How to Prepare Business Owners for the Approaching CalSavers Deadline

CalSavers is a state-run retirement program that applies to employers who do not already sponsor their own retirement plan.  It automatically enrolls eligible employees in a state-managed system of Roth IRA accounts. It has been in place since September 30, 2020 for employers with more than 100 employees and since June 30, 2021 for employers with more than 50 employees.  On June 31, 2022, it goes into effect for employers with 5 or more employees.  Below we cover key aspects of the CalSavers program, focusing on the types of issues that California business owners might bring to their benefits advisor for further clarification. A version of this post was published in the March 2022 issue of Santa Barbara Lawyer magazine.

Q.1:  What is CalSavers?

A.1:  CalSavers is the byproduct of California Senate Bill 1234, which Governor Brown signed into law in 2016. It is codified in Title 21 of the California Government Code and in applicable regulations. It creates a state board tasked with developing a workplace retirement savings program for private for-profit and non-profit employers with at least 5 employees that do not sponsor their own retirement plans (“Eligible Employers”).  Specifically, CalSavers calls for employees aged at least 18, and who receive a Form W-2 from an eligible employer, to be automatically enrolled in the CalSavers program after a 30-day period, during which they may either opt out, or customize their contribution level and investment choices.   The default is an employee contribution of 5% of their wages subject to income tax withholding, automatically increasing each year by 1% to a maximum contribution level of 8%. Employer contributions currently are prohibited, but they may be allowed at a later date.

Q.2:  If a business wants to comply with CalSavers, what does it need to do?

A.2:  The steps are as follows:

  • Prior to their mandatory participation date – which as mentioned is June 30, 2022 for employers with 5 or more employees, Eligible Employers will receive a notice from the CalSavers program containing an access code, and a written notice that may be forwarded to employees. Eligible Employers must log on to the CalSavers site to either register online, or certify their exemption from Calsavers by stating that their business already maintains a retirement plan. The link to do so is here. To do either, the employer will need its federal Employer Identification Number or Tax Identification Number, as well as the access code provided in the CalSavers notice. 
  • Eligible Employers who enroll in CalSavers will provide some basic employee roster information to CalSavers. CalSavers will then contact employees directly to notify them of the program and to instruct them about how to enroll or opt-out online. Those who enroll will have an online account which they can access in order to change their contribution levels or investment selections.
  • Once an Eligible Employer has enrolled in CalSavers, their subsequent obligations are limited to deducting and remitting each enrolled employee’s contributions each pay period, and to adding new eligible employees within 30 days of hire (or of attaining eligibility by turning age 18, if later).
  • Eligible Employers may delegate their third-party payroll provider to fulfill these functions, if the payroll provider agrees and is equipped to do so.  CalSavers provides information on adding payroll representatives once a business registers.

Q.3:  How does a business prove it is exempt from CalSavers?

A.3:  There are several steps:

  • First, it 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. 
  • Employers with plans in place must still register with CalSavers to certify their exemption.  The link is at https://employer.calsavers.com (Select “I need to exempt my business” from the pull-down menu.)  They will need their federal Employer Identification Number or Tax Identification Number and an access code that is provided on a notice they should have received from CalSavers.  If they can’t find their notice, they can call (855) 650-6916.  

Q.4:     How does a business count employees, for the 5 or more threshold?

A.4: To count employees for purposes of the 5 or more threshold, a business takes the average number of employees that it reported to the California Environmental Development Department (EDD) for the previous calendar year.  This is done by counting the employees reported to the EDD on Form DE 9C, “Quarterly Contribution Return and Report of Wages (Continuation)” for the quarter ending December 31 and the previous three quarters, counting full- and part-time employees.   So, for example, if a business reported over 5 employees to EDD for the quarter ending December 31, 2021 and the previous three quarters, combined, and it did not maintain a retirement plan, it would need to register with CalSavers by June 30, 2022.  If a business uses staffing agencies or a payroll company, or a professional employer organization, this will impact its employee headcount. The business should seek legal counsel as the applicable regulations are somewhat complex.

Q.5: What are the consequences of noncompliance with CalSavers requirements?

A.5:  There are monetary penalties for noncompliance, imposed on the Eligible Employer by CalSavers working together with the Franchise Tax Board. The penalty is $250 per eligible employee for failure to comply after 90 days of receiving the CalSavers notification, and $500 per eligible employee if noncompliance extends to 180 days or more after the notice.  CalSavers has begun enforcing compliance with the program in early 2022, for employers with more than 100 employees who were required to enroll by the September 30, 2020 deadline.   

Q.6:  Are there any legal challenges to CalSavers?

