If you are a California business owner or an employee who does not have access to a workplace retirement plan, you may have come across CalSavers. This state-run initiative is designed to help more workers in California save for retirement, especially those who are not covered by a traditional 401(k) or pension through their employer.
As the program continues to grow across the state, both employers and employees should become familiar with how CalSavers functions.
Understanding CalSavers
CalSavers is a retirement savings program created by the state of California to give employees an easy way to build retirement savings. It was developed for workers whose employers do not provide a retirement plan. When enrolled, employees contribute to a Roth IRA through automatic payroll deductions.
The program’s purpose is to reduce the number of Californians entering retirement without sufficient savings. By requiring employers to either offer their own retirement plan or participate in CalSavers, the state hopes to promote better long-term financial outcomes for workers.
Who Needs to Comply
California law requires that any employer with five or more employees must register with CalSavers if they do not already offer a retirement plan. These businesses are obligated to either join CalSavers or establish a different qualifying retirement option.
In 2022, California expanded the program to include even smaller employers:
Businesses with just one to four employees will also be required to register or file an exemption by December 31, 2025. Notifications for this group will begin going out in early 2025.
Deadlines for larger employers have already passed, and those who fail to comply with the law may face penalties.
How CalSavers Works for Employees
Once an employer registers, employees are automatically enrolled in the program unless they choose to opt out. Here are some important features:
- Employees are enrolled in a Roth IRA by default
- Contributions are deducted from paychecks
- The initial contribution rate is five percent of gross pay and increases automatically each year
- Employees can modify their contribution rate or opt out at any time
- Investments are professionally managed and limited to a few selected options
- Since contributions are made with after-tax dollars, qualified withdrawals in retirement are tax-free. However, income limits apply, which may affect eligibility for higher earners.
Key Benefits of CalSavers
- No direct costs for employers aside from basic administration
- Offers retirement savings to employees who might not otherwise have access
- Simplifies the savings process for workers with automatic deductions
- Encourages long-term financial habits and planning
What Employers Should Keep in Mind
Even if you have a small team, you must register or prove you already offer a qualified retirement plan. While there is no charge from the state to participate, noncompliance can lead to financial consequences.
Some employers may decide that offering a private retirement plan is a better fit. These plans can offer greater flexibility, higher contribution limits, and potential tax advantages.
If you have questions about how CalSavers may impact your business or whether a private retirement plan is a better solution, we are here to help. Call our team of group benefits experts at Bay Area Health Insurance to review your options and receive guidance tailored to your situation.
