There are nearly 7.5 million private-sector workers in California who do not have access to a workplace retirement plan, according to the California State Treasurer.
Data also shows that access to workplace retirement plans makes individuals far more likely to save for retirement, especially those whose annual income is between $30,000 and $50,000. Employees in this salary range are 15 times more likely to save money for retirement when a plan is made available to them.
Faced with millions of workers lacking access to employer-sponsored retirement plans, the state of California introduced the CalSavers Retirement Savings Program, or CalSavers as it’s more commonly known, in 2019. The program is designed to allow eligible employees to direct a portion of their paychecks to an Individual Retirement Account (IRA). If you’re a small business owner in the Golden State, it’s important to be familiar with the CalSavers program and understand the role and legal requirements for your business.
How does CalSavers work?
The CalSavers retirement savings program is designed for private sector employees whose place of work does not provide traditional retirement plan options, such as a 401(k) program. CalSavers was created to provide employees in such situations with an easily accessible alternative.
Using CalSavers, employees can contribute a portion of each paycheck to a Roth IRA that’s opened in the employee’s name. While the program allows each employee to decide how much they contribute from each paycheck, the amount invested each pay period will automatically increase by 1 percent annually until reaching 8 percent (unless the employee chooses to opt out of this plan feature, also known as auto-escalation.)
CalSavers also allows employees to opt out entirely if they wish or even back out of the program at any time after enrolling in it. Additionally, employees have the freedom of choosing how the money in their Roth IRA is invested, or they can simply allow the money to be invested in the standard options.
Currently, funds of employees who set up an account and do not select their own investment option are invested in the CalSavers Money Market Fund, managed by State Street Global Advisors. After 30 days, funds are moved into the CalSavers Target Retirement Fund, also managed by State Street Global Advisors, according to the saver’s age.
Perhaps the most important benefit for the employee is that their CalSavers account is portable—meaning, if an individual changes employers, the IRA goes with them.
What are the requirements for small businesses?
Under California state law, employers of California workers must participate in CalSavers if no other form of retirement plan is offered by your company. When initially creating the program, the state established specific requirements with regard to business size and participation mandates.
Most notably, the state mandated that all businesses with five or more employees as of June 30, 2022, must participate in CalSavers if there is no other workplace retirement program in place.
Because that deadline has passed, moving forward, any business with five or more employees must register by the end of the year in which they become subject to the mandate. That means at the end of the calendar year in which your business started employing five or more employees. Or alternatively, at the end of the year, your business stopped offering a sponsored retirement plan for employees.
Enrollment requirements become even stricter as of December 31, 2025, when businesses with just one or more employees must offer CalSavers, according to the state of California’s Employment Development Department.
There are also financial penalties for employers who fail to comply with this requirement. According to California state law, eligible employers who fail to comply and allow eligible employees to participate in the CalSavers program are subject to a $250 penalty per employee “on or before 90 days after service of notice of its failure to comply.”
If noncompliance extends 90 days or more after the notice ”and if found to be in noncompliance 180 days or more after the notice, an additional penalty of $500 per eligible employee.” For a small business with 10 employees, for example, that equates to $7,500 in penalties in a 6 month period!
The good news for employers, however, is that you have very limited responsibilities when it comes to program implementation. For instance, there are no employer fees and no fiduciary liabilities associated with offering CalSavers.
Getting started with CalSavers
Establishing a CalSavers program is meant to be quick and easy for businesses. It’s not intended to be onerous. To that end, the program simply requires registering with CalSavers by the deadlines outlined above, establishing a simple payroll deduction process, and maintaining a current and accurate list with the state of your employees. But that last point is an important one: It is the employer’s responsibility to maintain their CalSaver account once it’s set up by adding and removing employees as needed.
Equally importantly, there are no fees for businesses when establishing or maintaining a CalSavers program. There are no mandated employer contributions either, making the program incredibly easy for small businesses to operate and maintain.
To enroll in CalSavers, employers follow these simple steps:
- Register with CalSavers. Registering requires providing the company’s Federal Employer Identification Number or Tax Identification Number (EIN/TIN) and a CalSavers Access Code.
- Provide employee information: Once registered, you must provide information about all eligible employees. This step initiates an automatic enrollment for each individual you employ.
- 30-day opt-out period: Once your CalSavers program is first initiated, employees have 30 days to decide whether they want to participate or opt-out. If an individual employee does nothing at all, meaning takes no action, he or she will be automatically enrolled.
- Payroll deductions begin: Once the 30-day opt-out period has elapsed, you will kick off payroll deductions. Deductions must take place each pay period moving forward.
For any small business that still has questions, the CalSavers platform provides ongoing support, including a description of the employer’s role, tips, and templates.
Benefits of CalSavers
The CalSavers program has important benefits for both employers and employees.
Employee benefits
- CalSavers, like all retirement savings programs, provides a critical source of income in retirement. According to the California state treasurer’s office, nearly 40 percent of CalSavers participants may be able to delay claiming Social Security by one year or more as a result of saving through CalSavers.This is significant because delaying Social Security claims allows those benefits to increase in value.
- Early career workers whose income is at the bottom 50 percent of wages may be able to increase their retirement income by half, thanks in part to participation in CalSaver. This retirement income growth is also due, however, to the state of California’s new minimum wage.
- CalSavers accounts are portable, allowing employees to take this savings with them when moving from one employer to another.
- Employees have control over how much they contribute and some optionality in their investment choices.
Employer benefits
- Registering for CalSavers is quick and easy, it takes just a few minutes.
- There are no costs associated with offering or maintaining a CalSavers program.
- There are no mandated matching employer contributions.
- Employers are not responsible for managing investments or processing any distributions.
- CalSavers is run by the state of California, so there are minimal requirements overall for employers.
CalSavers vs. 401(k) plans
While the CalSavers program can be very helpful for small businesses and their employees, it also comes with many limitations. It’s important to bear in mind that there are other retirement program options available that may provide more valuable benefits.
For instance, using CalSavers, employers are not able to provide matching contributions to their employees’ retirement accounts. Employers can only remit the employee contributions to each individual’s account. If as an employer, you would like to make contributions to your employees’ retirement efforts, there are other plans to explore that allow for doing this.
The investment options associated with CalSavers plans can also be limited compared to private sector 401(k) plans. For instance, the first $1,000 an employee allocates for their CalSavers account must go toward the CalSavers money market account, which is made-up of assets primarily beneficial for younger employees.
The annual contribution limits for CalSavers accounts are also an important factor to consider, as they’re much lower than a traditional 401(k). With access to 401(k) plans, individuals can contribute as much as $22,500 annually toward their retirement savings as of 2023. The limits for CalSavers IRA plan are drastically lower at just $6,500 per year (or $7,500 if you are 50 or older).
While there are some benefits to state-run programs like CalSavers, it’s important to remember that they are just one option.
The takeaway
Adequately preparing for retirement is no small challenge. Employers play a key role in helping employees to achieve this goal.
If your small business is located in California and does not offer a 401(k) plan or some other retirement program, it’s likely that you will be required to offer CalSavers. Knowing what this program involves and the deadlines for enrollment are important to maintain compliance with state laws. The good news is, that CalSavers is quick and easy to sign-up for and costs you nothing to offer.
Interested in retirement plans for your employees? Get started today with a free, no-obligation consultation with a 401(k) retirement specialist.
