CalSavers State-Sponsored Retirement Plan Has Officially Launched
As of July 1, 2019, registration officially opened for CalSavers, California's new retirement savings program, formerly known as Secure Choice. CalSavers is a mandatory state-sponsored program for private sector and nonprofit workers whose employers do not offer a retirement plan. Under CalSavers, eligible employers with five or more employees must register with the California State Treasurer’s office as a participating employer in CalSavers.
Employers are not required to register with CalSavers if they offer their employees any of the following tax-qualified retirement plans:
Public agencies and other governmental employers cannot participate in CalSavers.
Registration Deadlines and Penalties
The program’s three-year rollout provides staggered deadlines for mandatory registration and participation, based on employer size. For eligible employers with:
Penalties of $250 per employee may be assessed if an employer fails to timely register and participate, and an additional penalty of $500 per employee applies if the failure persists for 180 days.
Eligible employers may join at any time prior to the applicable deadline and may cease participation in the program by establishing another tax-qualified retirement plan at any time.
When CalSavers takes effect, participating employers must automatically enroll employees in the program and remit payroll deductions on behalf of employees who do not opt out. The default contribution rate when employees are first enrolled in CalSavers is 5% of their gross salary. CalSavers also includes an auto-escalation feature, which increases an employee's payroll deduction by 1% annually, up to 8%, capped by the annual maximum contribution amount for IRAs. Employees enrolled in CalSavers can opt out of the program altogether, or customize their contribution rate and investments. Contributions for employees who do not elect specific investments for their accounts will be invested in a target date fund based on the employee’s age.
Currently, CalSavers accounts are after-tax Roth IRAs. However, a traditional pre-tax IRA option is expected to be offered by CalSavers in 2020. CalSavers accounts are employee-owned and portable from one job to the next. As the program takes effect, employers will be provided with employee information packets that will explain the program, including the auto-enrollment process and how employees can opt out.
The CalSavers program will be administered by a nine-member board comprised of the state’s Treasurer, Director of Finance, Controller, and other members appointed by the Legislature and Governor. Participating employers will not become sponsors or fiduciaries of the program.
Online Guidance for Employers
The CalSavers website provides guidance and information about the program for eligible employers and employees, including an employer account set-up guide. A series of Frequently Asked Questions for employers provides additional information about the registration process, remitting employees’ contributions, and penalties for non-compliance.
Legal Controversy over Federal Preemption
In March 2019, the CalSavers program was upheld by a federal district court in a lawsuit that challenged its validity based on federal preemption under the Employee Retirement Income Security Act (ERISA). The court held that, because employers with existing ERISA retirement plans are exempt from CalSavers, the program does not “govern” or “interfere” with any ERISA plan and so is not preempted by ERISA. The court also rejected the argument that the CalSavers program creates an employee benefit plan under ERISA because of the auto-enrollment feature. After that ruling, the case was refiled and the U.S. Department of Justice (DOJ) recently asked the court to delay further ruling while the DOJ considers whether to participate in the lawsuit. We will monitor the case and provide an update if the program is revised.
For any questions or concerns about CalSavers or other retirement programs, please contact the Hanson Bridgett Employee Benefits Group.
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