CalSavers or Qualified Employee Benefit Plans?

CalSavers is a program established by state law to assist California residents in saving for retirement. Presently, most employers with five or more employees based in California are obligated to enroll their workforce in the CalSavers program, unless they opt for a qualified plan. In 2022, the California legislature updated the CalSavers program, mandating that employers with even a single California-based employee must either register for CalSavers or file for an exemption by December 31, 2025. This article offers an insightful overview of the CalSavers program and summarizes defined contribution-qualified plans as alternatives to participation in CalSavers.

Eligibility for CalSavers

Employers with an average of at least five California-based employees, with at least one employee over 18, qualify as eligible employers and must either register for CalSavers or file an exemption. The calculation of the average number of employees is based on the information reported to the Employment Development Department (EDD) in the prior year through the Quarterly Contribution Return and Report of Wages (DE 9) and the Quarterly Contribution Return and Report of Wages (Continuation) (DE 9C) filings, with rounding for fractions. It's important to note that employers with an average of one to four California-based employees must also register for CalSavers or file for an exemption by December 31, 2025.

Exemptions from the program are granted to employers who fall into specific categories:

• Employers who solely employ the owner.
• Government entities, religious entities, or tribal organizations.
• Employers offering a qualified retirement plan.

Registration and Contributions

Upon registration for CalSavers, employers are required to provide information about their eligible employees. They also have an ongoing obligation to report information regarding new eligible employees within 30 days of their hiring. Eligible employees are automatically enrolled in CalSavers with contributions set at 5% of their compensation, post-tax.

These contribution percentages increase annually by 1%, reaching a maximum of 8% of compensation. Employees have the flexibility to opt-out or modify their contribution amounts by directly contacting CalSavers. Eligible employers are responsible for deducting contributions from each pay period and must remit these funds within 7 days. Notably, employers do not need to send notices to their employees; CalSavers handles direct communication with employees to provide program information.

Failure to timely register or file an exemption results in employers receiving non-compliance notices. If these notices are not addressed within 90 days, penalties of $250 per employee are imposed. After 180 days or more, an additional penalty of $500 per employee is levied.

Exemptions from CalSavers

Employers can be exempted from the CalSavers program if they sponsor a qualified retirement plan falling under specific Internal Revenue Code (IRC) Sections, which include:

• IRC Section 401(a) — Qualified Plans (including profit-sharing and defined benefit plans).
• IRC Section 401(k) plans, including multiple employer plans (MEPs) or pooled employer plans (PEPs).
• IRC Section 403(a) — Qualified Annuity Plans or 403(b) Tax-Sheltered Annuity Plans.
• IRC Section 408(k) — Simplified Employee Pension (SEP) plans.
• IRC Section 408(p) — Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA Plans.
• Payroll deduction IRAs with automatic enrollment.

In cases where employers are part of a controlled group of businesses, exemption from CalSavers applies if any of the controlled group members sponsor a qualified plan. This exemption holds even if a particular employer within the group does not participate in the controlled group plan. Each employer within the controlled group, however, must independently assess their eligibility based on the average number of California-based employees. Furthermore, every employer must individually register or file an exemption with CalSavers.

Exploring Qualified Retirement Plan Alternatives

For employers seeking alternatives to CalSavers, there are various qualified plan design options available, ranging from straightforward and easy-to-administer plans to more intricate plans with customizable features, as mentioned in Section I. Most qualified retirement plans enable employees to make contributions using both pre-tax and after-tax funds. Additionally, employers may have the flexibility to make employer contributions, depending on the type of qualified plan they select. Various plan design options, including vesting requirements that encourage employee retention, are available.

To assist businesses in selecting the most suitable qualified retirement plan, we have provided a 2-page chart comparing CalSavers with defined contribution plan options at the end of this article. It's important to note that this article does not specifically address defined benefit plan options for employers.

Tax Advantages

Employers stand to gain tax advantages by establishing and maintaining qualified plans. For instance, businesses with 100 or fewer employees may qualify for the Credit for Small Employer Pension Plan Startup Costs. This credit, expanded by the SECURE Act 2.0 in December 2022, amounts to 100% of eligible startup costs for a qualified plan during the first two years. Subsequently, it decreases to 75% in the third year, 50% in the fourth year, and 25% in the fifth and final year. The maximum credit is $5,000 or $100 per participant for up to 50 participants. This credit phases out for employers with 51 to 100 employees. Eligible costs include setting up and administering a new retirement plan and educating employees about the plan.

Recent legislative changes make this credit available to new employers joining an existing Multiple Employer Plan (MEP) or Pooled Employer Plan (PEP), even if another entity sponsors the plan, and unrelated employers participate for the benefit of their employees.

Responsibilities and Risks

While there are compelling reasons to establish a qualified retirement plan, there are also associated responsibilities and risks. All qualified plans are subject to regulatory schemes by the Department of Labor and the Internal Revenue Service, with plan fiduciaries responsible for administering the plan in compliance with applicable federal law and guidance. Employers, acting as plan sponsors and administrators, must adhere to ERISA's fiduciary duties, including prudence and loyalty. Fiduciaries are obligated to act in the best interest of participants and beneficiaries, as well as cover reasonable expenses related to plan administration. Plan sponsors and fiduciaries also bear the duty of selecting service providers for the plan and monitoring them continually. Should a fiduciary breach their duty, they may be personally liable for restoring losses to the plan. Consulting with an ERISA expert is crucial when considering the creation of a new plan.

Choosing Between ERISA Plans and CalSavers

In evaluating the alternatives discussed in this article, employers should consider several key questions:

• How much savings do you wish to facilitate for your employees? An ERISA benefit plan may be preferable to enable employees to save more than $6,500 annually or cater to high-income employees.
• What is the optimal strategy for talent retention? Employers may opt for vesting requirements as an incentive.

So, what are you choosing? We'll let you decide but know that whichever one it might be, never hesitate to contact one of our specialists for a complete breakdown of this important question: CalSavers or Qualified Employee Benefit Plans? Contact us at 909.466.7876 today.

Also, if you've made up your mind and wish to get the CalSavers Retirement Program, you may be wondering: Will CalSavers Save Me Enough Money for Retirement? Click on the link for the full article!