How Employers With 51 -100 Employees Can Meet Their CalSavers Deadline

The CalSavers Program applies to employers that do not maintain a retirement plan.  It automatically enrolls eligible employees in a state-managed system of Roth IRA accounts. June 30, 2021 is the deadline by which employers with 51 to 100 California employees must either establish that they are exempt from CalSavers (for instance, because they have their own plan) or enroll in the program.  Employers with more than 100 California employees were required to enroll by September 30, 2020

Although under legal attack for some time, on the grounds that the federal benefits law, ERISA, prohibited a state-run retirement program, the CalSavers program was just upheld by the Ninth Circuit Court of Appeals.  Money penalties apply to employers who don’t timely either establish their exempt status, or participate in the program.  Below is a how-to for employers in the 51+ group, who have approximately six weeks until their CalSavers deadline arrives:

  1. Already have a retirement plan (including a SEP or SIMPLE)?  Register or certify your exemption.  The link is here.  You will need your federal Employer Identification Number or Tax Identification Number and an access code that is provided on a notice you should have received from CalSavers via email or snail mail.  If you can’t find your notice, call (855) 650-6916. 
  2. Don’t have a retirement plan?  Consider establishing one in the time period left.  IRS Publication 560 contains information about setting up a SEP, SIMPLE, or a 401(k) plan for your small business.  Investment advisors to your business and even business CPAs can also help.  Don’t do it on your own, get expert advice as your choice of plan will have consequences!
  3. Don’t have a plan and don’t want one?  Register with CalSavers.  Again, you need your EIN, or TIN, and an access code.  If you don’t have an access code you can request one using this link. After you register, you will have 30 days to upload your employee roster and facilitate payroll contributions.  If you use an outside payroll provider, you will need to add them as your payroll representative.  More information on adding payroll representatives is provided once you register.
  4. Need more information about counting employees towards the 51 employee threshold?  Check out our prior blog post on the topic, which includes a discussion of use of staffing companies and the like, and also visit the CalSavers FAQ re eligibility.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.

Photo credit Levi Meir Clancy, Unsplash

IRS FAQs Address COVID-19 Partial Plan Termination Issues

On April 27, 2021 the IRS supplemented its online FAQs on COVID-19 relief for retirement plans and IRAs with information related to relief from partial plan terminations.  Under Division 33, Section 209 of the Consolidated Appropriations Act of 2021 (CAA), a plan is not treated as having a partial termination during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020.  For employers with a calendar year, this buys them three months of additional time to recover and add back participants, as usually a partial termination would have been determined based on participant levels as of their plan year end on December 31, 2020.  We reviewed the partial termination relief provisions of the CAA in this earlier post.

The new FAQs clarify the following issues:

  1. Definition of Active Participants Covered by the Plan  For purposes of the 80% retention rule, the FAQ advises that plan sponsors use a “reasonable, good-faith interpretation,” of the term “active participant covered by the plan,” applied in a consistent manner, when determining the number of participants covered by the plan on the March starting and ending dates.   In 401(k) plans, participants who meet the eligibility requirements to make salary deferrals generally have been required to be counted as active participants covered by the plan (See Q&A 40), even if they do not actively defer.   The FAQ does not address the distinction between “eligible” versus actively deferring.  Plan sponsors with questions about counting active participants should consult benefit counsel or other benefit advisors.
  2. Application of March to March Period to Calendar Plan Year  The FAQ clarifies that if any part of the plan year falls within the March 13, 2020 to March 31, 2021 period, then the relief applies to any partial termination determination for that entire plan year.   For a plan with a calendar plan year, the relief therefore applies to both the January 1 to December 31, 2020 plan year and the January 1 to December 31, 2021 plan year, because both years include a portion of the March 13, 2020 to March 31, 2021 determination period.
  3. Impact of New Hires on 80% Test  The FAQs make clear that the 80% test looks at the total population of active participants and not only at the pool of active participants who were covered on March 13, 2020.   In other words, new hires that met eligibility under the plan by March 31, 2021 may be counted, and plan sponsors do not need to take a snapshot of active participants as of March 13, 2020 and ensure that 80% of those exact people were still employed on March 31, 2021, in order for the relief to apply.  This is an expansion of normal rules for partial terminations, which would ordinarily require that a participant who is terminated be individually rehired in order not to count as having been affected by the partial termination.
  4. Relief Not Limited to COVID-Related Staff Reduction  The FAQs make clear that although March 13, 2020 happens to be the date that the COVID-19 national emergency was declared, the relief applies regardless of the reason for the reductions in active plan participants; the reductions need not be related to the COVID-19 pandemic. 

