The California Secure Choice Retirement Savings Trust Act (“CalSavers”) takes effect on July 1, 2019. Large employers that have at least one eligible California-based employee and who do not offer their own employer-sponsored retirement plan must register with the CalSavers program and begin auto-enrolling employees in the CalSavers plan no later than June 30, 2020. By 2022, even employers with as few as 5 California-based employees (at least one of whom meets the eligibility requirement –age 18) will be subject to the mandate. The statute applies to both for-profit and non-profit employers, but not to government agencies.
The following deadlines to either claim an exemption or to register with the CalSavers program apply:
• 100+ employee: June 30, 2020
• 50+ employees: June 30, 2021
• 5+ employees: June 30, 2022
The number of employees is based on the average number of employees reported to the California Employment Development Department quarterly, for the quarter ending December 31stand the previous three-quarters of available data from the reports.
Once registered, an additional filing must be made with the program within 30 days, including an employee census with social security numbers –it will be important for employers who do that filing to do so through a secure upload to the program to protect their employees. Then, within 30 days after that initial filing, employees will be notified by CalSavers about the program and may opt out of CalSavers if they so choose. If employees do not opt out, the employer must begin withholding and forwarding employee contributions at the end of that 30-day notice period. There will be an open enrollment period each year in the fall. Even if an employee previously opted out, if that opt-out was more than six months prior, they will need to opt out again or the employer will be required to re-enroll them.
Employers that offer their own qualified retirement plan are exempt from the mandate but must certify that exemption to the State. Any “qualified retirement plan” will satisfy this requirement, including:
Qualified pension plans
401(k) plans
403(a) plans
403(b) plans
Simplified Employee Pension (SEP) plans
Savings Incentive Match Plan for Employees (SIMPLE) plans
Payroll deduction IRAs with automatic enrollment
Employers can register for an exemption by clicking here.
Under the CalSavers program, employees are automatically enrolled to defer 5% of gross pay after a 30-day notice. Each year this percentage is increased by 1% up to a maximum of 8%. Participants may change their deferral rate or opt out completely at any time. The accounts in which deferrals are held are currently treated as a “Roth IRA” [See: What is a Roth IRA?], meaning that these contributions are made on an after-tax basis (and are subject to the Roth IRA dollar limits and restrictions). A traditional IRA, with pre-tax deferrals, will be an option that the enrolled employee may choose in the future. CalSavers participants make their own investment decisions, choosing among a variety of investment funds, with the first $1,000 automatically invested in a money market account unless a participant chooses otherwise. The program then uses various “target-date funds” based on the participant’s age as the default investment once the $1,000 threshold is met (again unless the participant makes a different investment election).
Employers who participate in CalSavers pay no fees. Although the statute provides that they have no fiduciary duties regarding the program, the courts may find that they do have certain duties in the way they set up and operate it, e.g., in how they handle payroll deductions. Unlike qualified retirement plans, and some IRA arrangements, under CalSavers, employers may not make contributions to the CalSavers accounts of their employees; only employee deferrals may be contributed.
To participate in the CalSavers program, an employer can go to the CalSavers website and sign up now or may wait and register when notified by CalSavers. Once registered, the employer will set up the process by listing delegates or payroll representatives, creating a payroll list, and adding employees. After the account is set up, maintenance involves submitting contributions and adding new employees, etc.
Although CalSavers was challenged in court with a claim that it is preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”) in Howard Jarvis Taxpayers Association et al. v. CA Secure Choice Retirement Savings Program, at this point, it has been upheld and is in effect. Plaintiffs contended that ERISA “supersedes any and all State laws insofar as they may now or hereafter relate to any employee benefit plan. . . .”(1) The District Court held that CalSavers was not preempted by ERISA as it does not create an employer plan nor affect existing employer plans but gave plaintiffs leave to amend (which they have done).[See order linked above.] Of course, this is only a District Court opinion and is subject to appeal to the Ninth Circuit Court of Appeals (and possibly the United States Supreme Court). At least 7 other states have enacted or are considering mandatory retirement arrangements, so it is possible that there will eventually be legislation at the federal level (or a finding of preemption by a federal court). While CalSavers remains open to further challenges, employers with California-based employees will need to comply in the meantime.
Penalties for non-compliance have been proposed but not finalized and it is not clear whether employees will have any private right of action to enforce the statute.
What employers should do now:
Familiarize themselves with the requirements of the statute. The CalSavers website offers a wealth of information and resources for employers with California-based employees.[See: CalSavers Resources]More detail can be found in the regulations that are available on the website. [See: Amended CalSavers Regulations]
Determine if they are exempt from the program or subject to the mandate. Employers who already offer a qualified retirement plan to their employees are exempt from the new requirements.
No later than the applicable deadline (June 30, 2020, for large employers), employers should register with the state, either as an exempt employer or as a participating employer. For new employers (or employers newly subject to the program), the deadline is 24 months after first crossing the threshold.
If intending to participate in the program in 2019-2020, employers should create a plan now to implement the program in a timely manner. Although employers are not required to hand out program disclosures (they are only required to give employee contact information to the plan administrator), most employers will want to provide some notice about the program and the program has provided a template for doing so on its website.
Commence payroll withholdings by the applicable deadline. Note –the CalSavers regulations require that amounts deducted from payroll be forwarded as soon as possible but no later than7 business days after they have been withheld.
Comply with the rules on an ongoing basis, e.g., with respect to new employees, annual open enrollment periods and auto-escalation requirements.
Please feel free to contact our Firm if you would like to discuss any of the foregoing information in greater detail. We would welcome the opportunity to consult with you.
¹ Bd. of Trs. of the Glazing Health & Welfare Tr. v. Chambers, 903 F.3d 829, 837 (9th Cir. 2018).
© Boutwell Fay LLP 2019, All Rights Reserved. This handout is for information purposes only and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of June 28, 2019.