California has implemented a mandatory retirement plan law that requires companies with more than five employees to offer a retirement plan to their workers. This law came into effect on June 30th, 2022. Companies that do not comply with the law will be required to enrol in CalSavers, the state-sponsored individual retirement account (IRA), or face fines.
The amended law, Senate Bill (SB) 1126, was signed by Governor Gavin Newsom on August 29th, 2022, and expands the CalSavers requirements to most California employers. Effective January 1st, 2023, the amended law expands the CalSavers requirements to any California employer with at least one employee who is not an owner of the business.
With this new law, California aims to address the lack of retirement assets among private-sector workers in the state.
It is important for California employers to understand the requirements of the retirement plan mandate and ensure compliance with the law.
In this article, we will explore the details of the mandatory retirement plan law in California and provide guidance on how employers can comply with the law.
Table of Contents
Overview of Retirement Plans
In California, employers with five or more employees are required to offer a retirement plan to their workers. The state of California has implemented a new mandatory law requiring all companies with more than five employees to offer a retirement plan to their workers by June 30, 2022.
Retirement plans are designed to help individuals save for their retirement years. They come in different types, including defined benefit plans, defined contribution plans, and individual retirement accounts (IRAs).
Defined benefit plans provide a guaranteed retirement benefit to employees based on their salary and years of service.
Defined contribution plans, on the other hand, are funded by both the employee and employer and provide a retirement benefit based on the contributions made and the investment returns earned.
IRAs are individual retirement accounts that allow individuals to save for their retirement on their own.
California employers must offer a qualified retirement savings plan if they do not sponsor a qualified retirement savings plan. Qualified retirement savings plans include 401(a) plans (such as profit-sharing plans), 401(k) plans, and other similar plans.
Employers can also enrol in CalSavers, the state-sponsored individual retirement account (IRA), to meet the retirement plan mandate.
Retirement plans offer several benefits to both employers and employees. They help employees save for their retirement years and provide tax benefits.
Employers who offer retirement plans can attract and retain employees and may also qualify for tax deductions and credits.
Overall, retirement plans are an essential part of financial planning and can help individuals and businesses achieve their retirement goals.
The Legality of Mandatory Retirement Plans in California
California has implemented a mandatory retirement plan law requiring all companies with more than five employees to offer a retirement plan to their workers by June 30, 2022. Companies that do not comply with this law will be required to enrol in CalSavers, the state-sponsored individual retirement account (IRA), or face fines.
Generally, any provision in a private employer’s retirement plan, pension plan, collective bargaining agreement, or similar plan or agreement that requires mandatory retirement of an employee over 40 years of age is unlawful. However, California’s retirement plan mandate has been upheld by the Ninth Circuit, which affirmed that it is not preempted by ERISA.
Under California law, all employers must offer their employees some form of retirement plan, or if no approved retirement vehicle is offered, must utilize automatic enrollment into the state’s payroll deduction IRA known as “Calsavers.” California for-profit or non-profit employers with five or more employees must give employees access to the CalSavers Plan if they do not sponsor a qualified retirement savings plan.
While there have been legal challenges to CalSavers, the program persists. CalSavers provides an opportunity for employees to defer wages, through payroll deductions, to a retirement savings account that they own and control. The program is designed to be easy and cost-effective for employers to comply with California’s retirement plan mandate.
In summary, California’s mandatory retirement plan law has been upheld by the Ninth Circuit, and employers with five or more employees must offer their workers some form of a retirement plan or enrol in CalSavers. Any provisions in a private employer’s retirement plan that require mandatory retirement of an employee over 40 years of age are unlawful.
Types of Mandatory Retirement Plans
California implemented a new mandatory law that requires all companies with more than five employees to offer a retirement plan to their workers by June 30, 2022. Companies that don’t will be required to enrol in CalSavers, the state-sponsored individual retirement account (IRA), or face fines.
Under the new law, employers have three options to comply with the mandate:
- Sponsor a qualified retirement savings plan – Employers can offer a qualified retirement savings plan such as a 401(k) plan, a profit-sharing plan, or a defined benefit plan. These plans must meet certain requirements to be considered qualified, such as offering employees the ability to make contributions and limiting the amount of contributions made by highly compensated employees.
- Use the state-sponsored CalSavers program – Employers can enrol in CalSavers, a state-sponsored individual retirement account (IRA), which allows employees to contribute a portion of their income to a retirement account. Employers are not required to contribute to the account, but they are required to facilitate employee contributions through payroll deductions.
- Offer an alternative retirement plan – Employers can offer an alternative retirement plan that meets certain requirements, such as being offered to all employees, being portable, and providing a minimum level of benefits.
Employers who choose to sponsor their own qualified retirement savings plan or offer an alternative retirement plan must meet certain requirements, such as providing employees with information about the plan, offering employees the opportunity to enrol, and ensuring that the plan complies with all applicable laws and regulations.
