Retirement plans are frequently positioned to employers to achieve the 4 R’s:
- Recruiting top talent
- Rewarding employees for good performance
- Retaining quality employees
- Retiring employees with dignity
Employer-sponsored retirement plans have always been vital to running successful businesses. They have provided substantial financial benefits to the employees and have helped the employers alleviate tax burdens. While the 4 R’s are sufficient reasons for companies to sponsor retirement plans, in the last year, the list of reasons grew even longer, particularly for companies doing business in California.
The Secure Act
On December 17, 2019, the United States Congress passed the Secure Act allowing employers to write off any expense they incur starting or operating an employee benefit plan and receiving tax credits for qualifying employees enrolled. An employer with fewer than 100 employees will get a $250/participant tax credit up to 20 non highly compensated employees (HCE’s) for the first three years of setting up a plan. An HCE is defined as someone who owned more the 5% of the interest in the business during the current year or the previous year or makes $130,000 or more per year. For example, if a business averages 10 non HCE’s for the first three years on your payroll after setting up a 401(k) plan, the business will be able to write $7,500 off your Federal tax bill plus any expenses it incurs from operating the plan. This makes it more affordable than ever before to start and maintain a plan in its infancy.
CalSavers Retirement Savings Program
Some states, such as California, have moved to force employers with five or more employees to offer a plan or participate in the state-sponsored plan. The state-sponsored plan is known as CalSavers. CalSavers began its open enrollment to all California employers who did not have benefit plans in place in July of 2019. There is a three-year phase-in that mandates employers without existing benefit plans to either join the CalSavers plan or implement their own independently sponsored retirement plan for their business. The implementation deadlines are as follows:
- September 30, 2020: Businesses with 100 + employees
- June 30, 2021: Businesses with 50 + employees
- June 30, 2022: Businesses with 5 + employees
Employers are required to submit a full census to the state and track all eligible employees. Employers must offer eligible employees the plan within 30 days from their date of hire. If the employee does not make an election within 30 days, the employer is required to auto-enroll the employee and set up their 5% Roth deferral via payroll deduction. Additionally, the employer is also required to track and auto-escalate all employees by 1% every January 1st, up to 8%. If the employee makes an election, they must specifically opt-out of the auto-escalate as well. A notice must be provided to each employee 60 days before they are auto escalated each year on January 1st unless they opt-out again. Employers are required to hold an open enrollment meeting every two years between November 1st and November 30th to auto enroll any employees who have opted out previously.
There is technically no cost to the employer to register your business for the CalSavers plan as all fees are passed on to the individual employees participating in the plan. However, the penalties for non-compliance start at $250 per eligible employee if the employer remains non-compliant after 90 days from being served a notice. The penalties will increase by an additional$500 per eligible employee if the company remains in non-compliance after 180 days from receiving an initial notice. Any employee that is at least age 18, receives a W-2, and has worked for the business for 30 days is considered an eligible employee. There is not an hours per year requirement, so part-time employees are eligible for CalSavers.
Sponsoring a Company Retirement Plan
There are more administratively manageable retirement plan options for employers than being forced into a CalSavers Retirement Plan. If an employer sets up their own independent retirement plan, such as a 401(k) plan, then they will be considered an “exempt employer” and will not have to register for the CalSavers state run plan. Click here to access the IRS site and learn more about the limitations on benefits and contributions. The silver lining for sponsoring your own retirement plan is that the Secure Act will provide your business with expense write-offs and tax credits. We know that every company has unique needs. Our team of retirement plan experts can walk you through the benefits and advantages of the different available plans so that you can make an informed decision. Visit the corporate retirement section of our website or call our team today for additional information about the plans we offer.