Do you own a business in California? Our sunshine state is at it once again. This time it's making retirement savings mandatory. While in concept, this sounds like a great idea...the devil is in the details.
Think you are exempt? you may want to keep reading.
If you have 5 or more employees, your business is already required to have a retirement plan for your employees. If you don't yet have a retirement plan, you are not just late to the game but you are not in compliance with California mandates.
There is now a state-provided retirement plan option if you don't want to go the traditional path of having a company retirement plan, California is providing a better-than-nothing retirement plan option to you with CalSavers.
Think you are exempt? I only have 1 employee... listen up!
California businesses with only one employee will soon be required to have a retirement plan in place for employees, under the same regulations as businesses with 5 or more employees.
Basically, if you have a business in California, unless you are a Sole Prop or Single-Member LLC, you have to get a retirement plan in place in 2025 or sign up for CalSavers.
"But I don't have full-time employees?" Stop the scroll! California also has different ideas of who you should cover.
As with anything in California, fines will be issued if you don't comply. This is something you want to know about if you own a business in California, take action on in a timely matter, to avoid fines.
CalSavers Retirement Savings Trust Act
As of January 1, 2023, the CalSavers Retirement Savings Trust Act requires employers with five or more employees to provide a retirement savings option, either through their own plan (like a 401(k)) or by enrolling employees in CalSavers. Employers with fewer than five employees have until December 31, 2025 to comply.
But here's a key detail many overlook: even if your business already offers a retirement plan, you are still required to register with the CalSavers program.
Here’s a breakdown of what you need to know.
What is CalSavers?
CalSavers is California's state-sponsored Roth IRA program designed to help employees save for retirement if their employer doesn’t offer a plan. Employees are automatically enrolled unless they opt out. The program offers:
- Automatic payroll deductions for employees. - you must work this into your payroll process
- Roth IRA structure, meaning contributions are made with after-tax dollars and grow tax-free.
- No employer contributions are required - no tax deductions for your company as well
Who Must Register?
The mandate applies to all California businesses with one or more employees, regardless of whether you already have a retirement plan in place. If you offer a 401(k) or another qualified plan, you still need to register and certify your exemption on the CalSavers portal.
Employers have two options:
- Establish a 401(k) or another qualified retirement plan.
- Register with CalSavers and automatically enroll employees, unless they opt out.
You can register or certify your exemption here: CalSavers Registration.
Deadlines and Who Must File by When
The deadlines depend on the size of your business:
- Employers with 5 or more employees were required to comply by January 1, 2023.
- Employers with fewer than 5 employees have until December 31, 2025, to register or certify their exemption.
Penalties for Non-Compliance
Failing to comply will end up with serving your company penalty notices.
Non-compliant employers face fines of up to $250 per employee after 90 days of non-compliance, and $750 per employee if compliance is not achieved after 180 days.
Avoid penalties and register today. If you already have a plan in place, you can apply for the waiver option.
Why You Might Not Want to Use CalSavers as a Business Owner
CalSavers might be an easy solution, but we call it the Better Than Nothing solution. Here are a few reasons why it's not so great.
- No Employer Tax Benefits
Since you as the employer can not contribute tot he plan, you also miss out on tax deductions. -
Limited Customization and Control
While you may be able to shop for plan custodians that offer better options in the marketplace, don't expect those same options with CalSavers. There is no flexibility in plan design or investment options with CalSavers. -
ROTH IRA only
While many employer plans offer both options to contribute to pre-tax retirement plans and Roth IRAs, CalSavers only provides a Roth option.
What’s the Best Option for Your Business?
For smaller businesses or those that want a hands-off approach, CalSavers is an affordable and easy way to stay compliant with the state’s mandate.
However, we recommend finding a better option in the marketplace that allows for maximizing tax benefits, providing more robust investment options, and more control. Current tax credits even exist offset admin setup costs for new 401k plans.
Regardless of your choice, remember that all businesses must register with CalSavers, even if they already have a retirement plan in place.
To comply, visit the CalSavers Registration page today.