Plan sponsors should take heed of the CAA partial termination relief and make use of it when possible.  Form 5500 Return/Reports require plan sponsors to report the number of active participants at the beginning, and end, of each plan year, which permits IRS to IRS FAQs Address COVID-19 Partial Plan Termination Issues possible partial plan terminations.  Armed with this data, IRS earlier this year announced a compliance check program focused on partial terminations.  This is a form of soft audit that could lead to a more formal audit program in the future.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo credit: Andrew Winkler, Unsplash

IRS Lists Solo 401(k) Plans as Audit Target

If your business sponsors a “solo 401(k)” plan, it may be in the crosshairs of the Internal Revenue Service.  The Service’s TE/GE (Tax Exempt and Government Entities) division has identified one-participant 401(k) plans as among its current audit initiatives.  In its web posting announcing the initiative, TE/GE states:  “[t]he focus of this strategy is to review one-participant 401(k) plans to determine if there are operational or qualification failures, income and excise tax adjustments, or plan document violations.”

By way of background, a solo 401(k) plan is a traditional 401(k) plan covering a 100% business owner with no employees, or that person and their spouse.  As this handy IRS info page describes, solo 401(k) plans are subject to the same rules and requirements as any other 401(k) plan, however because no common law employees participate, you do not have to worry about minimum coverage and nondiscrimination testing, top heavy rules, or most of the requirements of Title I of ERISA.  Solo 401(k) plans can be a great fit for some businesses, but those that stray outside the strict eligibility requirements for these plans have potentially high exposure to correction costs and sanctions in an audit setting.    

Below we list some common solo 401(k) compliance pitfalls.   If you are a solo 401(k) sponsor, check your plan design and operations to determine if these might be issues for you.  Take steps now to correct any compliance failures through use of EPCRS and other voluntary compliance programs, where applicable, so that, if an IRS audit does occur, it is resolved without incident.

