What’s This About A New Mandated Retirement Plan In California?

Last year, we created a video series to address the Top Ten reasons why most Americans will NOT be able to retire. . . I am not suggesting the good folks in Sacramento and Washington D.C. were watching our video series, but there are BIG changes in the law regarding retirement from both our State and Federal governments in 2020!

Here in California, a workplace retirement savings plan begins implementation this year if you are a private sector employer with more than 100 employees. Substantial changes in the federal laws concerning retirement accounts will also be taking effect this year. (Stay tuned for next month’s newsletter on the SECURE Act.) Gee, new sweeping laws that affect employers and their employees – with little fanfare to comply with the new requirements . . . “Imagine That™!

CalSavers Program

In 2016, California Governor Jerry Brown signed into law the development of a workplace retirement savings program, now known as CalSavers. The program was adopted to enable California employees to make automatic contributions from their paychecks into their CalSavers retirement account. CalSavers applies to private sector employees whose employers do not offer a retirement plan. Deadlines for CalSavers compliance vary by the size of the business:

Number of Employees                               Deadline

Over 100                                                         June 30, 2020

Over 50                                                           June 30, 2021

5 or more                                                        June 30, 2022

These new rules have some teeth for the employer– with penalties of up to $750 per employee assessed for failure to comply and/or timely enroll employees.

If you are a private sector employer with more than 100 employees and do not offer a retirement plan, you have two options:

  • ­­Provide employees with access to the CalSavers program
  • Create and offer your own private qualified retirement plan for your employees

If you choose the CalSavers option:

  • Employees ONLY get an option to contribute to a Roth IRA (the after-tax type of plan) with a maximum contribution limit of $6,000 ($7,000 if 50 or older) in 2020
  • Income rules apply to employees, and if they make “too much money,” some may be ineligible to participate in CalSavers. The phase-out range for adjusted gross income in 2020 is:
    • Single or head of household: $124,000 to $139,000
    • Married filing jointly or qualifying widow(er): $196,000 to $206,000
    • Married filing separately: $0 to $10,000

The lower number above represents the point where the employee is no longer allowed to contribute the maximum yearly contribution. The higher number represents the point where the employee can no longer contribute to a Roth IRA at all. So, for example, if you are single and have $139,000 or more in adjusted gross income in 2020, you are not permitted to contribute to a Roth IRA for this particular year (BUT – we do have a solution!)

  • There is no cost to the employer to use CalSavers but employees will pay an annual fee of less than 1% (between .825 and .95%, depending on the investment program they choose). Investment options for employees include equity and bond funds, “target” retirement funds (depending upon the level of aggressive or conservative investment allocations) as well as simply a money market fund
  • Employers sign up at https://employer.calsavers.com/ and must provide information about each employee. All employees are automatically enrolled in the program, unless they opt out

Pros of Using the CalSavers Option:

  • Easy to set up and minimal administrative requirements for employers
  • No dollar cost to the employer—it is entirely funded by employees
  • California law protects employers from any liability or fiduciary responsibilities
  • The program is also available to the self-employed
  • Registration for CalSavers opened on July 1, 2019, and any employer or self-employed person can sign up now if interested
  • Employees may opt in or out of the program at any time. The account stays with them, even if they change employers

Cons of Using the CalSavers Option:

  • Highly compensated employees are ineligible if their income exceeds the income limits for a Roth IRA (see above for income limits)
  • Small contribution limit—if the employer creates their own qualified plan, there are several different retirement tools where more money can be contributed each year beyond the meager Roth IRA contribution limits. 401(k) plans, for example, have an employee contribution limit of $19,500 ($26,000 if age 50 or above). The business can add an additional $37,500 (or $44,000 if age 50 and above)
  • Even more money can be saved for retirement by establishing a Defined Benefit plan, which has a benefit amount that can be received of $230,000 in 2020
  • No matching of employees’ contributions—401(k) plans may provide matching of employees’ contributions by the employer but the Roth IRA does not permit this feature
  • Even though the distribution is eventually not taxable, there is NO tax deduction now for the contribution to the Roth IRA

Conclusion: If You Are an Employer, Please Contact Us to Discuss Your Retirement Plan Options

Let’s have a complimentary conversation about the type of retirement savings plan you should set up for your employees. While the CalSavers program is easy to set up, creating your own qualified retirement plan may result in the ability for you and your employees to save much more money for retirement.

If you are a California business owner, the time will soon come for you to offer a retirement plan for your employees or provide them with access to the CalSavers program. Let’s strategize the best way to meet the new California requirement and achieve the retirement of your dreams . . . “Imagine That™!

 

 

Written by R. J. Kelly, January – 2020

 

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