We are looking forward to helping Laguna Chamber members!
We wrote this article to help businesses understand their CalSavers options when considering how to comply with the upcoming June 30, 2022 deadline to provide some type of retirement plan to their employees.
Every business in California with 5+ employees is subject to this new law so most chamber members will likely find this article useful.
We created a solution that saves businesses the cost of hiring a traditional retirement plan consultant to set up 401(k) type plans. It also saves them the hassle of enrolling in CalSavers, constantly sending employee information to CalSavers, and updating payroll records to maintain compliance.
McClements Insurance Services
The CalSavers Retirement Plan Mandate:
What Business Owners Need to Know by June 30, 2022
Does your business offer a retirement plan? If not, you are one of almost 200,000 California entities which must comply with the new mandate that all businesses with five or more employees provide a retirement plan to their workers. If you are unsure of your options, this article has you covered with everything you need to know to make sure your business is ready for the June 30, 2022 compliance deadline.
What is CalSavers?
California law (SB 1234, signed by Gov. Jerry Brown on 9/29/2016) now requires every employer with five or more employees to either offer a qualified retirement program (such as a 401-k) or enroll in the state-sponsored CalSavers program. CalSavers is a highly ambitious program designed by lawmakers in Sacramento to address the over 7 million working Californians who do not have access to a retirement plan at work. CalSavers has been in a successive roll-out phases since September 2020, and soon the largest block of targeted employers (those with 5 to 50 employees) will need to comply or face penalties.
CalSavers designers attempted to create a program without adding burdens to employers (for example, there is no cost to the employer to sign up and there is no need for employers to contribute to employee retirement accounts). But to generate the highest likelihood of employee participation, CalSavers incorporates the concept of “auto-enrollment”. This means employees that do not actively opt-out must be automatically enrolled (and the default amount of 5% of their earnings are deducted by you and sent to CalSavers for the benefit of the employee).
What happens if a business doesn’t comply with CalSavers?
Noncompliant businesses will be issued a penalty letter by California’s Franchise Tax Board (FTB). Once FTB letters are issued, if the targeted employer remains noncompliant for 90 days, they will face a $250 penalty per eligible employee. If noncompliance extends beyond 180 days, the FTB will seek to collect an additional $500 penalty per eligible employee.
Eventually all businesses with 5+ employees will inevitably fall into one of the following three categories.
1. Employers who sign up with CalSavers,
2. Employers who create an alternative retirement plan,
3. Employers who will potentially pay the noncompliance penalty.
Joining Group #3 will naturally want to be avoided, but due to the specific approach that CalSavers has taken (as explained below) Group #1 might also be something many employers will want to avoid. Therefore, understanding which of the alternative programs is the right fit for your business will be critical when forming your CalSavers compliance strategy.
The Challenges of Enrolling in CalSavers
While CalSavers takes significant steps to make the employer sign up process as easy as possible, there are aspects to how the CalSavers program works, both during installation and on an on-going basis, that will present major challenges to some businesses.
First and foremost, it must be remembered that CalSavers requires auto-enrollment of all W-2 employees age 18+, regardless of hours worked (part-time workers are eligible in CalSavers). While there is a 30 day period during which employees have to option to opt-out, there is technically no “waiting period” for eligibility. Therefore, employers are instructed to report all new hires as soon as possible to CalSavers to initiate that 30 day opt-out clock. This initial communication process is somewhat complicated by the requirement that employers must play a “limited” role in the set-up and operation of the program. This “limited” role for the employer is driven by the legal structure of the CalSavers program which attempts to shield employers from federal retirement plan ERISA fiduciary responsibilities and IRS reporting requirements. To steer clear of added federal requirements, employers are required to take a neutral role in CalSavers and are told to direct employee questions about the program to CalSavers. Importantly, employers are not even permitted to accept employee opt-out requests directly. Employees that want to opt-out do so via CalSavers and then CalSavers communicates the employee’s decision to the employer by way of a secure website. Also, employees are free to change their investment percentage at any time. This creates a situation where employers’ payroll services must integrate the most up-to-date data on the CalSavers website before calculation of each and every paycheck, since employees might have recently decided to change their deductions since the last update. In essence, CalSavers requires a “triangular flow of information” where employees must contact CalSavers and then CalSavers communicates with employers. For all of the above reasons, many employers will not be comfortable with the extra burdens CalSavers places on their payroll departments.