  1. Employees Eligible for Benefits: One of the most frequent errors with solo 401(k) plans is that they lose their solo status when the business sponsoring them acquires employees, and the employees work the necessary number of hours required for eligibility under the plan.  (These generally cannot exceed 1,000 hours in a year of service.)  This will trigger application of minimum coverage, nondiscrimination, and top heavy rules, as well as ERISA reporting and disclosure requirements (Summary Plan Description, Form 5500-SF, etc.).  Failure to meet requirements under any of these sets of rules will be fodder for the IRS in an audit setting.  Business owners who need employees should probably avoid solo 401(k) plans unless they can be certain that the employees’ work hours never reach or exceed 1,000 hours in a year.   
  2. Controlled Group/Affiliated Service Group: This issue is related to the first in that, if the business that sponsors the solo 401(k) plan is under common control with a business that has common law employees, the answer to the question “who is the employer” — and who has employees — will be both businesses under common control, not just the business that sponsors the solo 401(k).  Generally, solo 401(k) status will be lost as a result.  The same potential coverage, testing, and top-heavy issues listed above can apply. Potentially, employees of the other business could be eligible for benefits under the (formerly) solo plan.
  3. Form 5500 Filing Duties: Solo 401(k) plans are exempt from filing Form 5500-EZ so long as plan assets remain under $250,000.  If plan assets exceed this threshold and a Form 5500-EZ is not filed, significant penalties could be assessed by IRS and by Department of Labor.  Participation in the Department of Labor Penalty Relief Program for Form 5500-EZ Late Filers should be considered in such instances. 
  4. Exceeding Contribution and Deduction Limits: The contribution and deduction limits that apply to group 401(k) plans apply to a solo 401(k) plan.  Employee salary deferrals cannot exceed the applicable dollar limit under Internal Revenue Code (“Code”) § 402(g) ($19,500 in 2021, plus $6,500 for those 50 and older).  The 415(c) limit equal to the lesser of 100% of compensation or $58,000 (in 2021) applies (and is increased by the age 50 catch-up limit, for a total of $64,500).  The maximum Code § 404(a) deduction of 25% of eligible plan compensation also applies, but in general the 415(c) limit will be reached first.  Failure to observe any of these dollar limits could be picked up on audit.
  5. Plan Document Errors: Businesses that sponsor a solo 401(k) need to update their plan document periodically to comply with the law just like any plan sponsor, meeting the adoption deadlines for preapproved plan remedial amendment cycles (the next one falls on July 31, 2022). Voluntary plan amendments also have to be properly documented and timely adopted.  Failure to meet these document requirements may be able to be corrected under EPCRS. 

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo Credit:  Markus Spiske, Unsplash

In Rehire Mode? Keep March 31, 2021 in Mind for Your 401(k) Plan

If your business is one of the many that reduced employees in the early days of the COVID-19 pandemic, you need to keep March 31, 2021 marked on your calendar, particularly if you are fortunate enough to be ramping up activity and adding workers back to your payroll.

As explained in our earlier post, when employer action, including as the result of an economic downturn, results in 20% or more of the population of an employee retirement plan being terminated from employment, a presumption arises that a “partial plan termination” has occurred, with the result that everyone affected by the partial termination must be fully vested in their plan accounts.

The partial termination rule is therefore relevant to plans that include employer contributions that are subject to a vesting schedule.

March 31, 2021 comes into play because it is the date set under Division EE, Section 1, Title II, Section 209 of the Consolidated Appropriations Act, 2021 as the snapshot date on which a partial plan termination may be avoided through rehires that restore earlier plan participation levels.  Specifically, a plan will not be treated as having experienced a partial plan termination if on March 31, 2021, the number of active plan participants is at least 80 percent of the number covered by the plan on March 13, 2020 (the beginning of pandemic-related stay at home orders).  For purposes of this rule, “active” status relates to the plan, not payroll, meaning that the individual maintains a plan account but may or may not be actively employed.  Clearly, however, adding new hires who establish accounts under the plan will result in increased plan participant numbers as the March 31, 2021 date approaches.

The partial plan termination relief applies during any plan year which includes March 13, 2020 to March 31, 2021 period.  If you have questions about application of this new rule to your 401(k) or other benefit plan, don’t hesitate to contact us. 

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2021 Christine P. Roberts, all rights reserved.

Photo credit: Booke Lark, Unsplash

The Song Remains the Same: Few 2021 COLA Adjustments for Retirement Plans

On October 26, 2020, the IRS announced 2021 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.  The maximum annual limit on salary deferral contributions to 401(k), 403(b), and 457 plans remained the same for 2021 as it was in 2020, at $19,500, and the catch-up contribution limit for employees age 50 and older also stayed the same at $6,500.  The SIMPLE employee contribution limit of $13,500 was also unchanged, as were the annual deductible IRA contribution and age 50 catch-up limits ($6,000 and $1,000, respectively).  The Section 415(c) dollar limit for annual additions to a retirement account was increased to $58,000 from $57,000 and the maximum limit on annual compensation under Section 401(a)(17) increased from $285,000 to $290,000.  Below we list the changed and unchanged dollar limits for 2021. Citations below are to the Internal Revenue Code. (Click on the chart for a larger image.)

