Starting in 2022, all California body shops and other businesses with at least 5 employees must either offer a retirement plan or connect employees with the state’s official CalSavers IRA option.
However, the program is set to open effective 7/1/2019.
According to the Cal Savers website, “CalSavers provides employees access to a retirement savings program without the administrative complexity, fees, or fiduciary liability of existing options for employers. Any employer with at least five employees that doesn’t already offer a workplace retirement savings vehicle will be required to either begin offering one via the private market or provide their employees access to CalSavers. CalSavers will be operated solely through administrative fees, so there’s no cost to taxpayers. After CalSavers opens for enrollment, eligible employers can register for CalSavers at any time and will be required to comply by the following deadlines:”
While there is no cost to register for the program, employers will need to allocate administrative time to implement the program and be prepared to be subject to penalties if they do not offer some sort of retirement savings plan. Fines range from $250 per eligible employee if an employer remains noncompliant after 90 days of being served notice, escalating to $500 per eligible employee if noncompliance reaches 180 days or more after the notice.
The good news for the employee is that with the CalSaver plans, they will have a portable plan that will follow them as they change jobs. They only have 30 days from the offering notice to decline the plan. If they do not opt-out, they are automatically enrolled at the default savings rate of 5% of pay. This is increased annually to a maximum of 8% of pay.
Contributions will be made via payroll deduction. The employee is allowed to customize their plan to choose a different pay rate at any time. If they opt out, they can re-enter the plan at any time.
If an employer already offers a qualified retirement plan such as a 401K or Simple IRA, they will not need to offer this option.
These accounts are Roth IRA’s. This means that the contributions are made with after tax dollars. However, as the invested funds grow, the growth is not taxed and the income is not taxed at distribution, so there are favorable tax benefits.
For withdrawals before age 59 1/2, an individual may have to pay taxes on the earnings that have been credited, but this varies on how long the account has been open and purpose for which the funds are withdrawn.
There are 17 investment choices for savers, the bulk of which are “target date” funds. These are funds designed with the object of retirement at the designated target date and an investment allocation that is appropriate for that stated date range. This type of fund is common in most retirement accounts. They are affectionately known as “the easy button” for those that don’t have investment experience or confidence.
Although the law is not effective this year, individuals may participate. One must be at least 18 years old, employed by an eligible employer, have the status of an Employee under the IRS, receive a W-2 with California wages.
If an individual has both a CalSaver Roth IRA and an individual Regular IRA or 401k plan, it is important to meet with a tax professional to determine what is allowed. Also higher earners will want to seek tax advice as well.
According to Trading Economics, Household Saving Rate in the United States decreased to 6.20% in April 2019. Personal Savings in the United States averaged 8.80% from 1959 until 2019, reaching an all-time high of 17.30% in May of 1975 and a record low of 2.20 % in July of 2005. Clearly this type of plan will be beneficial to many. However there will be those that are concerned about government overreach by the fact that the state is mandating such a program.
More information is available at www.calsavers.com.