If you own a small business in California, you may already know that the state is phasing in a requirement for all businesses to provide retirement plans to employees. For those who haven’t yet complied with this new requirement, it’s time to start thinking about your options.
Advice Chaser will host a webinar on this topic on May 25 to clarify the choices available. Meanwhile, let’s talk about the requirements of this law and your two main options as a business owner.
What the Law Requires
According to legislation passed in 2016, all employers in California with at least five employees will soon have to provide a retirement plan. This includes nonprofits. Businesses are phased in based on their number of employees.
- Companies with at least 100 employees are already required to comply.
- Those with at least 50 employees must comply by June 30, 2021.
- Those with at least 5 employees must comply by June 30, 2022.
If you don’t meet the deadline, you’ll be liable for fines: $250 per employee if you are 90 days late, and $500 per employee after 180 days.
If you already provide a retirement plan to your employees, you don’t have to change anything to comply with the new law. You can go to CalSavers.com and request an exemption. But if you don’t, you have two options: get a traditional retirement plan, or allow your employees to enroll in CalSavers.
What is CalSavers?
CalSavers is a retirement program for California employees. It provides each participating employee with a personal IRA. Since the state manages the plan, you have no fiduciary responsibility, no costs to pay, and few administrative duties. You simply use your existing payroll system to send your employees’ contribution directly to their account.
Once you’ve registered, your employees will be automatically enrolled unless they’ve opted out. They can choose the percentage of their pay they want to contribute and pick one of five investment options. Employees will pay their own plan fees, which run from 83 to 95 cents per $100 invested. They can contribute up to $6,000 a year to their CalSavers plan.
You can’t make matching contributions to this plan. You can, however, participate in it yourself to save for your own retirement.
Traditional Retirement Plan
If, on the other hand, you want to contribute to your employees’ retirement, you will need a more traditional retirement plan such as a 401(k). Contributing to their plan may reap some tax benefits you couldn’t get with CalSavers. A traditional retirement plan also gives your employees more options.
Employees can contribute more annually to a 401(k) than to CalSavers—$19,500 vs. $6,000. Depending on the plan you select, you may be able to get one with more investment choices. And, while CalSavers is only available to employees making less than $135,000 a year, traditional retirement plans are open to everyone.
On the downside, if you provide a 401(k) or other traditional retirement plan to your employees, you take on the fiduciary duty of managing that money properly. According to ERISA, the regulation that governs retirement funds, you have a legal responsibility to handle retirement funds as a “prudent expert” would. So if you aren’t an investment expert, you may need to hire one.
You Don’t Have to Be Intimidated
Though the new law may seem intimidating to small business owners, it’s possible to provide a retirement plan with very little hassle. Take some time to look over your options. One step is attending our webinar on May 25, at 12:00 pm Pacific Time. Connor McDevitt, retirement expert and fiduciary advisor, will walk participants through their options and discuss how to choose the best plan. Sign up today and get ready to learn!