In a separate announcement, the Social Security Taxable Wage Base for 2021 increased to $142,800 from the prior limit of 137,700 in 2020.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. (c) 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Jude Beck, Unsplash

FAQ on New 401(k) Coverage Rules for Long-Term, Part-Time Workers

With a stated goal of encouraging retirement savings, the Setting Every Community Up for Retirement Enhancement Act expands eligibility to make salary deferrals under a 401(k) plan to “long-term, part-time workers.” The new rules under the SECURE Act, which became law on December 20, 2019, ramp up between 2021 and 2024. However, some employer action is already required, as explained below. The following Frequently Asked Questions walks you through the new rules, including those contained in IRS Notice 2020-68, published on September 3, 2020.

Q.1: What are the current rules for excluding part-time, seasonal, and temporary employees under 401(k) and other retirement plans?

A.1: Even of you exclude these categories by name, you must still track their hours of service and include them in the plan on the entry date coinciding with or following their completion of 1,000 or more hours of service within a 12-month period (or, if later, upon also attaining a minimum age not exceeding 21). This is required under Section 401(a) of the Internal Revenue Code. Different rules applicable under Section 403(b) plans are outside the scope of this FAQ.

Q.2: Over what period do you count the 1,000 hours of service?

A.2: You count them over an “eligibility computation period.” The first eligibility computation generally starts upon the date of hire and ends on the first anniversary of that date. The plan may then continue to use the anniversary of hire, or switch to a plan year cycle.

Example – Switch to Plan Year Cycle: Kyle is hired on June 15, 2021 under a plan that follows a calendar year cycle and uses quarterly entry dates. Kyle works 700 hours between June 15, 2021 and June 14, 2022, the first anniversary of hire. Kyle does not enter the plan on July 1, 2022. Kyle completes 1,000 hours between January 1, 2022 and August 15, 2022 and enters the plan on October 1, 2022.

Q.3: What is a “long-term, part-time worker”?

A.3: Section 112 of the SECURE Act defines a long-term, part-time worker as an employee who has worked 500 or more hours in each of 3 consecutive 12-month periods, and who has attained a minimum age, not to exceed 21, as of the end of that 36-month period. The 12-month eligibility computation periods may be based on the anniversary of hire or may switch to the plan year cycle as described above.

Q.4: What eligibility rules apply to long-term, part-time workers?

A.4: An employee who qualifies as a long-term, part-time worker must be allowed to make employee salary deferrals under a Section 401(k) plan as of the first applicable entry date following completion of the 36-month period. A plan is allowed to use 6-month entry dates for long-term, part-time workers (e.g., January 1 and July for a calendar year plan) or may use regular quarterly, monthly, or other entry dates for this group.

Q.5: When do you begin tracking hours of service for long-term, part-time workers?

A.5: You begin tracking on January 1, 2021. That means the first point at which an employee will qualify for participation in a 401(k) plan as a long-term, part-time worker is January 1, 2024.

Q.6: Must long-term, part-time workers receive matching contributions or other employer contributions?

A.6: No, only eligibility to make salary deferral contributions is required. However, an employer may voluntarily make long-term, part-time workers eligible for matching and other employer contributions.

Q.7: If we choose not to, does that mean we don’t have to track hours of service towards vesting, for long-term, part-time workers?

A.7: No, you must track hours of service towards vesting, even if you don’t make employer contributions for this group. That is because, if a long-term, part-time worker later meets the plan’s conventional eligibility requirements, the worker joins the plan as a “regular” participant as of the first subsequent plan year, and may become eligible for matching and other employer contributions at that point. All of the worker’s hours of service must be counted towards vesting at that point. If these are hourly workers, you may be tracking their hours of service automatically, as it is.

Q.8: Do special rules apply to tracking vesting service for long-term, part-time workers?

