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CalSavers Scoops Up Micro-Businesses Effective in 2025

Coming close on the heels of expansion of the CalSavers program to businesses with 5 or more employees, which went into effect on June 30, 2022, California Governor Gavin Newsom signed into law a further expansion of the CalSavers program on August 26, 2022, in the form of Senate Bill 1126.  Under this new measure, as of December 31, 2025, businesses with one (1) employee or more must either enroll in the CalSavers program, or sponsor a retirement plan.

This sweeps into the CalSavers regime even micro-businesses like home-based Etsy shops, food trucks, and the like.  Expressly excluded from the expansion are sole proprietorships, self-employed individuals, or other business entities that do not employ any individuals other than owners of the business (a company that employs two spouses, who each own half of the company’s stock, would be one example).

For these very small businesses, enrolling in CalSavers may be preferable to establishing even the simplest format retirement plan, due to the complexities of administering these plans, and the very inflexible rules for the IRA-based retirement plans (SIMPLE and SEP arrangements).  We covered some of the potential pitfalls of setting up a plan in our earlier post. 

That said, the financial services industry is increasingly reaching out to smaller employers with app-based service packages that allow a business owner to establish a 401(k) plan online, with “just a few clicks.”  No matter how easy it is to establish, a 401(k) plan is still a 50+ page written contract that is governed by two federal agencies (Department of Labor and Internal Revenue Service) and caution is advised.  With the proper prior planning, a SIMPLE, SEP, or 401(k) plan can be a powerful means of attracting and retaining employees and a good strategic move for even the smallest business.  But knowing what you are getting into, is key.   The persons vending the plan services may not be your best source of knowledge as to what can go wrong.  Stay on the safe side and check with an expert – either a CPA with retirement plan experience, a 401(k) plan third party administrator, or an ERISA attorney, before you sign plan documentation. 

Finally, classifying someone as an independent contractor to avoid the 1-employee threshold is not a good idea in California, where the criteria for independent contractor are quite narrow.  If you have questions in that regard, check with the California Department of Industrial Relations, or with a qualified employment law attorney.

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.

Photo credit: Anthony Persegol, Unsplash

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The Slippery Slope of SEP and SIMPLE Notification Duties

As the June 30, 2022 CalSavers deadline bears down on employers with five or more California employees, many small employers may be giving thought to adopting a simplified retirement plan, whether a SEP or SIMPLE IRA.  Establishment of one of these types of plans is a permissible alternative to participating in CalSavers.  There are circumstances where these types of plans are a good fit.  However, each of these types of plans imposes participation notification duties that employers often overlook, and noncompliance can put the tax-sanctioned status of the whole arrangement at risk. Below we summarize the relevant rules.

Simplified Employee Pension (SEP) Notification Duties

IRS Form 5305 is often used to establish a SEP.  A plan set up via Form 5305 is considered adopted when eligible employees have been provided with:

  • a copy of the completed, signed, and dated Form 5305-SEP, including the Instructions to Employer and Information to Employee sections;
  • a statement to the effect that IRAs other than the IRA(s) into which employer contributions will be made may yield different rates of return and may have different terms concerning, among other things, transfers and withdrawals of funds from the IRA;
  • a statement that notice of any amendment to the SEP, a copy of the amendment and a written explanation of its effects, will be provided within 30 days of the effective date of any such amendment; and
  • a statement that the employer will provide written notice of contributions made to the plan, by the later of (a) January 31 of the year following the year in which the contribution is made, or (b) the date that is 30 days after the date the contribution is made.  This notice duty may be met by reporting the SEP contribution on eligible employees’ Form W-2 for a given year.  Failure to provide the notice of contribution may subject the employer to a $50 penalty per failure unless the failure is due to reasonable cause. 

This information must be provided thereafter to each new employee who becomes eligible under the SEP.

