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Small businesses are a critical part of the economic landscape in California. As is the case with many other states, these businesses account for a high percentage of revenue and employment. According to the U.S. Small Business Administration, there are 3.9 million small businesses in California employing more than 7 million people. It is clear these businesses are essential to the state’s economy, but unfortunately, they are often plagued by challenges difficult to overcome. One such area is in offering employees a retirement savings plan such as a 401(k), IRA, or other tax-deferred plan option. Setup costs, compliance, plan management, and additional related fees are too much for the company’s available resources. This leaves many without a plan necessary to fuel retirement savings. To help these companies, the state of California has passed a law that requires small businesses that do not offer a retirement plan to participate in the CalSavers program. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
To ensure qualifying employees, regardless of company size, have access to a retirement account, the state of California passed a law requiring businesses with five or more employees to offer a qualified retirement plan or to participate in the CalSavers Program. A qualified retirement plan includes 401(k), 403(a), 403(b), Simplified Employee Pension (SEP) plans, Savings Incentive Match Plan for Employees (SIMPLE) plans or a payroll deduction IRA with automatic enrollment. If an employer’s plan does not include one of these types, then they are also required to participate.
Employer registration must be completed by established deadlines, which are based on the number of company employees. Companies with more than 100 employees are required to register on or before June 30, 2020. Companies with more than 50 employees need to register on or before June 30, 2021. For companies with five or more employees, the deadline to register is June 30, 2022. It is important to note that any employer that fails to allow eligible employees to participate, on or before 90 days after notice, will be required to pay $250 per eligible employee. For non-compliance of 180 days or more, an additional penalty of $500 per eligible employee will be assessed.
Employer Plan Responsibilities
Since the program is designed to make participation easy, the CalSavers program assumes possible plan management responsibilities. Employer responsibilities include registration, submitting employee contributions, adding new employees, and removing those who left the company from the plan. There are no employer fees, and no employer matching contributions are permitted. CalSavers is responsible for enrolling employees, answering program questions, managing investment options (including choice of funds and employee investment changes), processing distributions, answering questions about investment options, and account maintenance. To make plan participation even easier, CalSavers offers a resource center with various ready to use templates.
Any employee of a participating company who is at least 18 years old and receives an IRS Form W-2 with California wages can participate. Business owners who are also employees of the company (meeting the same criteria) are also allowed to participate. It is important to note that employee contributions do not start until the first payroll following the 30-day notification period. As a result, some short-term employees may not be able to make contributions.
Since the state is requiring companies to participate in this program, it may make sense to review retirement plan options and determine what plan works best for your company. There are many new tax incentives implemented by the SECURE Act, which reduce plan start-up and maintenance costs. If you have questions about program participation or need assistance with a tax issue, JLK Rosenberger can help. For additional information, please call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.