Retirement Plans for Small Businesses in California

All too often, small businesses in California get stuck on retirement plans. With a focus on daily operations, retirement thinking gets pushed to the side, but this critical piece of financial planning should not be ignored. Employers can help employees save for retirement, and employees should be thinking to the future and what they will need to retire.

Some of the most common retirement plans for small businesses in California come down to CalSavers, or a 401K. We are here to help employer and employees navigate both of these options to find something that suits their needs.

What is CalSavers

CalSavers is a retirement saving program for Californians working in the private sector. It is made for workers whose employees do not offer their own retirement plan. It was created in 2016, and operates at no taxpayer expense, with a mission to ensure all Californians have a path to financial security in retirement. CalSavers is automatic for employers with five or more employees, if they do not already have a workplace retirement plan.

How does CalSavers work?

Through CalSavers, employees contribute to a Roth Individual Retirement Account, or IRA, which belongs to them. That means that if they switch jobs, they can keep their CalSavers account. Employers do not contribute to employee accounts.

Can employees opt out?

Participation in CalSavers is voluntary, and employees can opt-in or out at any time.

Does CalSavers cost employers?

Employers serve a limited role in CalSavers, facilitating the program and submitting contributions through payroll deduction. There are no fees for employers, as a result.

What types of retirement plans are available?

Through CalSavers, the savings rate increases by one percent each year until it reaches eight percent, by default. Employees can maintain the standard options for saving rates and investments or choose their own. As soon as an employer registers, employees will be automatically enrolled with the standard options if they do not customize within the first 30 days. CalSavers investment plans include Money Market Funds, Target Date Series, one ESG fund, one bond fund, or two stock funds.

What is a 401K

A 401k is an employer-sponsored retirement plan. Employers can match some or all of the contributions an employee makes. There are two types of 401ks, traditional and Roth.

How do 401Ks work?

Employees decide how much money they want deducted from their paychecks and deposited into the 401k. Employers may make contributions as well, but this is optional. Employers decide who is eligible, how much and when they can contribute, how the employer will contribute, investment options, and other aspects. All of the employer decisions must align with laws, rules, and regulations around 401ks.

Can employees opt out?

Employees can decide if they want to participate in the 401k, and how much they want to contribute.

Do private 401Ks cost employers?

401k’s cost an employer a small amount of money, in administrative costs, per-participant charges, and miscellaneous fees. Employers who choose to match or contribute to employee funds will also have to pay for the matching portion.

What types of retirement plans are available?

Employees choose the specific investments in their 401k accounts, from the options offered by the employer. This may be stock and bond funds, target date funds, guaranteed investment contracts, or a combination of various investments.

CalSavers Private Plan?

Should I use CalSavers?

Are employers required to offer CalSavers?

Employers who do not offer an alternative plan, who have more than five employees, must offer CalSavers.

What are the income limits for CalSavers?

The contribution limit for CalSavers is phased out between $193,000 and $203,000 for married, filing jointly. For single filers, it phases out between $122,000 and $137,000.

How much money can be contributed?

Contributions are maxed out at $6000 per year in 2020, or $7000 for those over age 50.

Are contributions pre-taxed or after-taxed?

Contributions are made with after-tax dollars.

Are you taxed on withdrawals?

Qualifying withdrawals of contributions and earnings are not subject to income tax.

At what age do you have to take distributions?

Under CalSavers, there is no requirement to take distributions while the account owner is alive.

Should I use a private plan?

Are employers required to offer a 401K plan?

A 401k is an optional type of employer-sponsored plan.

What are the income limits for a private 401K?

There are no income limits to participate in a private 401k.

Are contributions pre-taxed or after-taxed?

This depends on the type of 401k. A traditional 401k has contributions made with pre-tax dollars, while a Roth 401k is after-tax dollars.

Are you taxed on withdrawals?

Qualifying withdrawals of contributions and earnings are subject to income tax with a traditional 401k. A Roth 401k does not tax qualifying withdrawals of contributions.

At what age do you have to take distributions?

Distributions must begin no later than age 70 and a half.

How does PTO Accrual Work?

Sick leave, the only required PTO in California, is required for any employee who works at least 30 days in a year. They can begin accruing that paid sick leave once they have worked for an employer for 90 days. Employees will accrue one hour of paid sick leave for every 30 hours worked.

Employers can make this process simpler with the option of offering three days of paid sick leave to every employee at the start of each year.

Do you accrue PTO while using PTO?

For optional PTO like paid vacation days, employers are generally able to determine their own policies. Some may choose to base accrual on hours actually worked.

What is the Deadline for Businesses to Enroll in CalSavers?

Every workplace has its own deadline to apply based on the size of the business. For businesses with over 100 employees, that was September 30, 2020, then June 30, 2021 for over 50 employees, and June 30, 2022 for five or more employees. Eligible companies can register at any time.

What will happen if I miss the program adoption deadline?

Employers who miss the deadline or fail to allow employees to participate will receive notice.

Are there penalties for not enrolling into CalSavers?

Employers who do not give their employees the option to enroll may face penalties of $260 per employee after 90 days of notice. After 180 days of notice, that increases to $500 per employee. Employees will not face the consequences of choosing not to enroll.



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