Additional disclosure duties apply if you are using a prototype SEP arrangement, rather than Form 5305-SEP, including special disclosures for plans under which contributions are integrated with Social Security.  Providing eligible employees with a copy of the SEP agreement will meet many of the disclosure requirements, but employers should check with the prototype SEP sponsor to confirm that they will timely supply your business with all necessary additional disclosures.  Annual contribution reporting through Form W-2 is the same. 

Savings Incentive Match Plan for Employees (SIMPLE IRAs)

Notification duties under a SIMPLE plan are more complicated than under a SEP due to the employee elective deferral feature.  Also, there are two model SIMPLE forms in use, Form 5304-SIMPLE and Form 5305-SIMPLE.  Form 5304-SIMPLE is used when all IRAs are established with a single designated financial institution, and Form 5305-SIMPLE is used when participants select their own IRA provider.

For an existing SIMPLE IRA plan, eligible employees must receive a Summary Description and Notification to Eligible Employees before the start of a 60-day election period.  Since all SIMPLE plans must be on a calendar plan year, including those set up using Forms 5304- or 5305-SIMPLE, the plan year must be the calendar year.  Therefore the 60-day election period runs from November 2 through December 31, and the notice must be provided before November 2 each year.   Provision of a current copy of the completed Form 5304-SIMPLE or 5305-SIMPLE, with instructions, will satisfy both disclosure duties if Article VI – Procedures for Withdrawals, is completed.  When Form 5304-SIMPLE is in use, the custodian or trustee may provide the Article VI information directly to the employees; employers should confirm that the custodian/trustee is timely meeting this disclosure duty, however. 

For a new SIMPLE IRA plan or for a new hire who becomes eligible, the Model Salary Reduction Agreement that comprises part of Forms 5304- and 5305-SIMPLE must be provided prior to the 60-day period that includes either the date the employee becomes eligible or the day before.  The employee must be able to commence elective deferrals as soon as they become eligible, regardless of whether the 60-day period has ended, but no earlier than the plan’s effective date.  Certain special notification and election period rules apply when an employee becomes an eligible employee other than at the beginning of a calendar year, including when an employee is rehired during a plan year. 

How to Deal with SEP and SIMPLE Mishaps

If you have not timely met your SEP notification duties as outlined above, you should consult an ERISA attorney.

If you have not timely met your SIMPLE-IRA plan notification duties as outlined above, you can fix the problem by following the steps outlined in the SIMPLE IRA Plan Fix-It Guide.  Self-correction may be an option if you had practices and procedures in place to timely provide the notice but failed to follow them, and other pre-requisites to self-correction have been met.  Otherwise, you may need to use the Voluntary Correction Program to fix the problem.  This will generally require the involvement of an ERISA attorney.

In addition to notification duties, SIMPLE plans are subject to rules regarding timing of deposit of employees’ elective deferrals.  Elective deferrals must be deposited with the IRA custodian or trustee within the 30-day period following the last day of the month in which the amounts otherwise would have been payable in cash to employees.

If elective deferrals are not timely deposited, the Department of Labor (DOL) may have to be contacted to correct the problem.  Why is this necessary?   To avoid potential employer liability for civil penalties, and in some cases involving missed or late elective deferrals, criminal penalties. 

Special rules, not addressed above, may apply to plan documents not established using the IRS forms mentioned in this post.

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.

Photo credit:  Nico Smit, Unsplash

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Just Adopted a New 401(k) Plan?  Beware These Common Pitfalls

By June 30, 2022, businesses with 5 or more California employees must either enroll in CalSavers, a state-managed system of Roth IRA accounts, or establish their exemption from CalSavers by adopting 401(k) or other retirement plans of their own.  Other states have implemented or are rolling out similar auto-IRA programs.  Below are some potential pitfalls for new plan adopters that business owners should be aware of, and, where possible, take steps to avoid. 

