them to upload their employment roster. Uploading the roster will allow those employees to participate. If it wants to, an employer may designate a payroll services provider to operate on its behalf. After enrollment, the employer or its payroll service will transmit the contributions to a third-party administrator.

Failing to register with CalSavers after being notified that they are required to do so face a penalty of $250 per employee if the employer does not comply within 90 days of receiving the notification. The penalty jumps to $500 per employee if the company does not comply within 180 days of the notice.

Will Employers Even Need to Comply?

While a judge threw out an initial court challenge to the CalSavers program in March 2019, the plaintiffs filed an amended complaint the next month and the court has yet to rule on that filing. It is notable that the U.S. Department of Justice has joined in the litigation, arguing that the CalSavers law is preempted by federal law.

The DOJ contends that the program is pre-empted by the Employee Retirement Income Security Act (ERISA). Under the doctrine of pre-emption, a federal law overrules any inconsistent federal law. The plaintiffs contend ERISA establishes federal uniform standards to protect employees and that it does not allow for state-run programs.

The case will mark the first time a federal judge has addressed the legality of any state-mandated retirement program, so whatever decision he makes will likely apply to plans offered by other states. It is also not clear what would happen if the federal judge rules against the state, but at the very least most experts agree that enrollment would no longer be mandatory for employers.

Other States with Mandated Retirement Plans

State-mandated retirement plans have been considered by at least 30 other states, but only these 10 have enacted legislation establishing them. In addition to California, they include:

  • Connecticut
  • Illinois
  • Maryland
  • Massachusetts
  • New Jersey
  • New York
  • Oregon
  • Vermont
  • Washington
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This post was written by Sean Allaband

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