California’s new mandatory retirement plan law requires employers with more than five employees to offer a retirement plan to their workers. Employers can comply with the law by sponsoring a qualified retirement savings plan, using the state-sponsored CalSavers program, or offering an alternative retirement plan that meets certain requirements.
Pros and Cons of Mandatory Retirement Plans
Benefits
Mandatory retirement plans have several benefits for employees. Firstly, they provide a savings vehicle for retirement, which can help ensure financial stability in old age. Additionally, mandatory plans can help ensure that all employees have access to retirement savings, regardless of their income level or employer’s willingness to offer a plan.
From the employer’s perspective, mandatory retirement plans can help attract and retain employees, as well as improve employee morale and productivity. Additionally, some plans may offer tax benefits to employers, which can help offset the costs of offering the plan.
Drawbacks
However, mandatory retirement plans also have some drawbacks. For employees, mandatory plans may limit their ability to choose their own retirement savings vehicle or investment strategy. Additionally, some plans may have high fees or limited investment options, which can reduce the amount of money employees ultimately save for retirement.
From the employer’s perspective, mandatory retirement plans can be expensive to administer and may require additional resources to manage. Additionally, some employers may object to the government mandating that they offer a retirement plan, arguing that it infringes on their freedom to run their business as they see fit.
Overall, while mandatory retirement plans have both benefits and drawbacks, they can be an effective way to ensure that all employees have access to retirement savings. Employers and employees should carefully consider the costs and benefits of such plans before deciding whether to participate.
California State Law on Retirement Plans
California is one of the few states in the US that has a mandatory retirement plan law. The law requires employers to offer a retirement plan to their employees or enrol them in the state-sponsored individual retirement account (IRA) known as CalSavers.
Employer Obligations
Under California law, all for-profit or non-profit employers with five or more employees must give employees access to the CalSavers plan if they do not sponsor a qualified retirement savings plan. Qualified retirement savings plans include 401(a) plans (such as profit-sharing plans), 401(k) plans, and other defined benefit plans.
Employers who do not offer a qualified retirement savings plan or enrol their employees in CalSavers may face fines. The fines can range from $250 per eligible employee for the first year of noncompliance to $500 per eligible employee for subsequent years.
Employee Rights
Employees have the right to participate in a retirement plan offered by their employer or enrol in CalSavers if their employer does not offer a qualified retirement savings plan. Employees can choose to opt out of the CalSavers plan at any time.
CalSavers provides an opportunity for employees to defer wages, through payroll deduction, into a Roth IRA. The contribution limit for 2023 is $6,000 for individuals under 50 and $7,000 for individuals 50 and over. Employees can choose how much to contribute, and the contributions are invested in a diversified portfolio of low-cost index funds.
In conclusion, California’s mandatory retirement plan law provides a way for employees to save for retirement and ensures that employers offer their employees access to retirement savings plans. Employers who do not comply with the law may face fines, and employees have the right to participate in a plan or enrol in CalSavers.
Implications for Employers and Employees
For Employers
California employers with five or more employees are required to offer a qualified retirement plan to their employees. Employers who fail to comply with the deadline of June 30, 2022, may face penalties. Employers have several options and obligations when it comes to offering a retirement plan:
- Offer a qualified retirement plan, such as a 401(k) plan, to employees.
- Participate in the state-run CalSavers program, which is a payroll deduction IRA program.
- Offer a private employer-run retirement plan that meets the requirements of the California Secure Choice Retirement Savings Trust Act.
Employers who choose to participate in the CalSavers program are required to facilitate payroll deductions, maintain accurate records, and provide certain notices to employees. Employers who offer a private employer-run retirement plan must ensure that the plan meets the requirements of the California Secure Choice Retirement Savings Trust Act.
For Employees
The California Secure Choice Retirement Savings Trust Act provides employees with a way to save for retirement. Employees who do not have access to a qualified retirement plan through their employer may participate in the CalSavers program. The program offers employees a way to save for retirement through automatic payroll deductions.
Employees who participate in the CalSavers program have several investment options to choose from. They can choose to invest in a target-date fund, a money market fund, or a fixed-income fund. Employees can also choose to change their investment options at any time.
Conclusion
In conclusion, California has implemented a mandatory retirement plan law requiring all companies with more than five employees to offer a retirement plan to their workers. This law was implemented on June 30, 2022, and companies that do not comply will be required to enrol in CalSavers, the state-sponsored individual retirement account (IRA), or face fines.
Effective January 1, 2023, the amended law expands the CalSavers requirements to any California employer with at least one employee who is not an owner of the business. Therefore, if you are an employer in California and have no retirement plan in place, you must participate in CalSavers if you have at least five full or part-time California employees.
It is important to note that CalSavers is not a retirement plan sponsored by the employer. Instead, it is a state-sponsored IRA that employees can contribute to through payroll deductions. Employers are only responsible for registering for CalSavers and facilitating payroll deductions.
Overall, California’s mandatory retirement plan law aims to address the looming nationwide retirement savings crisis and ensure that employees have access to a retirement savings plan. By complying with this law, employers can provide their employees with a valuable benefit and avoid potential fines.
