Calsavers Law- Know Your Options

KEY TAKEAWAYS

  • CalSavers, which aims to solve the problem of workers not saving for retirement, does so in a way that could add costs and risks to many small businesses in California.
  • With the registration deadline for complying with CalSavers around the corner (June 30, 2022), it’s imperative business owners understand their options for complying with CalSavers and the state mandate on retirement.
  • Business owners have several choices in how they can comply with CalSavers and avoid the related fines and penalties. Want to see the top 3 options?

What is CalSavers?

CalSavers, formerly known as Secure Choice, is California’s state-run retirement savings program for the millions of private-sector workers who don’t currently have a way to save for retirement at work. CalSavers requires employers to offer a retirement plan—AND, if they fail to offer one of their own, they must offer their employees CalSavers, the state-sponsored retirement savings plan (or else face fines).

Want to learn a lot more about CalSavers? Visit https://quiverfinancial.com/calsavers-know-your-options/

CalSavers and it’s potential impact on California businesses

Running any business is a challenge, but for small businesses, even a minor change in costs or income can have a drastic impact. For many small businesses, CalSavers, or rather the implications of it, may impact their business in drastic ways. With the deadline for complying with CalSavers around the corner it’s imperative business owners understand their options for complying with CalSavers and the state mandate on retirement.

Beware of the costs and burden for complying with CalSavers

With the state government generating more new legislation every year, keeping pace is difficult enough, but when that legislation has the potential for additional costs and more bureaucracy, it is important to know your options.

Using CalSavers to comply with the state mandates on retirement requires time spent trying to navigate the State of California website and hotlines to register each employee and obtain assistance. California businesses that employ a greater number of part time, seasonal or lower wage jobs and may retain employees for shorter time frames will have a much higher burden complying with CalSavers compared to a business that employs higher wage long term “career'' type of positions.

In addition to burning valuable time and energy maneuvering CalSavers, a business owner choosing to use CalSavers will not be eligible for many of the tax credits the government has made available for business owners who chose to set up a private retirement plan as a way to comply with the state mandates on retirement.

CalSavers puts the business owner in a position of having to be a financial advisor to their employees.

There are multiple reasons why over a dozen (12) types of retirement plans exist that a business owner can choose from to save for their long term financial security while attracting higher quality talent.

CalSavers seems to miss this understanding. Within CalSavers the default option for business owners and their employees is a Roth payroll deduction IRA which is extremely limiting and not always the best option for the business owner or the employee, putting the business owner in an awkward position of now becoming an expert on which type of retirement plan is best for their business and employees. This can be a slippery slope when you consider the following:

  • Roth IRAs have income limits: Only those employees who earn below a certain income threshold can own a Roth IRA. This restricts which of your employees can participate in CalSavers.  
  • Roth IRAs don't offer tax benefits on contributions: Roth IRAs only allow after-tax contributions. This means your employees don't receive tax benefits the year they make contributions. This differs from a 401(k), which allows pre-tax contributions.
  • Low contribution limits: Like many retirement savings plans, Roth IRAs have an annual maximum contribution limit—$6,000 in 2021. While that goes up every year, it falls short of a 401(k)'s contribution limit—$19,500 in 2021. A Roth IRA's low limit could hinder an employee's ability to fully prepare for retirement.
  • No employer match options: Roth IRAs don't allow employers to match employee contributions. This severely limits the amount an employee can save for retirement.
  • Fewer investment options: CalSavers' list of investment options is limited. More options, like those often offered by a 401(k), can give employees more opportunities for investment growth in the years leading to retirement. 401(k)s also offer additional resources helpful to savers, like account management and personalized investment advice.
  • No account fee options: Fees should always be a big consideration when choosing a retirement plan because they can seriously erode employee savings over time. CalSavers comes at no cost to the business owner. The individual account holders must pay an annuals fee—usually between $0.83 and $0.95 for every $100 they hold in their account, or nearly 1%. 401(k)s also have fees, but there are different plans available—many of which offer lower fees for account holders.

Those are quite a few things a business owner needs to consider when choosing the right strategy to comply with the CalSavers mandates.

Want to learn more about the top 3 options a business owner can use to comply with CalSavers and the state mandate on retirement? Click Here

Is there a better option to CalSavers?

There are several retirement plan options a business owner can consider for their business when deciding the best way to comply with CalSavers. Each option will have different rules and limitations for the business owner. As always, a financial consultant can help you find a plan that both meets your business goals and meets mandate requirements.

A 401(k) plan offers many benefits over the CalSavers Roth IRA option. The biggest might be the control it offers: as a business owner, a 401(k) lets you pick your plan's provider, offers a wider variety of investments, and a selection of features that lets you build the plan that works best for your business.

Additional benefits include:

  • Tax credits: The Secure Act offers tax credits for offering a 401(k)—up to $15,000(!)—that can off-set your plan's start-up costs. If you offer automatic enrollment, it could give you an extra $1,500 credit.
  • Tax deductions: Administrative fees associated with the plan and other costs could be deducted from your taxes at the end of the year.

401(k) benefits aren't restricted to business owners. Employees with a 401(k) could also benefit from:

  • Tax benefit options: Because 401(k)s offer the employer to make both pre-tax and after-tax contributions, they get the option of whether to receive contribution-year tax credits. This gives them the choice to decide which option works best for their retirement goals.
  • More savings: The higher contribution limits for a 401(k) plan allows employees to save thousands more each and every year. As time goes on, these extra savings can become monumental.
  • Investment options: Everybody's retirement goals are different. The wide choice of investments that a 401(k) offers can help employees prepare for the retirement they want the way they want. It also offers guidance options that can help employees find the investments that meet their needs and goals.
  • Support: 401(k) plans provide support options for plan owners. For instance, they might have access to educational resources on a wide range of topics. For example, many advisors that service 401(k) plans provide advice to help your employees reach their retirement goals and pursue overall financial wellness.

And, as a business owner you will benefit from saving time and energy. Using a private retirement plan like a 401(k) can help you comply with the CalSavers retirement mandates in a seamless effortless way.

There may be an easier, better way to comply with state retirement mandates.

At the end of the day, if you are a California business owner with 5+ employees your only choice is to comply with the state mandates or pay a fine. Obviously complying appears to be the best option, so if you are going to comply, why not comply in a way that gains you the greatest benefits with the least amount of effort?

As a business owner you will have to decide which is better for you. Spending your time and energy to register your payroll and employees with CalSavers and maintain that process yourself as turnover occurs. Or, you can outsource those tasks. Private plans offer a valuable benefit for yourself and employees: they manage the tasks related to your retirement plan for you while keeping you compliant with state mandates.

There are many such plans available to you. When shopping for plans, keep your business needs in mind. Some plans work best for big businesses. If you own a small business, it's most helpful to find a plan suited to your specific needs.

401(k) plans are a popular option that offer many advantages and could potentially outperform the CalSavers Roth IRA. Ready to explore?

Want to explore the advantages of offering your employees a 401(k) benefit instead of the state retirement plan?
Meet Our Contributors
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Colby McFadden

Founder, Quiver Financial

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Justin Singletary

Director of Retirement Services,
Quiver Financial

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Patrick Morehead

Director of Alternative Investments,
Quiver Financial

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