Is CalSavers Right for Your Business?

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Most Los Angeles and Orange County businesses are aware of the requirement to register with CalSavers. It is a new program designed to ensure that employees of small businesses have access to a retirement savings vehicle. Unlike larger companies, many small businesses cannot manage the cost of setup, administration, and the associated financial responsibility of a 401k plan. So, rather than leave employees of these businesses without any plan option, CalSavers provides a solution that minimizes the administrative burden while providing employees a much-needed benefit. In fact, the registration deadline for businesses with more than 50 employees passed at the end of June. However, many have been wondering if CalSavers is the best option for their company, especially because starting a 401k plan in 2021 comes with several important benefits, including significant tax savings compliments of an expanded credit ushered in through the SECURE Act. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.

Employer’s Perspective

A key reason the CalSavers program was started in the first place is that 401k plan start-up costs have traditionally been too high for small businesses to manage. Despite this, there are many reasons small business owners may want to take another look at “opting-out” of the program. CalSavers does not offer day-to-day plan administration assistance, has limited payroll integration, and cannot be customized for specific business situations. In other words, it is a “cookie-cutter” option that requires participating businesses to fit the template. For this reason, many should consider the 401k plan option because of the level of control and administration assistance.

Employee’s Perspective

From an employee’s perspective, 401k plans are far more beneficial than the CalSavers counterpart. The unfortunate reality is that CalSavers only provides very basic saving and investment opportunities with no plan guidance from qualified investment professionals. Upon further analysis, the CalSavers program has a maximum allowable contribution of $6,000 per year, elective contributions are not tax-deductible, there is no employer match, and decisions about the plan are made by California.

By comparison, an employer-sponsored 401k has a maximum allowable contribution of $19,500 per year, features an employer match, typically offers advice from investment professionals, and the plan is managed by the employer. Unlike CalSavers, there are participant protections required by the Employee Retirement Income Security Act (ERISA).

New Tax Credits to Offset Costs Associated with 401k Plan Setup

Despite all the information presented above, the reality is that many simply cannot afford to start a 401k plan at this time. For those in this situation, the good news is there were two tax credits passed as part of the SECURE Act to help small businesses manage such expenses, including:

• Retirement Plan Startup Costs Tax Credit – This allows eligible employers to claim a federal tax credit of up to $5,000 for three years ($15,000 total) for the ordinary and necessary costs related to starting a 401k plan. The credit is limited to 50% of eligible start-up costs. These costs include those related to plan set-up and administration, as well as expenses incurred to educate employees about the plan. Only those that employed 100 or fewer employees that received at least $5,000 in compensation during the previous year and have at least one participant that is non-highly compensated are able to claim the credit.
• Automatic Enrollment Tax Credit – There is also a $500 federal tax credit, available for three years, for those who add an auto-enrollment feature to the plan.

We’re here to help.

While CalSavers provides an important starting point for many California small businesses, it does not mean it is the best plan option. The SECURE Act’s tax credits have changed the cost dynamic and make it easier for many to manage the expenses associated with 401k plans. If you have questions about the information outlined above or need assistance with a plan audit or other issue, JLK Rosenberger can help. For additional information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.