  1. Immediate top-heavy status.  The “top-heavy” rules compare the combined plan account balances of certain owners and officers, called “key employees,” with the plan account balances of all other plan participants (non-key employees).  If the key employee account balances make up 60% or more of the combined plan account balances of all participants, the plan is top-heavy and the plan sponsor is required to make minimum contributions (generally equal to 3% of compensation) to the accounts of all non-key employees.  A plan can be top-heavy in its first year of operation, although it is more commonly a result of large account balances accumulated over time by long-term key employees, versus smaller accounts held by high-turnover, lower paid employees.   Top-heavy status is particularly likely to arise in a family-owned business, as family members of owners count as key employees, but the problem is not limited to this scenario.  Businesses that anticipate a potential top-heavy problem should consider adopting safe-harbor 401(k) plan designs, as a basic safe-harbor matching or non-elective contribution will satisfy minimum top-heavy contribution requirements.  A SIMPLE-IRA plan is also exempt from top-heavy requirements, provided you have 100 or fewer employees.
  2. ADP/ACP testing failure.     A similar and more common problem, failure of the Actual Deferral Percentage or ADP test, occurs when the average rate of elective deferrals made by Highly Compensated Employees exceeds the average rate of elective deferrals made by non-Highly Compensated Employees by more than a permitted amount.  (A related test, the Actual Contribution Percentage test, applies to matching contributions.)  Highly Compensated Employees (HCEs) are persons who own more than 5% of the company sponsoring the plan at any time during the current or prior year, or who, for the prior year, earned above a set dollar amount.  (For 2022, the amount is $135,000 and applies to 2021 earnings.)  Correcting testing failures will involve refunding amounts to HCEs, or making additional contributions to non-HCEs.  Fortunately there are a number of preventive measures to take, including using a safe harbor contribution formula, using a “top 20%” election to define HCEs, using automatic enrollment at a meaningful percentage of compensation (such as 5% or higher), and robust enrollment meetings and tools to engage employees with savings potentials under the plan. 
  3. Late deposit of elective deferrals.  When you run payroll and pull employee elective deferrals from pay, you have a deadline within which to invest them under your 401(k) plan, which is the point at which they are considered to be “plan assets” under ERISA.  Investment is generally is denoted as a “trade date” by your plan’s recordkeeper, whether Fidelity, Vanguard, or the like.   If you have under 100 participants as of the beginning of your plan year (counting those who are eligible to participate even if they don’t actively do so) you have seven business days to get from pay date, to trade date.  For larger plans, the normal deadline to invest is as soon as elective deferrals can reasonably be segregated from your general assets.  (An outside deadline of 15 business days after the end of the month following the month in which the elective deferrals would have been payable in cash applies in the event of extraordinary circumstances interrupting normal payroll functioning.)  If you fail to meet the seven business-day or “as soon as” deposit deadline, your retention of employee funds constitutes a “prohibited transaction” and an excise tax is payable to the IRS. Additionally, the Department of Labor views it as a fiduciary breach.  It is possible to seek relief from the excise tax and from potential fiduciary liability by participating in the Department of Labor’s Voluntary Fiduciary Compliance Program or VFCP.  Late deposits of employee elective deferrals (and loan repayments) must be disclosed each year on your Form 5500 Return/Report, which in turn could trigger further inquiry, so compliance with your applicable deposit deadline is important.
  4. Plan audit requirement.  As we covered in an earlier post, a business sponsoring a brand new 401(k) plan may be required to obtain an audit report on the plan’s operations and finances, prepared by an independent qualified public accountant or IQPA, at an annual expense of $5,000 – $15,000 or more.  These reports generally are required for plans with 100 or more participants as of the first day of the plan year, counting those who are eligible to participate whether or not they actually do so.  Proposed regulations for Form 5500 might change that rule, to count only those with plan account balances, but they have yet to be finalized and put into effect.  Until that time, businesses sponsoring new plans that will cover 100 or more eligible participants need to prepare for the audit process, both in terms of budgeting dollars for the cost, and time to gather responses to the auditor’s questionnaires.  New auditing standards going into effect this year put increased responsibilities on plan sponsors to account for plan operations and documentation.

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.

Photo credit:  Goh Rhy Yan, Unsplash

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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.