A.6:  Yes, but the main suit challenging the program has exhausted all appeals, without success. A bit of background information is necessary to understand the legal challenge to CalSavers. The Employee Retirement Income Security Act of 1974 (ERISA) generally preempts state laws relating to benefits, but a Department of Labor “safe harbor” dating back to 1975 excludes from the definition of an ERISA plan certain “completely voluntary” programs with limited employer involvement. 29 C.F.R. § 2510.3-2(d).  The Obama administration finalized regulations in 2016 that would have expressly classified state programs like CalSavers, as exempt from ERISA coverage, and thus permissible for states to impose. However, Congress passed legislation in 2017 that repealed those regulations, such that the 1975 safe harbor remains applicable. Arguing that the autoenrollment feature of CalSavers program makes CalSavers not completely voluntary and thus takes it out of the 1975 regulatory safe harbor, a California taxpayer association argued that ERISA preempts CalSavers.   On March 29, 2019, a federal court judge concluded that ERISA did not prevent operation of the CalSavers program, because the program only applies to employers who do not have retirement plans governed by ERISA.  The Ninth Circuit affirmed.  In late February 2022, the Supreme Court of the United States declined to review the case. Meanwhile, state-operated IRA savings programs are underway in a number of other states, including Oregon, Illinois and New York, and in the formation stages in yet others. 

Q.7:  Does CalSavers apply to out-of-state employers? 

A.7:  It can.  An employer’s eligibility is based on the number of California employees it employs, as reported to EDD. 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 5 employees meeting that description, as measured in the manner described in Q&A 4, then as of June 30, 2022 it would need to either sponsor a retirement plan, or register for CalSavers.

Q.8.  Does CalSavers apply to businesses located in California, with workers who perform services out of state? 

A.8:  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.

Q.9: Can an employer be held liable over the costs, or outcome of CalSavers investments?

A.9:  No.  Eligible Employers concerned about lawsuits should be aware that they are shielded from fiduciary liability to employees that might otherwise arise regarding investment performance or other aspects of participation in the CalSavers program.  In that regard, the CalSavers Program Disclosure Booklet, available online, goes into significant detail about the way CalSavers contributions will be invested; notably the cost of these investments (consisting of an underlying fund fee, a state fee, and a program administration fee).

Q.10:  Can an employer share its opinions about CalSavers, to employees?

A.10.  Not really.  Eligible Employers must remain neutral about the CalSavers program and may not encourage employees to participate, or discourage them from doing so. They should refer employees with questions about CalSavers to the CalSavers website or to Client Services at 855-650-6918 or clientservices@calsavers.com.

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. © 2022 Christine P. Roberts, all rights reserved.

IRS Announces 2022 Retirement Plan Limits

On November 4, 2021, the IRS announced 2022 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(b) plans increased $1,000 to $20,500, but the catch-up contribution limit for employees aged 50 and older stayed the same at $6,500.  That raises the total deferral limit for a participant aged 50 or older to $27,000.  The Section 415(c) dollar limit for annual additions to a retirement account was increased to $61,000 from $58,000, and the $6,500 catch-up limit increases that to $67,500 for participants aged 50 or older.   In addition, the maximum limit on annual compensation under Section 401(a)(17) increased to $305,000 from $290,000, and the compensation threshold for Highly Compensated Employees increased to $135,000, from $130,000.  Other dollar limits that increased for 2021 are summarized below; citations are to the Internal Revenue Code.  Unchanged were the annual deductible IRA contribution and age 50 catch-up limit ($6,000 and $1,000, respectively), and the age 50 SIMPLE catch-up limit of $3,000.  In a separate announcement, the Social Security Taxable Wage Base for 2022 increased to $147,000 from the prior limit of $142,800 in 2021.

Photo credit: Atturi Jalli, Unsplash.

Summertime Blues for Your 401(k) Plan, Pt 3

The third in our series of posts on common plan errors that are discovered when plan audits are underway each summer, is the failure to timely deposit plan assets consisting of employee elective deferrals and loan repayments. Unlike the operational errors we discussed in the prior two posts, which are corrected under the IRS Employee Plans Compliance Resolution System or EPCRS, this particular error of late deposits is corrected under a Department of Labor program called the Voluntary Fiduciary Correction Program or VFCP. There is an IRS piece that must be attended to, however, discussed below.

First – to identify the problem. Money taken out of employee pay in the form of elective deferrals, whether pre-tax or Roth, and loan repayments, becomes ERISA plan assets as of a certain point in time. Once they become plan assets, they must be invested in the Plan “trust” – meaning they must be documented as having been deposited with the plan recordkeeper. If they have not been deposited by the magic “plan asset” hour, then the Employee Benefits Security Administration of DOL (EBSA) views the situation as an illegal, interest-free loan of plan assets, by the plan sponsor. In formal terms, this is a “prohibited transaction” or misuse of plan assets by a fiduciary, and it has adverse consequences with DOL. It also triggers excise taxes with IRS, described below.

