As we get further into 2022, our focus is on an important deadline coming up for California businesses—June 30, 2022. That’s the date by which nearly every employer in the state will need to either register with the CalSavers program or have their own qualified retirement plan in place to be exempt from participation. There are significant advantages to setting up your own 401K plan to help your employees (and you!) save for retirement, so if your business is coming up on the compliance deadline, here’s what you need to know.
Understanding CalSavers
CalSavers was created by legislation passed in 2016 to address the need to help workers save for retirement. Under the law’s provisions, private sector employers, including nonprofits, are required to either offer a qualified retirement plan to their employees or register for CalSavers. This state-run program allows employees to contribute to a Roth IRA via payroll tax deductions. Employees can choose their contribution rate, opt-out, or choose from a limited range of investment fund options to customize their accounts.
The three-year phased rollout of the requirement included staggered deadlines based on business size: employers with more than 100 employees were expected to enroll or provide their own plan by September 30, 2020, while those with more than 50 employees had until June 30, 2021. Now businesses with 5 or more employees must enroll in the state program or put their own plan in place by the end of June this year.
Does This Mean Me?
According to the provisions of the law, if your company has at least 5 California-based employees and at least one of them is age 18 or older, you’ll need to provide your own plan or enroll in CalSavers. Keep in mind that this can include you, as the business owner, or your spouse if they also work in the business. The law also doesn’t distinguish between full-time and part-time employees—both count. By the middle of this year, the majority of small businesses across the state will be affected.
The Advantage of a 401K
While CalSavers is better for employees than not having any type of retirement account, it is a limited option. Roth IRAs are not tax-deductible, and they have an annual contribution limit of $6,000 for individuals under the age of 50. Roth IRAs are also subject to income limits that could potentially make some employees ineligible to contribute. Employers who choose to enroll rather than setting up their own 401K plan stand to lose significant benefits for themselves and their employees.
To begin with, 401K’s have a far higher contribution limit—$20,500 for individuals under age 50 in 2022—and can be funded with pre-tax deferrals, giving participants more power to save for retirement. Typical 401K accounts also offer a far wider range of investment options to allow employees to meet their savings objectives. Even more important, employees are increasingly weighing the value of benefits like retirement plans in their decision-making, so having a 401K in place can help attract and retain quality hires. A company plan will also give you the opportunity to fund your own retirement more effectively.
The cost to set up a plan is lower than you might imagine, with a federal tax deduction and tax credit opportunities that also help reduce the expense for businesses, especially when getting started with a new plan. The only caveat is that it can take anywhere from 3 to 8 weeks to get a plan set up, so businesses considering a new 401K plan should act soon to get it in place prior to the June 30 compliance deadline.
If you’re not sure if your business is affected or if recent hiring has put you over the 5-employee threshold, Secura Financial has answers and solutions. We can help you put an inexpensive, effective 401K plan customized for the needs of your business in place to get you in compliance and provide enhanced benefits for you and your employees. To find out more, contact us here today.