Employers with the following traits might be particularly concerned about directly joining CalSavers:
• If they have high worker turnover,
- If they have many part-time and/or seasonal workers,
• Where worker pay is based on highly variable hour counts from one pay-period to another,
• When a majority of their workers need 100% of their current earnings (rather than saving 5%+ of their earnings for retirement),
• If they face employee communication challenges (non-English-speaking workers or other issues).
What are the alternatives to enrolling in CalSavers?
If an employer has any retirement program already in place (see list below), they are permitted an exclusion from the CalSavers mandate:
• 401(a) – Qualified Plan (including profit-sharing plans and defined benefit plans)
• 401(k) plans (including multiple employer plans or pooled employer plans)
• 403(a) - Qualified Annuity Plan or 403(b) Tax-Sheltered Annuity Plan
• 408(k) - Simplified Employee Pension (SEP) plans
• 408(p) - Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA Plan
• Payroll Deduction Individual Retirement Accounts With Automatic Enrollment
Every employer should know that they take on significant long-term responsibilities and operational costs whenever they set up their own qualified retirement plan. Most of the options above involve employer funding of some (or all) of the retirement plan contributions for employees. The cost for this might be much more than an employer is willing to spend to simply become CalSavers compliant. On top of the cost of direct contributions, there are the “soft” costs that come with achieving non-discriminatory employee enrollment and communication of investment options. To make matters even more complicated, most retirement plans require ERISA compliant plan documentation as well as annual audits and IRS Form 5500 filings.
To address the complexity and cost of creating a retirement plan for workers, in recent years the U.S. Congress has approved legislation that makes it easier for employers to share the expense and design burdens of 401(k) programs. It is now possible for employers to consider banding together with other similar employers to participate in a Multiple Employer Plan (MEP) or with non-similar employers in a Pooled Employer Plan (PEP). The main advantage of both the MEP and PEP approach is the use of the retirement planning guidance and cost reduction that comes from the single organization that sponsors the MEP or PEP. For many small businesses that want to offer a 401(k), but feared the administrative and cost burdens, MEPs and PEPs are a welcomed new alternative.
Introducing an Even Simpler Way to Comply: The EZSAVINGS4U Program
While MEPs and PEPs make setting up 401(k) plans easier, they typically still involve some hard and soft costs to the employer. Many employers simply want to avoid setting up any IRS qualified retirement plan. They just want the easiest and least expensive approach meeting their CalSavers compliance burden.
Typically, these employers seek the option that:
- Saves the employer the hassle of providing employee information to CalSavers and constantly updating payroll records to maintain compliance.
- Saves the employer the costs of hiring any retirement plan consultant to set up traditional retirement plans (or MEPs or PEPs).
- Is free from needing any employer contributions to help fund employee retirement accounts.
- Permits the employer to give back to the employee any deductions that were taken due to the employee failing to officially opt-out, thus allowing mistaken deductions to go back to the employee’s pocket immediately rather than formally having to contact CalSavers and wait for a return of funds.
- Allows the employer to directly communicate with each employee, without outside involvement.
- Doesn’t require annual reporting (Form 5500) to the IRS and DOL, CPA plan audits and any ERISA plan documentation and communication responsibilities.
- Is as inexpensive as possible to set up and maintain.
- Is easy to discontinue – which leaves employers open to consider other retirement plan options in the future with minimal hassle.
If your business values the benefits listed above, then the best option among the CalSavers approved alternative programs is the Payroll Deduction Individual Retirement Account With Automatic Enrollment (PDIRAWAE, for short).
But there is a bit of a catch...while the concept of a payroll deduction IRA has been around since the 70s, CalSavers adds the requirement that any employer what wants to use this type of program must incorporate the automatic enrollment feature. Exactly how an employer is supposed to incorporate automatic enrollment is left up to the employer to figure out. Since automatic enrollment was not contemplated by any of the IRS or DOL guidance documents, there is little help from that direction. Therefore, creating a PDIRAWAE can be a bit puzzling to most business owners. And to cap it off, most retirement planners are unfamiliar with PDIRAWAEs because these plans put the control of all retirement plan investments in the hands of each individual employee (thus insulating the employer for investment oversite responsibilities). As a consequence of this decentralized approach to investments, retirement planners have no ability to charge an overall asset management fee (the core way they typically make their income), which obviously makes them reluctant to explore the PDIRAWAE option with employers.
