In California, state law requires that employees have access to a workplace retirement savings program, but the retirement plan provided is the employer’s choice to make. CalSavers is the State of California’s new program and is designed to ensure all Californians have access to a workplace retirement savings program.
It’s important to note that this new CalSavers program has some limitations for your employees.
The CalSavers program is constructed so employees can make voluntary contributions to their plan via an automatic payroll deduction. Accounts are set up as Roth IRAs, which means contributions are not tax deductible, and annual contributions are limited to $6,000 if under age 50 or $7,000 for employees ages 50 or older. By default, CalSavers invests 5% of an employee’s gross income in predetermined funds based on his or her age – meaning the investment options within the plan are limited.
Currently, the program is set up so that if your business employs 50 or more employees and does not sponsor a retirement plan, you were required to register for CalSavers by June 30, 2021. If you have 5-49 employees, you have until June 30, 2022 to do so, but creating your own qualified retirement plan could offer more control, flexibility, and tax benefits than the state's default plan. If your business has fewer than 50 employees, don’t wait until June 30, 2022 to begin assessing your retirement plan options.
Start talking with your financial advisor today about the ideal qualified retirement plan for your employees because it could offer several benefits including:
- More options for account types
- More flexibility of investment choices
- Tax deductibility
- The ability to include profit sharing or other benefits
- Higher contribution limits (typical 401(k) plans allow up to $19,500 for individuals under ago 50 and $26,000 for those 50 and older, annually)
- Potentially lower costs
- An ongoing resource for your employees to work with a financial planner
- Greater control
Retirement plans are an important component of employee benefits packages because they help individuals save for a financially secure future. They can also offer valuable tax savings for business owners.
If you want to start a program such as a Safe Harbor 401(k), you will need to notify employees early in fourth quarter to launch in January. Be sure to take the time to evaluate all options and select what’s right for your business and employees. Don’t wait until the June deadline, or you could end up being forced into the state’s default plan.