Qualified Retirement Plan vs CalSavers Program: What’s Better for Business Owners?

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The CalSavers program is a big step in ensuring all California employees have the right to a retirement plan, but if you’re a business owner you may want to think twice before enrolling. It can be advantageous to both you and your employees to set up a qualified retirement program. 

If you’re a business with five or more employees in California, then you need to either have your own retirement plan or be enrolled in CalSavers. And if you have one to four employees, you have until December 31st, 2025 to meet these requirements. 

In this article, we’ll look at different retirement programs to see what the best option is for your company, why it’s worth setting up your own, and the benefits these programs provide that you won’t get from CalSavers.

Types of Qualified Retirement Plans

We’ll briefly look at what plans are available so you have a general idea of what you can offer your employees. If you want a more detailed understanding of retirement plans, check out our article here.

According to the U.S. Department of Labor, there are a few types of qualified retirement plans:

  • A Defined Benefit Plan promises a specific monthly benefit at retirement. It may state the benefit as a dollar amount or calculate the benefit through a formula that often factors in salary and service to the company. A common example of this is a Cash Balance Plan. 
  • A Defined Contribution Plan does not promise a specific benefit amount. The employee or employer, and sometimes both, contribute to a retirement account for the employee. The employee ultimately receives the balance in their account. Common examples include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.
  • A Simplified Employee Pension Plan (SEP) allows employees to make contributions on a tax-favored basis to their IRAs. SEPs are subject to minimal reporting and disclosure requirements. 

The plan you choose for your business will depend on factors such as the costs of the plan, the size of your business, the investments offered in the plan, and the goals and needs of your employees. Having a qualified financial planner can alleviate a lot of the headaches and burden that comes with choosing the perfect plan for your company’s needs. 

Advantages of Qualified Retirement Plans for Employers

Setting up your own retirement plan comes with a lot of advantages to help save you money and improve your business’s long-term financial health. These include…

  • Customization: With your own qualified retirement plan, you can fully customize the plan to meet the specific needs of your business. A qualified retirement plan provides you with a wide range of contribution levels, vesting schedules, and investment options. The CalSavers program doesn’t provide the same amount of range and offers more of a one-size-fits-all approach.
  • Tax Benefits: Money you contribute to your qualified plan can be tax deductible up to certain limits depending on which plan you choose. Assets that are in the plan also grow tax-free until they are distributed to employees upon retirement. 
  • Attract High-Level Employees: Having a customized qualified retirement program that is best suited to the type of employees you hire will set you apart from other businesses. You can also set up your plan to incentivize employees to stay at the company and reduce turnover. 

Advantages for Employees

As we said at the end of the last section, the right qualified retirement plan can help you attract and retain high-level employees. But how does the right plan do this?

  • Tax-Free Savings: Employees can contribute income to a plan on a pre-tax or tax-deferred basis, helping them save more for retirement and possibly lower their annual tax bill. 
  • Various Investment Options: Qualified Retirement Plans can offer options such as mutual funds and individual stocks, giving employees individual customization to their needs and tolerance for investment risk.
  • Employer Matching: Some plans, such as a 401k, allow employers to make matching contributions to the employee’s plan, potentially doubling the amount of money an employee can save for retirement.

Disadvantages of the CalSavers Program

The CalSavers program is a great concept for ensuring all workers in California have the right to a retirement program no matter the size of the company they work at. However, the best option for business owners in California is still a qualified retirement plan due to the disadvantages that come with opting into the CalSavers Program. These disadvantages include…

  • Roth IRA Income Limits: The CalSavers Program is a Roth IRA, meaning it’s subject to the income limits that come with that type of plan. If your employees make above a certain amount they can’t participate in the CalSavers program. This could potentially lose you high-level employees, due to the lack of a retirement program option. 
  • Taxes for Employees: CalSavers only allows your employees to make after-tax contributions, reducing the amount of money they save for retirement and not reducing their annual tax bill as other plans offer. 
  • Limited Options: Other plans offer a much broader range of investment options when compared to the CalSavers program, as well as additional resources to help employees make the right decisions based on their needs and risk tolerance. 
  • No Employer Matching: One of the biggest disadvantages of the program is that CalSavers does not allow employers to match their employee’s contributions, which is often a great incentive for employees to participate in the program. Employer contributions are also a great way for business owners to attract and retain employees in a tax-deductible way. 

Learn More About Qualified Retirement Plans

Finding the right retirement plan for your business can be overwhelming. If you want to learn more about how qualified retirement plans work, or need assistance in creating the perfect plan for your business needs, contact us today. We’d love to help you reach your financial goals. 

This material is being provided as a general template for plan sponsor review.  Plan sponsors should seek legal guidance in developing a document specific to their plan.  In no way does advisor assure that, by using this template, plan sponsor will be in compliance with ERISA regulations.