By Special Guest Nick Gizzarelli, CPFA, QPA, QKA
The Golden State has finalized regulations for the implementation of a state-run automatic Roth IRA plan, becoming the third state to create an auto-IRA program for the private-sector.
Recently renamed CalSavers (formerly California Secure Choice), this program will require employers with five or more workers to either offer an employer-sponsored retirement plan or enroll their staff in the state-run program. Scheduled to take effect by the end of 2018, CalSavers will grant 12 months for businesses with 100 or more employees to comply, and will gradually phase in smaller businesses over the subsequent two years.
“Regardless of socioeconomic status, the hard-working people of California who have made our state a global economic powerhouse deserve a measure of financial security in their golden years,” said Senate President Pro Tem Kevin de León, who authored the legislation designed to introduce a retirement savings program to the 7.5 million Californians not covered by an employer-sponsored plan.
The Role of the Employer
As written, the regulation will require employers with at least five employees and who do not offer an employer-sponsored plan to setup automatic IRA payroll deductions for both part-time and full-time employees within 30 days. Only employees working in California will be eligible for the program. Employers must determine if and when CalSavers will impact their business and register with the state by the deadline. For employers wanting to opt-out of the state-run program, they will want to adopt an employer-sponsored retirement plan before the same deadline.
Employers will be responsible for identifying eligible employees, distributing required notices, setting up automatic payroll deductions, and transmitting the funds to CalSavers. Penalties and fees will apply for failure to enroll eligible workers or properly execute the employer’s administrative duties.
Because CalSavers is a state-run Roth IRA program, some employees may not be eligible to contribute as eligibility to participate in a Roth IRA is based on an individual’s adjusted gross income. It is unclear whether the employer or individual will be responsible for determining whether or not the worker is eligible to participate in a Roth IRA.
The plan will not allow the employer to make discretionary or employer matching contributions. Only employee IRA deductions will be allowed.
Who Pays for the Plan?
CalSavers is intended to be self-sustained, funded by fees deducted from employee account balances. California will not impose any direct fees to the employer during or after registration, however third party vendors, such as banks or payroll companies may impose fees to setup the deductions and funds transfer to the state.
When determining the financial impact on a business, the employer should carefully consider how to allocate internal resources to comply with the new regulation. While technically not considered an employer-sponsored plan, the employer will still be responsible for many of the ministerial functions related to enrollment, contributions, and employee communications. Failure to fulfill these duties may result in penalties or fees to the business.
No Qualified Plan, No Federal Tax Credit
Because CalSavers is not an employer-sponsored plan, the employer will not be eligible for the retirement plans startup costs tax credit, which reimburses employers for a portion of the costs related to implementing a new retirement plan. Currently, employers who setup a new employer-sponsored plan are eligible to receive tax credits of up to $1,500 to offset implementation and administrative fees.
Employers Have Options
California has started the countdown for businesses who do not yet offer retirement benefits for their staff. Employers scrambling to meet this deadline, should carefully research all available retirement options. Undoubtedly, more details about CalSavers will become available as we near the expected rollout date.
Nick Gizzarelli is a Retirement Plan Specialist at Thomas Doll, an employer-sponsored retirement provider located in Walnut Creek, CA. Nick and his team have worked for over three decades to bring Fortune 100 level retirement plan services to the small- and mid-employer space. Nick is a current member of the American Retirement Association and National Association of Plan Advisors, as well as former member of the National Institute of Pension Administrators.