Does your employer still not offer a retirement plan? They may be running out of time
Every employer with five or more workers in California is required either to sponsor a retirement plan or to sign its workers up for CalSavers, the system of individual retirement accounts set up by the state. And hundreds of employers that haven’t complied will soon get one last chance to avoid being penalized by the state’s tax collectors.
The state has been imposing penalties against noncompliant employers in waves, starting early this year with those that have 101 or more workers in the state. Katie Selenski, executive director of CalSavers, said the next wave will focus on noncompliant employers with 51 to 100 workers in California, which were supposed to have launched retirement savings plans or signed up for CalSavers by June 30, 2021.
As of the end of October, there were about 1,770 businesses and nonprofits in that group, including about 450 in Los Angeles County, Selenski said. They face a penalty of $250 per eligible employee, and if they don’t come into compliance within 90 days, they’ll have to pay an additional $500 per employee.
By the middle of November, these employers will receive their third and final notice of a potential penalty from CalSavers, Selenski said. They’ll then have 30 days before CalSavers turns them over to the Franchise Tax Board to impose the penalty. Employers that have not yet complied can register or seek an exemption on the CalSavers website.
The state enacted the CalSavers Trust Retirement Savings Act in 2016 to try to reduce the alarming number of Californians with far too little money saved for retirement. The problem is particularly acute among workers whose employers do not offer a pension, 401(k) or other retirement savings plan.
Lower-wage workers at smaller businesses and non-profits are most often left without retirement benefits, but the same issue can confront workers at all levels of pay and education, a 2015 study found. The study estimated that 7.5 million Californians, or more than half of the workers in the state between the ages of 18 and 64, worked for an employer that did not provide retirement benefits.
Small employers that do not offer a qualified retirement plan — which most do not — have to sign up for the state’s CalSavers IRA plan by June 30.
Workers whose employers do not offer a retirement plan can set up their own IRAs through a bank or financial services company (such as Vanguard or Fidelity), or they can sign up for CalSavers directly at the program’s website. To be eligible for CalSavers, employees have to be at least 18 years old, work in California and have a Social Security or taxpayer identification number.
If your employer registers with CalSavers, it will enroll you automatically in a CalSavers IRA unless you opt out. It will then deduct your IRA contributions from your paycheck and deposit the money into your retirement savings account.
By default, the contributions start at 5% of your gross pay and rise annually until they reach 8%, although you can choose to contribute less or more, up to the federal limit on IRA contributions. CalSavers offers five types of IRAs with different investment strategies, with the default being a “target date” fund that shifts your holdings into less risky investments as you near retirement age.
California law requires all but the smallest employers to offer workers some kind of retirement savings plan. Here are the requirements and options.
The CalSavers IRAs are Roth IRAs, which means that you pay taxes on the contributions initially, but not on any dividends or capital gains they earn. Roth IRAs also allow you to take out money that you contributed, but if you withdraw money the account earned before the account is 5 years old and before you’ve turned 59½, you may have to pay taxes on it and a 10% penalty.
State law phased in the deadlines for employers to launch qualified retirement savings plans or sign up for CalSavers, starting with employers with at least 101 workers in California, then employers with 51 to 100 workers in the state, and finally those with five to 50 California employees. A qualified retirement plan could be a pension, a 401(k) or certain IRA-based plans.
In August, the state extended the mandate to employers with as few as one worker in California, excluding self-employed people and sole proprietors. These businesses have until the end of 2025 to comply.
The vast majority of employers with five or more California employees have at least responded to the mandate — more than 97% of those with 101 or more eligible workers, more than 92% of those with 51 to 100 workers, and 87% of those with five to 50 workers, Selenski said.
That third group of employers has responded far faster to the mandate than the previous groups, she said, in part because CalSavers and the companies offering competing retirement savings plans to employers have stepped up their outreach and marketing efforts. In recent years there has been a surge in web-based financial services catering to small businesses, and they’ve made 401(k)s and other retirement plans far less daunting for small employers.
The percentage of employers that have actually started collecting workers’ IRA contributions is a bit lower: 94% for the biggest employers, 80% for the next largest and about 57% for the smallest. The compliance rate for the middle group will probably jump above 90% when the Franchise Tax Board’s penalty notices go out, Selenski said.
More than 7 million Californians have had no access to a workplace retirement program. Can the CalSavers program help?
Despite the high response rate, awareness of CalSavers remains an issue, according to a survey cited by Guideline, a company that helps small businesses establish 401(k) plans. Almost three-quarters of the small-business owners surveyed in the state hadn’t heard of the program or the mandate to offer a retirement savings plan, the company said.
Nearly 30,000 employers with five to 50 workers in California haven’t done anything yet to comply. “We’re sending polite follow-ups this fall, and will commence our series of three required due-process penalty notices in January, followed by the FTB notices later in the spring,” she said.
In the two groups of larger employers, about a third of the noncompliant ones haven’t even registered with CalSavers, Selenski said. Another third haven’t sent in their roster of employees, and the remainder haven’t started deducting their workers’ IRA contributions from their pay.
The potential tax penalties led to a jump in sign-ups this year among employers with five to 50 workers, and will probably do so again next year when the notices of noncompliance go out, said Jeff Rosenberger, Guideline‘s chief operating officer. His company urges employers to consider 401(k) plans because they can build wealth faster than a CalSavers IRA — they allow employers to contribute to their workers’ retirement accounts and let employees set aside significantly more per year.
CalSavers isn’t releasing the names of noncompliant employers, Selenski said, because that information is protected by state confidentiality laws.
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