Running any business is a challenge, but for small businesses, even a minor change in costs or income can have a drastic impact. With state government generating more new legislation every year, keeping pace is difficult enough, but when that legislation has the potential for additional costs and yet more bureaucracy, it is important to know where you stand.
One of those new mandates is CalSavers, which is aimed at the problem of so many workers not adequately preparing for retirement, but it does so in a way that adds costs and risks to every small business in California today. Because of the potential financial penalties for not complying or providing an alternative arrangement, it’s crucial that every small business in California understands what CalSavers is, what it means for your business, and how it may affect small businesses across the state.
What is CalSavers?
Designed to ensure that employees are taking steps to prepare for retirement, CalSavers is a new mandate from the state government of California that applies to all businesses with five employees or more. It is a retirement savings program that is designed to be as simple as possible for the savers, however, because that simplicity involves an automatic deduction from their pay at source, it does place a burden on the business to become a retirement fund administrator.
The idea behind this initiative has merit, saving for retirement is of course not just sensible, but a necessity for supporting ourselves once we leave work. This new initiative makes it mandatory for each business to either operate the CalSavers scheme or if they opt-out, have an alternative workplace retirement plan in place for employees to contribute into.
What does CalSavers mean for your business?
If your business is based in California and employs more than five people, or employs people within California, and you do not have an existing workplace retirement plan in place, then you MUST register with the CalSavers scheme before the deadline on June 30, 2022.
If you already operate a 401(k) plan or other established pension plan, you can opt-out of the CalSavers scheme, even if your Californian employees are not covered. It is important to reiterate, you have to actively opt-out of the scheme and provide proof of the alternative, you cannot simply ignore it.
Failure to either register by the deadline or opt-out with the required evidence of an alternative savings plan may face fines from the California Franchise Tax Board. The onus then is always on the business to participate or find an alternative, and with less than twelve months left, it is time to take action.
Knowing which is the best approach for your business means understanding what CalSavers involves for your business. This includes workload and costs, but what are they?
How it works
The CalSavers plan is reasonably simple. Once an employer is registered, employees can join the scheme which provides them with a Roth Individual Retirement Account (IRA) that is under their sole ownership. The account is transferrable between jobs, with employees able to stick with standard investments and savings rates or choosing their own. If we think about the offer for employees, there is a lot that is good about the idea, however, it is when we get to the other side of the coin, what it means for you as an employer, that things look somewhat different.
After registering, the scheme auto-enrolls each employee unless they are actively opt-out. Each employee requires a payroll deduction, with funds instead transferred to the employee’s IRA. The scheme is very quick to state that there are no costs to employers, and while there is no registration or operational fee payable to the State of California, that doesn’t mean it is completely cost-free.
You must process the deduction in payroll, deal with the paperwork, ensure accuracy at all times, every payroll period each employee opts into the scheme. That adds time, and with it costs, to your business operations. It also adds risk too, as there are potential cost penalties for failing to submit those payments on time, or for errors in the payments of any kind.
For larger businesses, this may not be too much of an issue, but for small companies with at least one employee in California, it can be. For most businesses of this size, as an owner, you have to cover many tasks. One of those is payroll and employee management, and the CalSavers program simply adds more to your already full day.
It’s not just time either, your time is incredibly valuable, and instead of using it to grow your business, you are basically acting as an unpaid collector for the State government. The biggest problem though is that you cannot avoid extra costs. The alternative is to enroll in a 401(k) plan or other retirement savings scheme, all of which add costs and take time to administer. There is no option to stay as you are right now. With small businesses still barely recovering from the pandemic, there is no spare capacity in working time or costs for such additions.
What does CalSavers mean for small businesses?
For many small businesses, CalSavers, or rather the implications of it, will be the final straw. On its own, an inconvenience and another cost you can do without, but with the already high cost of living in California, could see smaller companies simply opt-out of the State altogether. If you are a small business, why set up in California when Nevada or any other state will not try to make you an unpaid worker in the way California does?
This could cause a spiral, where an exodus of small businesses removes competition, and in turn sees costs of living rise even higher than before, which then forces more businesses and employees out of the state.
CalSavers is a case of having an idea that in theory is a good thing and implementing it as bad away as possible, losing the potential benefits and producing only destruction.