A.8: Yes. Notice 2020-68 provides that you count each year in which an employee has at worked least 500 hours of service as a year of service counted towards vesting. Further, you count all years of service with the company in which they reach that threshold, not just years of service worked from January 1, 2021 and onward (as you do for eligibility purposes). If the plan language allows, you may disregard only years worked before attaining age 18, years worked before the plan was adopted, or years that may be disregarded under specially modified break in service rules.

Q.9: Are the break in service rules modified for long-term, part-time employees?

A.9: Yes. Normally, a break in service is defined as a year in which an employee has not completed more than 500 hours of service. For long-term, part-time workers, it is defined as a year in which the employee did not complete at least 500 hours of service.

Q.10: Can a plan still exclude employees based on job function or job location, such as “employees at Location B,” without violating the long-term, part-time worker coverage rules?

A.10: Presumably, reasonable, job-based exclusion criteria that pass minimum coverage testing are still permissible and are not preempted by the long-term, part-time worker coverage rules, but more guidance from the IRS would be appreciated. Employers with specific questions should consult benefit counsel for individualized guidance.

Q.11: Are long-term, part-time workers counted towards nondiscrimination testing, including ADP/ACP, and minimum coverage testing?

A.11: No, you are not required to count them under these tests.

Q.12: Are you required to make minimum top-heavy contributions on behalf of long-term, part-time workers?

A.12: No, you are not required to do so.

Q.13: Do the long-term, part-time worker coverage rules apply to employees subject to a collective bargaining agreement?

A.13: No, they do not apply to collectively bargained employees.

Q.14: Instead of tracking new hires over 3 years, should I just allow all employees who complete 500 hours of service to participate in the salary deferral portion of my 401(k) plan as of the next entry date?

A.14: That is certainly a simplified alternative to the minimum requirements, and presumably the exceptions from nondiscrimination testing and top-heavy contributions would continue to apply to employees meeting these reduced eligibility criteria. However this route could bring its own complications, by increasing your plan participant headcount over the 100 participant threshold sooner than is required. See Q&A 17.

Q.15: How will the long-term, part-time worker rules apply to plans with automatic enrollment?

A.15: The SECURE Act currently only refers to the minimum semi-annual entry dates for long-term, part-time workers, so it would appear that the automatic enrollment provisions would not apply to them. More guidance would on this topic would be appreciated, however.

Q.16: What if my plan doesn’t use actual hours to track service, but instead uses the equivalency method (e.g., 45 hours credited per week, if any service is performed in the week)?

A.16: It would appear that you can continue to use this method of tracking service for employees who meet conventional eligibility criteria, and use actual hours to track eligibility of long-term, part-time workers. Nothing in the SECURE Act prohibits use of the equivalency method for tracking service of long-term, part-time workers.

Q.17: Should we just create a new, separate 401(k) plan for long-term, part-time workers?

A.17: That depends. As it stands, it appears that employees who meet the criteria of long-term, part-time workers – whether or not they actively defer under the plan – will be included in the plan participant headcount on the first day of a plan year. This headcount is used to determine whether or not the plan has 100 or more participants and must include an independent qualified auditor’s report with its 5500 for a given year. If inclusion of your long-term, part-time workers will push your existing plan over the 100 participant threshold, you might give thought to separating them out in a separate plan, such that both of your plans will be under the audit threshold. Both plans would still have to file a Form 5500-SF each year, of course.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. (c) 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Gabriella Clare Marino, Unsplash

Layoffs, Reductions in Force, and 401(k) Plans

Many business owners, employment law counsel and benefit advisors are grappling with reductions in force/layoffs due to the unprecedented business and economic impact of COVID-19. I wanted to flag for you, briefly, a retirement plan compliance issue that these staff reductions can trigger. The rule applies to all qualified retirement plans not just 401(k) plans; special issues exist if your client has a defined benefit/pension plan, or if it has collectively bargained benefits.

