3 Ways Calsavers will Impact Business Owners
- CalSavers hopes to help workers save for retirement, but could pose risks and raise costs for California small business owners.
- CalSavers requires time spent trying to navigate the State of California website and hotlines to register each employee and obtain assistance.
- CalSavers puts the business owner in a position of having to be a financial advisor to their employees.
- Non compliance with the state mandates on retirement carries big penalties to the business owner.
- Is CalSavers your best choice? Learn how a 401(k) plan may outperform the state-provided Roth IRA option.
Owning and operating a small business is no easy task. The smallest changes in cost can have significant effects. For those small businesses, the implementation of the CalSavers program could become a small hassle—or pose potentially larger challenges.
The state-run CalSavers retirement savings program is aimed at the problem of workers not adequately preparing for retirement. Unfortunately, it does so in a way that could add costs, risks and inconvenience to many small businesses in California in three major ways.
Increased costs and burden to business owners
Running a business often means keeping up with new legislation and regulations to stay compliant and in business. Sometimes, these changes create new costs for the business, more work, and potential financial penalties. When this happens, understanding your options becomes important.
CalSavers requires most businesses to offer a retirement plan to their employees. This means 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.
Time loss isn’t the only potential problem with the program. 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.
This 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 the 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 deciding how to best meet the CalSavers requirements.
Increases the risk for business owners
Noncompliance with the mandates comes at a cost to business owners. There are two rounds of penalties.
If a business is found to be noncompliant after the registration deadline, they will be served notice. If still noncompliant after 90 days, the business incurs a penalty of $250 per eligible employee. After another 90 days of noncompliance (180 days in total), an additional penalty of $500 per eligible employee could be assessed.
If the potential financial penalties for not complying or providing an alternative arrangement isn’t enough, think about this.
Many business owners structure their compensation to reduce their tax burden and qualify for financial aid that may be needed for a child in college or a child with special needs. The structure of CalSavers could put these business owners in a position of having to choose between the benefits they need for their family and the need to comply with CalSavers mandates.
That’s not to say a state-run California retirement program is a bad idea—far from it, in fact. Trying to help as many people save for retirement is a wonderful cause. But poor implementation of a good idea could result in possibly losing the intended benefits and producing more stress and anxiety for business owners.
Want to know the best way for your business to comply with CalSavers and the state mandates on retirement?
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.