CalSavers: Do You Have 5 or More Employees?

CalSavers: Do You Have 5 or More Employees?

Employers with 5+ employees must offer a retirement program or face fines

Employers may not realize that we’re inching up on the final registration deadline for the CalSavers mandate that will impact every business with five or more employees.

What many small business owners still don’t know about CalSavers

CalSavers (Senate Bill 1234) was signed into law in 2016 with a three-year tiered rollout. The bill requires all California businesses with five or more employees to offer a retirement plan to their employees.

  • The number of employees is determined by W2 filings and includes BOTH full- and part- time employees, so the mandate applies to most small businesses.
  • The mandate gives employers the option to either adopt their own plans (i.e., 401k) or participate in a new state-run Roth retirement plan.
  • The registration deadline for businesses with 5+ employees is June 2022, followed by a grace period for noncompliance, followed by a tiered penalty phase of up to $750 per employee.
  • The registration deadlines for businesses with 100+ employees and 50+ employees have already passed: June 2020 and June 2021 respectively.

There’s no Covid hall pass on this one: They’re enforcing penalties now

The Franchise Tax Board (FTB) is enforcing the penalties, so the mandate has teeth. The good news is there’s time for small business owners to get educated and understand the options so they can comply with the mandate and avoid penalties.

The CalSavers program offers limited benefits to business owners

The CalSavers program itself–what the state is offering if businesses don’t adopt their own plans by the deadline–does NOT provide much benefit to business owners themselves. Typically, an employer-sponsored retirement plan, like a 401k, allows the business owner to also participate in the plan and reap the benefits of putting away money for retirement, sheltering income on a tax-deferred basis, and maximizing the tax benefits, both for the business and as an individual. A plan might also allow for employer contributions, such as matching funds, which can increase the tax benefits to the owner while providing a good recruitment and retention tool for employees.

The limited CalSavers program, however, does not provide employers with those benefits. The restrictive Roth (after-tax) provision will exclude many owners from participating due to Roth income limits. The state program also places the full administrative burden on the business owner to manage enrollment and service the plan.

  • A restaurant/bar owner, for example, who has struggled to keep the doors open during Covid, might seek options that minimize cost and administrative burden–the minimum to meet the mandate–but help them with their own long-term retirement or exit strategy.
  • Independent contractors, however, who have never been busier, might seek plans that would maximize their ability to shelter more income and offset the increased tax liability fueled by growth during Covid.

Understanding the options to make informed decisions

There’s not enough balanced information on the CalSavers online website to provide a full understanding of the pros and cons of the CalSavers mandate. If business owners have to comply with the mandate anyway, it’s in their best interests to take the time to understand how they might be able to also benefit themselves.

One of our colleagues, Kirk Cowan, of Edward Jones, is available to answer questions. He provides a complimentary review to help small business owners make informed decisions.

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