The issue is this: the IRS established in Revenue Ruling 2007-43 that when employer action – including as a result of an economic downturn – results in 20% or more of the plan population being terminated from employment, then a presumption arises that everyone affected must be fully vested in their employer contributions under the plan. This is called a “partial plan termination.”

This is relevant only if the retirement plan has employer contributions, such as matching or profit sharing contributions, that are subject to a vesting schedule. Safe harbor contributions are always 100% vested as are employee salary deferrals.

The way the employer determines the 20% threshold is as follows:

  • Start with the number of participants on the first day of the plan year which will also be the number of participants on the last day of the prior plan year, on Form 5500. For 401(k) plans you look at who is “eligible” to make salary deferrals not just those who actually make salary deferrals or otherwise have a plan account.  (IRS Q&A with ABA from May 2004, Q&A 40).
  • Add new participants (eligibles) added during the plan year in progress.
  • Take that total number, and divide by the number of participants (eligibles) experiencing employer-initiated termination of employment.
  • In all cases, count both vested and nonvested participants (eligibles).

If you are at 20% or more you have a presumed partial termination. Certain facts can rebut this presumption such as very high normal turnover but this message is meant to address reductions in force related to COVID-19 which are employer-initiated due to outside forces and thus the presumption would likely not be rebuttable.

If you meet or exceed 20% then all persons directly terminated by the employer during the year must be fully vested in their employer contributions. The IRS also recommends you fully vest collaterally-affected employees such as those who leave voluntarily, as often those voluntary departures are triggered by concern over the company’s future in light of the involuntary terminations. Even if the reduction in plan population is under 20%, a potential partial plan termination may have occurred depending on all of the facts and circumstances.

The period of a partial termination may exceed a single plan/calendar year in some cases but in the instance of COVID-19, with any luck, we will only be looking at 2020.

Fully vesting folks does not cost the employer money because the money is already in the plan. However if this is not done correctly it is a complicated and expensive fix “after-the-fact.”

Generally there is not a requirement to notify participants of full vesting as a result of partial termination at the employer level but it might be mentioned in distribution paperwork according to the practices of the client’s plan recordkeeper.

Partial terminations raise a number of other ERISA compliance issues – as does the COVID-19 crisis as a whole – so let me know if questions arise.

Wishing all readers safe passage through the next weeks and months.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2020 Christine P. Roberts, all rights reserved.

Photo Credit: techdaily.ca.

2020 COLA Adjustments Announced

On November 5, 2019, the IRS announced 2020 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.  The maximum limit on salary deferral contributions to 401(k) and 403(b) plans increased $500 to $19,500 and a number of other dollar limits increased.  Citations below are to the Internal Revenue Code.

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In a separate announcement, the Social Security Taxable Wage Base for 2020 increased to $137,700 from $132,900 in 2019.

CalSavers: Employers Should Remain Compliance-Ready, Despite Court Challenges

Effective June 30, 2020, California employers with more than 100 or more employees, that do not maintain or contribute to a retirement plan, must participate in the CalSavers Program, by forwarding salary deferral contributions to the Program on behalf of most employees.  The CalSavers Program expands to employers with between 51 and 100 employees on June 30, 2021, and to employers with between 5 and 50 employees on June 30, 2022, again presuming that the employer does not have a retirement plan in place  Employers of any size may voluntarily participate in CalSavers at the current time, and self-employed individuals, including those in the gig economy, may enroll effective September 1, 2019.

How do business owners count employees in order to determine their applicable CalSavers effective date?  What is the impact, if any, of being part of a “controlled group” of businesses, or of using a staffing or payroll agency?  What about out-of-state employers, or California-based employers with out-of-state employees? Below we do a “deep dive” on these and other CalSavers employer coverage issues.  For more information, you can also check our prior post on CalSavers.

