California’s New Retirement Program: What You Need to Know

California’s New Retirement Program: What You Need to Know

By Sarina Flores, Director of Human Resources, Flores Financial

Restaurants take note, California’s recently piloted retirement savings program, CalSavers, is about to become mandatory. The state-run program was set up to make it easier for employees working for hospitality companies without a retirement savings program to save for later life by paying into an individual retirement account (IRA). Until now, adoption of the program has been optional, but by July 2019 you’ll be required by law to enroll your workers or provide a retirement plan through the private market.

CalSavers Details

Currently, the CalSavers program offers employees Roth IRAs, which enables them to save after-tax earnings now and withdraw funds tax-free during retirement. It’s thought that traditional IRAs, which are tax-free upfront but taxed on withdrawal, will be introduced during 2019.

By default, five percent is deducted from your participating employees’ paychecks (although they can choose a different contribution rate). That contribution rate will automatically increase by one percent each year until it reaches eight percent, unless that person has opted for a different amount.

Importantly, CalSavers retirement plans are portable, so will move with workers if they change jobs.   

Roth IRA Advantages

The fact that average wage-earning employees can take advantage of years of tax-free investment earnings is the reason that Roth IRAs are so frequently recommended by financial experts.

In 2019, the IRS will allow your employees to contribute up to $6,000 to an IRA (a total amount for Roth and traditional IRAs) if they earn an adjusted gross income of less than $122,000 (as a single-filer) or less than $193,000 (if married and filing taxes with a spouse). For workers aged 50 plus, that limit rises to $7,000.

What This Means for Employers

From July, all eligible California employers will be able to enroll their workers. If those employees chose to participate, funds will be automatically deducted from their paychecks and be channeled into their CalSavers IRA account.

However, you, the employer, can choose to adopt a policy stating that you have no control over individual investments in the CalSavers program and should make it clear that investment discretion is in your employees’ hands.

Important Deadlines

The program is being rolled out over the next three years, beginning this July. The different deadlines will depend on the size of your company.

Roll out dates for CalSavers are as follows:

• June, 2020: Companies with more than 100 employees.
• June, 2021: Companies with 50-99 employees.
• June, 2022: Companies with 5-49 employees.

The program is currently facing a legal challenge from a taxpayers’ rights group, which claims it violates the U.S. Constitution. However, this legal challenge aside, our advice is to comply with the deadlines if you happen to be one of those San Diego employers required to participate in the program.  

If you have any HR questions or need help with planning your company’s CalSavers policy, get in touch with our HR experts today.