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Scary Surprise for Some New 401(k) Sponsors: Plan Audit Costs

Imagine you are a California business owner, with three fast-casual restaurant operations throughout the state. You employ over 100 employees, such that by September 30, 2020, you were either required to have a retirement plan in place, or to begin to participate in the CalSavers program by forwarding employee contributions to Roth IRAs managed by a state-appointed custodian.

Your decisions about whether to adopt your own retirement plan were made in the early days of the COVID-19 pandemic when business operations, cash flow, and staffing needs were chaotic and fast-changing. On balance, however, you decided to adopt your own plan and ultimately chose a deferral-only 401(k) plan as the best fit for your business. You adopted the plan by July 1, 2020 in advance of the September 30, 2020 CalSavers deadline for employers with over 100 employees.

Your restaurants pivoted to take out and food delivery services and you were lucky not to have to furlough or lay off any employees, but employee wages were lower than before the pandemic and you had high turnover. In June of 2020 you conducted enrollment meeting for the 401(k) plan but employee response was tepid. Only a few dozen employees actually enrolled in the plan, although most all employees (well over 100) were eligible to make salary deferrals.

Fast forward to the end of 2021. You find out that as part of your Form 5500 filing obligations you need to engage the services of an independent qualified public accountant (IQPA) to audit plan operations and finances. The cost of these services run about $10,000. This is a scary surprise for you. Did things have to end up this way?

In a word, no, although the 401(k) plan design may still have been the best fit for your business, and there may be light at the end of the tunnel for you, regarding the audit requirement.

Let’s break it down.  First, the audit requirement.  Under Section 103 of ERISA, a qualified retirement plan with 100 or more participants as of the first day of the plan year generally must provide an audit report prepared by an IQPA together with their “long form” Form 5500.  “Participants” means those employees who meet eligibility requirements under the plan, even if they don’t contribute to the plan or have an account under the plan (it also includes former employees who retain an account under the plan because they have not taken a distribution or rollover).  A special rule – the “80-120 rule” applies to plans that filed a Form 5500-SF (Short Form) in the prior year and have 120 or fewer participants as of the first day of the plan year in question, but if you adopt your plan in a year where you meet or exceed the 100 participant rule – again, counting those who are eligible regardless of participation status – you will be required to provide an audit report for your first Form 5500 filing.  That is the situation of the restaurant owner in our example.

Second, plan design. The restauranteur could have adopted a SEP-IRA, which is exempt from Form 5500 filing requirements, and with it, the requirement for an audit. However, SEP-IRAs require employer contributions and the 401(k) required only employee elective deferrals, so the cost of a SEP-IRA may not have worked for the business. The hiccup here is that the “no cost” 401(k) plan carried the hidden cost of a plan audit.

Lastly, a potential change to counting 100 participants for purposes of the audit requirement may be in the offing.  Proposed regulations from the Department of Labor, Department of the Treasury, and the Pension Benefit Guaranty Corporation would change the participant headcount methodology to look only at participants with account balances, and disregard those who are eligible but not participating.  If finalized and adopted, these regulations would generally apply to plan years beginning on or after January 1, 2022.  So for the restaurant owner in question it may be that another audit is required for the 2021-2022 plan year but that the audit requirement goes away if plan participation remains low. 

The hidden cost of a plan audit is also a concern for a wider group of employers, irrespective of state auto-IRA plan mandates, in 2024 when the SECURE Act rules for long-term, part-time employees go into full effect.  If the Form 5500 proposed regulations do become law, then the fact that part-time employees are eligible to make elective deferrals under their employers’ 401(k) plans will not trigger audit requirements unless they actually participate in the plan, and the plan’s active and former participant ranks meet or exceed 100 as of the first day of any given plan year.  The coming increase in participant ranks due to long-term, part-time employees increase in plan participant ranks was identified as one reason for the proposed change in headcount methodology.

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: Colton Sturgeon, Unsplash

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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 to 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

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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.

