State to Force Businesses to Provide Retirement Plans for Employees

It is no secret that America faces a retirement savings crisis.  The vast majority of Americans have little or no savings for retirement, and may be relying on Social Security and supplemental employment to get by in their retirement years.

According to a survey published last year by Forbes Magazine, 20% of Americans have nothing saved for retirement or emergencies.  Another 20% have saved less than 5% of their annual income to meet financial goals, and less than a third of all Americans have saved 11% or more toward retirement.[i]

CalSavers

California’s answer to this situation is to phase in a new law that requires every employer with five or more employees to offer a private-sector retirement plan to their employees, or join a State sponsored program called CalSavers.  Businesses that already offer retirement plans to their employees, or adopt one by the appropriate deadlines are not affected by this law.

The mandated deadlines to adopt the necessary plans are:

June 30, 2020 for businesses with one hundred or more employees;

June 30, 2021 for businesses with fifty or more employees;

June 30, 2022 for businesses with five or more employees[ii];

Under the CalSavers plan, employees will be automatically enrolled unless they opt out.  If they choose to opt out, they must renew their choice every year, or they will be automatically enrolled again.  The automatic enrollment results in a 5% deduction taken from the employee’s gross pay, and deposited into the plan.  This amount increases by 1% per year until it reaches 8%.  Employees are free to elect other percentages, but will be subject to the automatic levels if they do not make that election.

The CalSavers plan is currently structured as a Roth IRA, which means there is no tax deduction for money withheld from the employee’s paycheck and deposited into the plan.  The benefit comes in later years when the funds are withdrawn, presumably in retirement.  At that time there is no tax due on either the initial contributions, or the growth of those contributions.[iii]

Who is an Employee?

Under private-sector sponsored retirement plans, an employee can be required to have one year of service, defined as 1,000 hours or more worked, and be at least 21 years of age, before they can begin participating in a retirement plan[iv].  Under CalSavers, any employee paid by W-2, who is age 18 or older and has worked for 30 days from their date of hire, must be automatically enrolled in the plan unless they opt out.  Among other requirements, employers must regularly submit a full employee census to CalSavers, and track eligible employees.

The “five employees or more” part of the CalSavers program becomes a bit more complicated when California Assembly Bill 5 is taken into account.  Employers who think they are below the limit because they use “independent contractors” may find those people are actually considered employees under the new AB-5 rules, and the business or professional practice may therefore be subject to the CalSavers requirements after all.

Proposed Non-Compliance Penalties

If a business is found to be non-compliant, a notice will be issued by the state.  If the business remains non-compliant 90 days after the notice, the proposed penalty is $250 per eligible employee.  If the business remains non-compliant for 180 days after the notice, the proposed penalty escalates to $500 per eligible employee.

Legal History & Challenges

The CalSavers program came into being under a U.S. Department of Labor regulation issued in 2016 that specifically exempted the CalSavers program from ERISA, the Employer Retirement Income Security Act of 1974.  That regulation was repealed in May of 2017 under the Congressional Review Act.[v]

In May 2018, following the repeal of the regulation, the Howard Jarvis Taxpayers Association (HJTA) challenged CalSavers in the U.S. District Court for the Eastern District of California, arguing that it violated the Supremacy Clause because it pre-empted ERISA.  In April 2019 the Court dismissed the suit with leave to amend.

The amended suit was refiled, this time with the support of a Statement of Interest from the United States Department of Justice.[vi]  The suit is now pending before Judge Morrison C. England Jr.

What Should Employers Do?

Employers who already sponsor private-sector retirement plans are not affected by the CalSavers law.  Those who do not currently have such a plan, but adopt one by the deadline that applies to their size business are also not affected.

If accounts are established for employees under the CalSavers plan, and the plan is later ruled unlawful, those accounts remain the property of the employees, subject to regular ROTH IRA regulations.[vii]

Private-sector retirement plans come in a variety of types, with many options available to both employers and employees.  A careful analysis should be made to study the needs of the business owners, the business, and the employees to develop the best plan for all involved.  That process should ideally involve the business owner’s financial advisor, attorney, tax professional, and a specialist in qualified retirement plan design.

To encourage businesses to adopt qualified retirement plans, the SECURE Act, passed by Congress last year, increases existing tax credits from $500 to $5,000 for certain small employers who adopt qualified retirement plans.  The Act also extends the credit for up to three years, for a total possible tax credit of $15,000.[viii]

CalSavers is a one-size-fits-all type of plan that may be ideal for some businesses, but that determination should not be made until all the other types of plans are explored as well.  Planning for retirement is too important to be left to chance.

[i]     The Retirement Crisis Is Much Worse Than You Think, Forbes Magazine, March 20, 2019;

[ii]     California State Treasurer’s Office, and employer.calsavers.com;

[iii]    Internal Revenue Code Section 408(A) et seq.;

[iv]    Internal Revenue Code Section 410(a)(1);

[v]    Taxpayer Rights Group Reengages CalSavers Challenge, Nevin E. Adams, JD, National Association of Plan Administrators, July 29, 2019;

[vi]    The DOJ Agrees: CalSavers is Illegal, Jon Coupal, Daily Press, October 11, 2019;

[vii]   California State Treasurer’s Office, treasurer.ca.gov;

[viii]   The SECURE Act, Section 104,  Altering the Retirement Landscape, Wells Fargo Advisors, CAR 0120-00724