California law requires that employers doing business in California that do not offer a 401(k) plan must register under the CalSavers Retirement Program (the “CalSavers Program” or “Program”) and provide employee census information in order for CalSavers to automatically enroll eligible employees in a retirement savings program. By June 30, 2022, all employers with five or more employees must comply.
CalSavers gives employees the opportunity to have the employer direct contributions into an IRA account maintained by California. The employer will be directed to automatically deduct these contributions from the employee’s earnings and remit them to the CalSavers Program. Contributions are made on an after-tax basis to a Roth IRA, which is administered by the State of California.
Who Must Comply with the Act?
An eligible employer for purposes of the CalSavers Program is any person or entity (other than the federal government, the State of California or any county, municipal corporation or any units or instrumentalities of the state)), whether for profit or not, (1) who is engaged in “a business, industry, profession, trade or other enterprise” in California, and (2) who employs at least five California employees, with at least one of the five employees being an eligible employee. This would include various sole proprietors and self-employed individuals.
Generally, an “eligible employee” is an employee who is at least 18 years in age, has the status of an employee under the California Unemployment Insurance Code, and receives a Form W-2 with California wages from an eligible employer.
Employers that contract employment services through multi-party employment relationships (for example, temporary services or leasing agencies and professional employer organizations (“PEOs”) should also consider those service providers when determining how many employees it has. If your company engages a PEO to provide human resource or payroll withholding services or engages leased or temporary employees from a third-party agency, we recommend you contact the PEO and/or agency to determine who is responsible for complying with the CalSavers Program.
When Must Eligible Employers Register under the Act?
Eligible employers must be in compliance with the Act by the following registration deadlines:
- Deadline for employers with more than 100 employees: September 30, 2020
- Deadline for employers with more than 50 employees: June 30, 2021
- Deadline for employers with five or more employees: June 30, 2022
The California legislature is further considering an amendment to lower this threshold for the mandate to any employer with one eligible employee.
If you are an employer with more than 50 employees, your registration deadline has already passed and you may be liable for penalties for noncompliance, as discussed below.
Can an Eligible Employer Become Exempt from Registration under the Act?
If an employer later adopts a 401(k) plan or drops below the required number of employees in the prior year such that it would be exempt from the requirements of the CalSavers Program in a current year, it must provide the appropriate notice to the CalSavers Program administrator within 30 days of its change in status.
An eligible employer becomes exempt from CalSavers if it adopts or offers an employer-sponsored retirement plan for its employees. Under the Act, plans meeting this requirement include the following:
- 401(k) plan (including a multiple employer plan (e.g., PEO sponsored) or a pooled employer plan (“PEP”))
- 401(a) qualified plan (including profit sharing and defined benefit plans)
- 408(k) Simplified Employee Pension (SEP)
- 408(p) Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA)
- 403(a) Qualified Annuity Plan
- 403(b) Tax-Sheltered Annuity
- An automatic enrollment payroll deduction IRA
If an employer adopts, or makes available, one of the above retirement plans, it must provide the appropriate notice to the CalSavers Program administrator within 30 days of its change in status.
Are Penalties Assessed on Eligible Employers That Do Not Register under the Act?
Eligible, non-exempt employers that, without good cause, fail to enroll their employees in the CalSavers Program upon receiving notice of noncompliance may be subject to a penalty of $250 per eligible employee if noncompliance extends 90 days or more after service of the notice. If noncompliance continues for 180 days or more after the notice, an additional $500 per eligible employee penalty applies (for a total per eligible employee penalty of $750).
Employers with more than 100 employees that did not register by June 30, 2020, and employers with more than 50 employees that did not register by June 30, 2021, should be aware that the CalSavers Program has begun notifying employers of delinquencies and will soon begin enforcement actions.
What Responsibilities Do Eligible Employers Have under the CalSavers Program?
Each eligible employer must register its business with the CalSavers Program by the applicable registration deadline. Upon registration, an employer will have 30 days to provide employee census and account information to the CalSavers Program. And once registered, an employer must maintain up-to-date employee census information and register new employees within 30 days of their respective hire dates. The CalSavers Program will use this information to contact enrolled employees to provide them with information on how the Program works, how to set up their account and how to opt out if they wish.
The CalSavers Program will send each registered employer an informational flyer that includes background information on the Program and appropriate disclosures. Employers may choose whether to disseminate these flyers to their employees. However, if the employer communicates any information regarding CalSavers to its employees the employer must remain neutral regarding the Program.
Eligible employers that elect to enroll in the CalSavers Program will act as Program facilitators, essentially as a conduit for remitting Roth IRA contributions, and are not responsible as sponsors of the Program. Employers are responsible for remitting employee contributions for each payroll period within seven days of the deduction from the employee’s paycheck. Employers will not have any liability for the investment decisions of employees whose assets are deposited in the Program. The Roth IRAs utilized by the CalSavers Program are not ERISA-covered plans; therefore, other than complying with the requirements of the CalSavers Program, employers have no ERISA reporting and disclosure or fiduciary responsibilities.
Additionally, employers are not required or permitted to contribute to employee accounts, nor are they responsible for answering questions about the Program, managing investment options, processing distributions or giving investment or tax advice.
Any fees collected for participation in, or the administration of, the CalSavers Program are assessed against the employees’ account balances and are not the financial liability of the employer.
Can Employees Opt Out of the CalSavers Program?
Employees that are enrolled in the CalSavers Program may elect to opt out (and opt back in) by notifying the CalSavers Program via written notice, the CalSavers website or telephone. Employers do not have any liability for an employee’s decision to participate in or opt out of the CalSavers Program.
How Are Employees Enrolled in the CalSavers Program?
Any eligible employee who does not opt out of the CalSavers Program within 30 days of the employer’s registration will be automatically enrolled in the Program.
Unless otherwise specified by the employee, 5% of each enrolled employee’s annual wage or salary will be contributed to the CalSavers Program, with an automatic increase of 1% each year up to a maximum of 8% of annual compensation. Automatic contributions will begin in the first payroll period following 30 days from the employer’s registration. Employees may log into their CalSavers account and change contribution amounts and investment options at any time. The process by which employers are notified of participant deferral election changes is not explicitly addressed, but informal discussions with CalSavers indicates there will be a notification and/or alert in the employer portal.
Are There Any Fees to the Employers Associated with Participation in the CalSavers Program?
There are no costs or administrative expenses to employers for joining CalSavers; all expenses are borne by the employees.
What Type of Retirement Investments Are Offered under the CalSavers Program?
The CalSavers Program offers employees a Roth IRA, which is an after-tax contribution retirement vehicle in which earnings grow tax-free. Distributions from a Roth IRA are also tax-free, provided certain holding periods are met prior to distribution.
From a practical standpoint, before a small employer rushes to adopt a 401(k) plan or retirement vehicle, it can enroll in CalSavers and establish a retirement plan after carefully considering all of the options. Fenwick can assist with designing a new retirement plan and the pros and cons of each type of retirement vehicle.