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California Employers: Get Ready for the CalSavers Program

Beginning on July 1, 2019, California private employers with 5 or more employees, who do not already sponsor a retirement plan, may enroll in the CalSavers Retirement Savings Program (CalSavers).   Mandated employers must enroll in CalSavers according to the following schedule:

  • Over 100 employees – June 30, 2020
  • 50-99 employees – June 30, 2021
  • 5-49 more employees – June 30, 2022

Below, we describe the key features of the CalSavers program.

  • 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 Government Code and in applicable regulations. It creates a state board tasked with developing a workplace retirement savings program for employers with at least 5 employees that do not sponsor their own retirement plans (“Eligible Employers”). This may mean a 401(k) plan, a 403(b) plan, a SEP or SIMPLE plan, or a multiple employer (union) plan.
  • CalSavers applies to private for-profit and non-profit employers, but not to federal or state governmental entities.
  • CalSavers calls for employees aged at least 18, and receiving 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 may be allowed at a later date.
  • Prior to their mandatory participation date, 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, you will need your federal tax ID number and your California payroll tax 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.
  • Eligible Employers are shielded from fiduciary liability to employees that might otherwise arise regarding investment performance or other aspects of participation in the CalSavers program.
  • There are employer penalties for noncompliance. 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.
  • 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 CalSavers program was challenged in court by a California taxpayer association, on the grounds that it was preempted by ERISA as a consequence of the automatic enrollment feature.[1] 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 taxpayer association is deciding whether to amend their complaint by May 25, 2019, or appeal the decision to the Ninth Circuit.  Therefore, further litigation may ensue, but after this important early victory the timely rollout of CalSavers seems likely, and employers should act accordingly.  (Programs similar to CalSavers are up and running in Oregon and Illinois, and have been proposed in a handful of other states.)

Employers reviewing this information should pause to re-examine their earlier decisions against maintaining a retirement plan for employees. The benefit of sponsoring your own plan is that it will bear the “brand” of your business and will serve to attract and retain quality employees.  Further, the administrative functions you must fulfill in order to participate in CalSavers are comparable to those required by a SEP or SIMPLE plan, both of which offer larger contribution limits and an employer deduction to boot.  If mandatory participation in CalSavers is bearing down on your business, now is a good time to talk to a retirement plan consultant, or your CPA or attorney, to determine whether you can leverage the time investment CalSavers will require, into a retirement arrangement that offers considerably more to your business and your employees.

In the meantime, here are some online resources for Eligible Employers:

  • Employer checklist – a punchlist to help you prepare for enrollment.
  • CalSavers Program Disclosure Booklet – this 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), will range at launch between $0.83 to $0.95 for every $100 invested, which is approximately twice the cost load for typical 401(k) investments.  It is expected that the fees will drop as the assets in the program grow, according to a breakpoint schedule approved by the CalSavers board and program administrator.
  • Online FAQ

[1] A Department of Labor “safe harbor” dating back to 1975 excludes “completely voluntary” programs with limited employer involvement from the definition of an ERISA plan.  29 C.F.R. § 2510.3-2(d).  The Obama administration finalized regulations in 2016 that would have expressly permitted state programs like CalSavers as exempt from ERISA coverage. However, Congress passed legislation in 2017 that repealed those regulations.

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.  © 2019 Christine P. Roberts, all rights reserved.

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State Auto-IRA Programs: What Employers Need to Know

California and four other states (Connecticut, Illinois, Maryland and Oregon) have passed legislation requiring employers that do not sponsor employee retirement plans to automatically withhold funds from employees’ pay, and forward them to IRAs maintained under state-run investment programs. Provided that these auto-IRA programs meet safe harbor requirements recently defined by the Department of Labor in final regulations, the programs will be exempt from ERISA and employers cannot be held liable for investment selection or outcome.  The DOL has also finalized regulations that would permit large cities and other political subdivisions to sponsor such programs where no statewide mandate exists; New York City has proposed its own such program, tentatively dubbed the New York City Nest Egg Plan.