Thus, there are several parts to this inquiry – first, what is the magic hour at which employee funds become plan assets, and second, what relief from adverse consequences with DOL and IRS is available under VFCP? Lastly there is how this issue is reported on the Form 5500 Return/Report series. We discuss each in turn below.  And – no surprise, there is a COVID-19 angle to consider, as well.

When Do Employee Funds Become Plan Assets?

The magic “plan assets” hour depends upon the size of the plan in question. If the plan has fewer than 100 participants as of the first day of the plan year, employee funds are timely deposited if they are deposited with the recordkeeper no later than the 7th business day following the day on which the amounts would otherwise have been payable in cash (i.e., the applicable pay date). Recordkeepers often refer to the deposit event as the “trade date.” If employee funds are not deposited by the end of that 7th business day, they are plan assets improperly held by the plan sponsor.

If the plan has 100 or more participants as of the first day of the plan year, employee funds are timely deposited if they are deposited with the recordkeeper as of the earliest date on which such amounts can reasonably be segregated from the employer’s general assets. In some cases, EBSA has asserted that, if payroll taxes can be segregated from general assets, so can employee contributions, making pay date the earliest segregation date. More commonly, the earliest reasonable segregation date can be determined by looking at payroll processing history and identifying the shortest amount of time that generally elapses between a pay date, and the recordkeeper trade date. Very often nowadays this is a period of only one or two business days. If employee funds are not deposited by the end of that period, they are plan assets improperly held directly by the plan sponsor.

Holidays may be taken into account in calculating the earliest reasonable segregation date, thus the deposit date would be the first business day after a holiday Monday, for example.  For unusual events that are out of the plan sponsor’s control, the “drop dead” deposit deadline is the 15th day of the month following the month containing the normal earliest reasonable segregation date.

What about the impact of COVID-19?  In EBSA Disaster Relief Notice 2020-01, issued on April 29, 2020, relief is granted only if a timely deposit cannot be made “solely on the basis of a failure attributable to the COVID-19 outbreak.”  This is a very fact-specific inquiry; each situation will be different. At the early stages of the pandemic, such a failure might have included a staff furlough that included payroll personnel or personnel at a third party payroll provider.  Now that the pandemic is almost eighteen months along, even taking into account setbacks like the Delta variant, deposit delays that can be demonstrated to be exclusively due to the virus are unlikely to be common. That said, the Disaster Relief Notice 2020-01 remains in effect from March 1, 2020 through the 60th day following the announced end of the COVID-19 National Emergency.

What Relief is Offered under VFCP?

Through timely participation in the VFCP program, which includes preparation of a written submission with proof of payment of earnings on late deposited elective deferrals and loan repayments, a plan sponsor may avoid potential civil actions, penalties, and the assessment of civil penalties under Section 502(i) of ERISA.  Successful participants receive a “no action letter” from EBSA that is useful to demonstrate plan compliance in the event of a later plan audit or in a due diligence process related to a corporate merger or acquisition.

Importantly, participation in VFCP must precede the point at which a plan is “under investigation” by EBSA meaning an EBSA audit of the plan in question.  Other circumstances can give rise to a plan being “under investigation” such that VFCP is unavailable.

A prohibited transaction consisting of late deposited ERISA assets gives rise to a first-tier excise tax under Internal Revenue Code Section 4975 that is equal to 15% of the amount involved, with the amount involved equal to the time value of the money that was untimely deposited in a plan.  The excise tax is payable by the plan sponsor and reported on Form 5330.  The VFCP offers a limited relief from this excise tax.  VFCP can be used for multiple years (but a plan sponsor should ask itself why its timely deposit problems are persisting), but the excise tax relief can only be used once every three years. 

Information on VFCP is found here – but keep an eye on that location as the program, which dates in its current form back to 2006, is under a rewrite and overhaul.  It is anticipated that the new version will streamline some of the correction methods currently described under VFCP (late deposits is only one of a number of other transactions that the program covers). 

How Are Delinquencies Reported on Form 5500/5500 S-F?

Form 5500 and Form 5500 S-F require a plan sponsor to disclose whether there was a failure to transmit any participant contributions to the plan during the plan year in question, and to disclose the aggregate amount that was not deposited timely.  Even if the late deposits were corrected under VFCP, you must report them.  If you report late deposits on Form 5500 without adding an attachment explaining that they were corrected under VFCP, you may get a letter from EBSA that politely “invites” you to participate in VFCP by a firm deadline.  You are recommended to submit your VFCP application by that date, or risk further action that may result in penalties.    

One question that comes up around late deposited employee funds is whether it is necessary to participate in VFCP for delinquent deposits that are small in amount and/or short in duration.  The answer is that, until EBSA announces a self-correction version of VFCP, participation in VFCP is recommended in order to avoid adverse consequences when the uncorrected delinquencies must be reported on Form 5500 or 5500 S-F.  If you have questions about a possible need for correction under VFCP, contact your plan’s third party administrator or ERISA attorney.


Photo credit: Inna Kapturevska, Unsplash

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.