Before we get to the details, CalSavers has not cleared all legal obstacles in its path as of this writing. The U.S. Department of Justice has stated that it is considering intervening in the federal court case over whether ERISA preempts CalSavers, and has asked for additional time, to September 13, 2019, to make its decision. CalSavers earlier survived a preemption challenge brought by the Howard Jarvis Taxpayers Association, succeeding in having the complaint dismissed, but the Association filed an amended complaint. The court’s decision on the amended complaint was pending when the Department of Justice got involved. We will continue to track the pending court challenge to CalSavers and update you on future developments.

  1. How do I count employees to determine when my business is subject to CalSavers? To determine employee headcount, take the average number of employees that your business reported to EDD for the quarter ending December 31 and the previous three quarters, counting full- and part-time employees.  California Code of Regulations Title 10, § 1001(a) (2019). So, for example, if you reported over 100 employees to EDD for the quarter ending December 31, 2019 and the previous three quarters, combined, you would need to register your business with CalSavers on June 30, 2020.
  2. What if my business is part of a controlled group of corporations? The CalSavers regulations do not address this issue. They appear to require each business with a separate federal EIN/California payroll tax account number to register or opt-out of the program.   So, for example, if your business has 25 employees but you are part of a controlled group that includes over 100 employees, and there is no controlled group plan in place, you would not need to register with CalSavers on June 30, 2020. This would also be the case if your business is part of a group of trades or businesses under common control (e.g. business types other than corporations), or an affiliated service group.
  3. What if my business contributes to a controlled group 401(k) plan or other retirement plan? Does my business qualify for the CalSavers exemption? If your business is part of a controlled group and contributes to the controlled group retirement plan on behalf of its employees the CalSavers exemption should apply, as it includes businesses that either “maintain” or “contribute to” a retirement plan. Cal. Code Regs. tit. 10, § 1000(m) (2019). The answer is the same if you are part of a group of trades or businesses under common control, or affiliated service group, that sponsors the retirement plan.
  4. What if my business is part of a controlled group, and the controlled group maintains a plan, but the plan excludes my business and my employees cannot participate? CalSavers personnel have informally stated that the CalSavers exemption applies even in this situation, because the business is still part of a controlled group that maintains a plan. Businesses that maintain their own plan, but that exclude a subset of employees from the plan (within the requirements of minimum coverage and nondiscrimination testing), even a majority of employees, are also exempt, per informal CalSavers commentary.  In such situations, an exempt employer cannot enroll their business in CalSavers voluntarily but can forward employee contributions on behalf of employees who have established a CalSavers account through prior employment.
  5. How do I do the employee headcount if my business uses a staffing agency or payroll company? Whether the staffing agency/payroll company or its “client” – your business – is the employer for headcount purposes depends upon what type of agency is involved. The CalSavers regulations refer to a“Tri-Party Employment Relationship,” which means that the employer enters into a service contract with a third-party entity for services including, but not limited to, payroll, staffing (both temporary and non-temporary), human resources, and employer compliance with laws and regulations. That category is further sub-divided into four categories.
  6. What categories of staffing/payroll companies do the CalSavers rules identify? The CalSavers rules refer to the following: Temporary Agencies, Leasing Agencies, Professional Employer Organizations or PEOs, and Motion Picture Payroll Services Companies. The basic rule is that the agency is the employer if you use a temporary agency or leasing agency, but your business is the employer for CalSavers headcount purposes if you use a PEO or Motion Picture Payroll Services Company. However, conditions apply! More details are provided in following questions.

Important Note: the Tri-Party Employment Relationship categories overlap to some degree, but not entirely, with federal rules governing who an employer is under ERISA employment benefit plans. The discussion here applies only to determining coverage under the CalSavers Program. For more information on ERISA benefit plan coverage issues raised by staffing agency and payroll company workers, see S. Derrin Watson’s treatise, Who’s the Employer esource, chapters 3, 5, and 6.