In light of this growing trend, what do employers need to know about auto-IRA programs?   Some key points are listed below:

  1. Some Lead Time Exists. Even for state auto-IRA programs that become effective January 1, 2017 (e.g., in California and Oregon), actual implementation of employee contributions is pushed out to July 1, 2017 (in Oregon) and, in California, enrollment must wait until regulations governing the program are adopted. The California program, titled the California Secure Choice Retirement Savings Program, also phases in participation based on employer size. Employers with 100 or more employees must participate within 12 months after the program opens for enrollment, those with 50 or more within 24 months, and employers with fewer than 50 employees must participate within 36 months. These deadlines may be extended, but at present the earliest round of enrollment is anticipated to occur in 2019.
  2. Employer Involvement is Strictly Limited. The DOL safe harbor prohibits employer contributions to auto-IRAs and requires that employers fulfill only the following “ministerial” (clerical) tasks:
    • forwarding employee salary deferrals to the program
    • providing notice of the program to the employees and maintaining contribution records
    • providing information to the state as required, and
    • distributing state program information to employees.  Note that in California, the Employment Development Department will develop enrollment materials for employers to distribute, and in addition a state-selected third party administrator will collect and invest contributions, effectively limiting the employer role to forwarding salary deferrals.
  3. Employers Always Have the Option of Maintaining their Own Plan. Generally the state auto-IRA programs established to date exempt employers that maintain or establish any retirement plan (401(k), pension, SEP, or SIMPLE), even plans with no auto-enrollment feature or employer match used to encourage employee salary deferrals. Therefore employers need not be significantly out of pocket (other than for administrative fees) to avoid a state auto-IRA mandate. Employers should bear in mind that an employer-sponsored retirement program, even if only a SEP or SIMPLE IRA, helps to attract and retain valued staff, and should consider establishing their own plan in advance of auto-IRA program effective dates for that reason.
  4. Penalties May Apply. California’s auto-IRA program imposes a financial penalty on employers that fail to participate.   The penalty is equal to $250 per eligible employee if employer failure to comply lasts 90 or more days after receipt of a compliance notice; this increases to $500 per employee if noncompliance extends 180 or more days after notification. The Illinois auto-IRA program imposes a similar penalty.
  5. Voluntary Participation in Auto-IRA Program May Create an ERISA Plan. One of the requirements of the DOL safe harbor is that employer participation in auto-IRA programs (referred to as “State payroll deduction savings programs” be compulsory under state law. If participation is voluntary, an employer will be deemed to have established an ERISA plan. In theory, this rule could be triggered when an employer that was mandated to participate later drops below the number of employees needed to trigger the applicable state mandate (for instance, a California employer that drops below 5 employees), but continues to participate. The DOL leaves it to the states to determine whether participation remains compulsory for employers despite reductions in the number of employees.   The DOL also notes that, under an earlier safe harbor regulation from 1975, an employer that is not subject to state mandated auto-IRA programs can forward employees’ salary deferrals to IRAs on their behalf without triggering ERISA, provided that the employee salary deferrals are voluntary and not automatic.   The DOL final regulations can be read to suggest that a payroll-to-IRA forwarding arrangement that is voluntary and that meets the other requirements of the 1975 safe harbor will constitute a pre-existing workplace savings arrangement for purposes of exempting an employer from a state-mandated auto-IRA program.
  6. The Trump Administration Will Likely Support Auto-IRA Programs. Early and necessarily tentative conclusions are that the Trump Administration will continue to support the DOL’s safe harbor regulation exempting auto-IRA programs from ERISA, as well as other state-based efforts to address the significant savings gap now known to confront much of the country’s workforce.   One unknown variable is the degree to which the Trump Administration will be influenced by opposition to the programs mounted by the financial industry. Until the direction of the Trump Administration becomes clearer, employers that do not currently maintain a retirement plan should track auto-IRA legislation in their state or city and otherwise prepare to comply with a state or more local program in the near future, ideally by adopting their own retirement plan for employees.