To integrate the automatic enrollment feature, a PDIRAWAE will require the employer to provide each employee with some basic plan communication documents. Interested employers can either hire their own professional resource (i.e., law firm, CPA firm or retirement planning consultant) to help them assemble the needed documentation or they can use a new program called EZSAVINGS4U*, which brings the PDIRAWAE to the marketplace in one self-contained package.
The EZSAVINGS4U program was specifically created to address the concerns of employers who want the easiest alternative to achieve CalSavers compliance. Visitors to the website www.ezsavings4u.com can access hours or informative video content on this subject. The site is designed to help private-sector employers make the right decision for their unique needs. If employers are interested in moving forward, they can fill out a simple form to request customized plan documents and a receive a full PDIRAWAE operations manual.
To summarize, CalSavers is the law and California employers who do not already provide workers a retirement plan must soon figure out if participating in CalSavers directly or opting instead to install an alternative is best for their business.
The www.calsavers.com website is filled with helpful information about the CalSavers program and every business is encouraged to look for themselves at the what the State of California is offering to help employers meet this new legal requirement. If an employer is willing to spend some money on a retirement plan for workers, recent federal law changes make it easier than ever for small businesses to participate in a group cost-sharing approach to offering a 401(k) to employees. For those employers interested only in the easiest way to comply with the June 30, 2022 CalSavers mandate, the Payroll Deduction IRA With Automatic Enrollment is worth investigating.
* The EZSAVINGS4U program was specifically designed by 3 legal and employee benefit professionals (with over a century of combined experience) to meet the compliance needs of the CalSavers program. But just like any private party retirement program - it is not endorsed, sanctioned, approved, or in any way affiliated with the State of California, the California Treasurer’s Office, or the CalSavers Retirement Savings Board. EZSAVINGS4U offers a simple kit with everything an employer needs to set up a PDIRAWAE. Visit www.ezsavings4u.com or contact Ed McClements at (949) 232-9178 or firstname.lastname@example.org for more information.
ED McCLEMENTS JR., CLU, ChFC, is the President of McClements Insurance Services, and the creator of EZSAVINGS4U. He has 45 years of employee benefit experience, including the past 30 years serving the agricultural industry. At age 14, Ed was the youngest person ever granted an insurance license in California. Formerly, he served as the Executive Vice President of United Agricultural Benefit Trust, Branch Manager for one of California’s largest insurance brokerages, and President of the Agricultural Personnel Management Association. Ed can be reached at (949) 232-9178 or email@example.com.
CalSavers wants more of California’s workers to save for retirement. By law, employers with as few as five employees on payroll must register into CalSavers by the appointed deadline or create their own alternative retirement savings program.
• Is one of 13 State Sponsored Retirement programs that are fully operational or are in some stage of development.
• Has already been challenged in Federal Court and been upheld as legal and within California’s rights as a state to enforce on employers.
• Is funded by employee payroll deductions, without employer fees or contributions.
• Is administered by a private firm (ASCENSUS) and overseen by a public board (chaired by the California State Treasurer).
• Has no “waiting period” before employees are eligible and employees are “auto-enrolled” into CalSavers after their first 30 days of employment.
• Requires all W-2 employees over age 18 (even if only working part-time) to be auto-enrolled.
• Allows employees the opportunity to opt out or back in at any time.
• Uses the default contribution of 5% of pretax wages.
• Gives employees the freedom to increase or decrease their contribution percentage at any time.
• Employee contributions are placed into a Roth IRA but can be converted to a Traditional IRA.
• Provides default investment options for initial deposits, but as the employee’s balance grows, employees have expanding investment options within CalSavers.
• Promises employers freedom from ERISA and fiduciary responsibilities, but consequently, the employer must play a limited role in communication and administration.
• Requires employers to direct virtually all employee questions about the program to CalSavers.
• Prohibits employers returning any CalSavers deposits to employees (that must be handled directly by CalSavers.)
• Employer cannot accept any employee requests to opt out or changes to the default contribution percentage (that must be handled directly by CalSavers.)
Readers are encouraged to visit www.calsavers.com to learn more.