  1. What is a temporary agency or leasing agency for purposes of the CalSavers rules? California Unemployment Insurance Code § 606.5 (b) defines a temporary services employer or leasing employer as a business that does all of the following:
  • Negotiates with clients or customers for such matters as time, place, type of work, working conditions, quality, and price of the services.
  • Determines assignments or reassignments of workers, even though workers retain the right to refuse specific assignments.
  • Retains the authority to assign or reassign a worker to other clients or customers when a worker is determined unacceptable by a specific client or customer.
  • Assigns or reassigns the worker to perform services for a client or customer.
  • Sets the rate of pay of the worker, whether or not through negotiation.
  • Pays the worker from its own account or accounts.
  • Retains the right to hire and terminate workers.

If your business uses a temporary or leasing agency you should review the terms of your services agreement with them and confirm that it meets all of these requirements. If it does not, please see the response to Question 10.

  1. What is a PEO for purposes of the CalSavers rules? The CalSavers rule incorporate the definition found in Section 7705(e)(2) under the Internal Revenue Code, which describes a PEO as a business that does all of the following:
  • assumes responsibility for payment of wages to such individual, without regard to the receipt or adequacy of payment from the customer for such services,
  • assumes responsibility for reporting, withholding, and paying any applicable taxes [ . . . ] with respect to such individual’s wages, without regard to the receipt or adequacy of payment from the customer for such services,
  • assumes responsibility for any employee benefits which the service contract may require the certified professional employer organization to provide, without regard to the receipt or adequacy of payment from the customer for such benefits,
  • assumes responsibility for recruiting, hiring, and firing workers in addition to the customer’s responsibility for recruiting, hiring, and firing workers,
  • maintains employee records relating to such individual, and
  • agrees to be treated as a certified professional employer organization for purposes of section 3511 with respect to such individual.

If your business uses a PEO you should review the terms of your services agreement with them and confirm that it meets all of these requirements. If it does not, please see the response to Question 10.

  1. What is a Motion Picture Payroll Services Company for purposes of the CalSavers rules? If a payroll services company in the motion picture industry meets all of the following criteria as set forth in California U.I. Code § 679(f)(4), then the “employer” is the client motion picture production company:
  • Contractually provides the services of motion picture production workers to a motion picture production company or to an allied motion picture services company.
  • Is a signatory to a collective bargaining agreement for one or more of its clients.
  • Controls the payment of wages to the motion picture production workers and pays those wages from its own account or accounts.
  • Is contractually obligated to pay wages to the motion picture production workers without regard to payment or reimbursement by the motion picture production company or allied motion picture services company.
  • At least 80 percent of the wages paid by the motion picture payroll services company each calendar year are paid to workers associated between contracts with motion picture production companies and motion picture payroll services companies.

If your business uses a motion picture payroll services company you should review the terms of your services agreement with them and confirm that it meets all of these requirements. If it does not, please the response to Question 10.

  1. What if my business uses a third party staffing or payroll arrangement that does not fall within any of those definitions? In such instance, your business will be considered the employer for California payroll tax purposes per California Unemployment Insurance Code § 606.5(c), and likely for CalSavers employer coverage (employee headcount) purposes. The cited Unemployment Insurance Code section clarifies that the staffing or payroll company is considered a mere agent of your business in such instances, and is not a separate employing entity for payroll tax purposes.
  2. Does CalSavers apply to out-of-state employers? An employer’s eligibility is based on the number of California employees it employs. Eligible employees are any individuals who have the status of an employee under California law, who receive wages subject to California taxes, and who are at least 18 years old. If an out-of-state employer has more than 100 employees meeting that description, then as of June 30, 2020 it would need to either sponsor a retirement plan, or register for CalSavers.
  3. Does CalSavers apply to businesses located in California, with workers who perform services out of state? Yes, if the employer is not otherwise exempt, and if they have a sufficient number of employees who have the status of an employee under California law, who receive wages subject to California taxes, and who are at least 18 years old.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  (c) 2019 Christine P. Roberts, all rights reserved.