The State of California requires that all businesses with 5 or more employees offer a retirement savings program. When examining the retirement-readiness of CA residents it became clear that many people were not saving enough for retirement. Because of this, a whole generation of retirees was facing the very real possibility of finding themselves dependent on State-funded programs… which would be very expensive for the government. So, to solve the problem, California now requires all employers with 5 or more employees to offer retirement savings to their employees. Employers and business owners can choose to default to the California state-run CalSavers program or, they can offer a retirement savings plan of their own.
There are a number of reasons why business owners should consider setting up their own 401k plan rather than relying on CalSavers. In this article, we review what CalSavers offers, what a custom plan can offer, and what the benefits of a custom 401k retirement savings plan are to both employers and employees.
What is CalSavers and what does it offer?
The CA EDD describes CalSavers as:
“a retirement savings program for private sector workers whose employers do not offer a retirement plan. This program gives employers an easy way to help their employees save for retirement, with no employer fees, no fiduciary liability, and minimal employer responsibilities.” The details are that CalSavers offers a basic Roth IRA to help employees build their retirement savings. If you are not familiar with Roth IRAs, they allow employees to save after tax dollars.
Roth IRAs have lower contribution limits, limited investments, and limited tax advantages.
You can withdraw the money from a Roth IRA without having to pay any taxes on it because you paid taxes on that income before contributing it to the IRA.
The contribution limit for a Roth IRA is $$6,000 per year, and the income limit is $144,000 for single people or $214,000 for married filing jointly per year (as of 2022). This means that if you make more than $144,000 per year, you are not eligible to contribute to a Roth IRA.
There are also limits on what you can invest in with a Roth IRA. You are limited to investing in stocks, bonds, and mutual funds.
While a Roth IRA can be a great way to save for your retirement, if you are looking for a retirement savings plan with more flexible investment options and higher contribution limits, you will want to consider setting up a 401k for your business instead.
First and foremost, a custom 401k plan can be designed to specifically meet the needs of your business and your employees. This means that it can be tailored to maximize both employee retention and to encourage and reward retirement savings.
Additionally, setting up a custom 401k retirement savings plan can have tax benefits for Business Owners. CalSavers does not offer any tax breaks for businesses, meaning that you could be missing out on significant savings.
If you are not familiar with the difference between a Roth IRA and an employer-sponsored 401k:
A 401k plan is a retirement savings plan that allows employees to save money for their retirement with pre-tax dollars, which means that the income they choose to invest in the plan is not taxed until it is withdrawn from the plan after retirement.
Setting up a 401k retirement savings plan for your business has a number of tax advantages that can save you money in the long run.
One of the biggest benefits is that contributions to the plan are made with pre-tax dollars. This means that you do not have to pay taxes on the money until it is withdrawn from the account. This allows employees to save more money for their retirement.
Another advantage of 401ks is that they offer businesses a number of tax breaks. For example, businesses can deduct their contributions to the plan from their taxable income, and they can also deduct employee contributions. This can save business owners a significant amount of money on their taxes each year.
It’s no secret that good employees are hard to find and harder to keep.
One of the best ways to retain key employees is by offering them a good benefits package. And one of the most valuable benefits you can offer your employees is a 401k retirement savings plan. Offering a 401k plan is a great way to show your employees that you value them and want them to stay with the company for years to come.
If CalSavers is not the right solution for my business, what do I have to do to exempt my business from the requirement?
Business owners must have a retirement plan in place as of the mandatory participation date. This may mean a 401(k) plan, a 403(b) plan, a SEP or SIMPLE plan, or a multiple employer (union) plan. Want to know what these terms mean? Check out our blog on simplifying the retirement savings jargon here.
Even if you set up your own 401k employers must still register with CalSavers to certify their exemption. Visit: https://employer.calsavers.com and choose “I need to exempt my business” from the drop-down menu. You will need your federal EIN or TIN and an access code provided on the notice sent to you from CalSavers (can’t find it or didn’t get one? Call (855) 650-6916).
Setting up a 401k retirement savings plan for your business is a great way to save money on taxes and provide your employees with a valuable benefit. If you are considering CalSavers for your retirement savings plan, be sure to weigh the pros and cons carefully before making a decision.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.