By Patrick M. “Pat” Lizza, CRPC®, CRPS®, EFC, CEPA®, UBS, Indian Wells

As you may have heard,  employers in California with five or more employees are now required to offer a retirement plan to workers, either through a private program or the new, state-run CalSavers Retirement Savings Program. The “CalSavers” mandate, as it is called, requires that all businesses in California—even small businesses—provide a retirement plan for employees. California is the first state to pass legislation to mandate that private sector employees have work-based retirement plans.

Businesses that do not meet requirements of the CalSavers mandate can be subject to financial penalties, including fines of $250 per employee, by which can escalate by an additional $500 per employee for continued non-compliance. As a business, not offering a retirement plan to employees could also make employment at your company less attractive to existing or potential employee candidates.

As financial advisors, we have been getting asked a lot of questions about the CalSavers mandate. The following are six critical questions businesses are asking and factors for Palm Springs-area businesses to consider.

Am I required to comply with the CalSavers mandate?

California law now requires all employers with five or more California-based employees, with at least one being age 18 or older, to comply with the CalSavers mandate. This is regardless of number of hours worked by employees or tenure with the company. The deadline for compliance for businesses with five or more California-based employees was June 30, 2022, so businesses that are not yet in compliance should do so as soon as possible.

What is the CalSavers option? How does it work?

CalSavers is also the name for California’s state-run retirement savings program. The CalSavers Retirement Savings Program is a payroll-deducted, Roth individual retirement account (IRA) with limited employer responsibilities, no employer fees or fiduciary responsibility.

Am I required to offer the CalSavers Retirement Savings Program to comply with the mandate?

While the mandate is referred to as the CalSavers mandate, employers are not required to offer the CalSavers Retirement Savings Program to employees to comply unless they have no other retirement plan in place. Then CalSavers is an option they may offer.

With the CalSavers retirement plan being a Roth IRA plan, there is no pre-tax savings. And some high earners might not be eligible. Additionally, employers are not allowed to make contributions to, or to match, employee contributions with the state-run plan.

There are also other elements of the plan that may or may not meet the needs of each individual business, so it is important to understand its features.

What types of other retirement plans qualify?

There are several other different types of plans that could qualify to meet the mandate and that offer different types of benefits. These include 401(k) programs, SIMPLE IRAs, SEP IRAs, and others.   

Each type of plan may offer different benefits, contribution limits to offer greater savings and lower taxable income, and require other considerations, so it’s best to talk with an advisor specializing in this area.

Why is California requiring retirement plans?

Planning for retirement, and ensuring financial resources in one’s golden years, is important for business owners and employees alike.

In an individual’s working years, he or she can live off their paychecks. Consistent income can provide confidence that you can pay your bills, regardless of what the market is doing.

Later in life, guaranteed income sources, such as Social Security, pensions, or annuity payments, can help to retain some of this confidence during retirement years.  However, often they cannot cover all your financial needs in retirement.

When an individual has enough resources to fund his or her goals, and no longer needs to work, he/she has what could be considered “financial freedom.” The goal is to be able to fund your lifestyle without compromise, and to be in control of your wealth, versus being constrained by it.

There are three components that indicate when an individual has achieved financial freedom:

  1. Liquidity – You have replaced your salary with a “synthetic paycheck,” funded by passive sources of growth and income for freedom to help fund your spending needs without having to work.
  2. Longevity – You have enough savings as a “buffer” to help insure your family against risks such as market volatility, unexpected medical expenses, and living longer than you had planned.
  3. Legacy – You have enough “excess” wealth to devote to people and causes you would like to give back to, through philanthropy or helping the next generations of your family.

How can a small business owner get more information on meeting requirements of the CalSavers mandate and facilitate getting qualified plans?

Business owners can learn more from the Employment Development Department for the State of California at https://edd.ca.gov/en/employers/calsavers and https://www.treasurer.ca.gov/calsavers/.

Businesses should also talk with their financial advisors and business accountants to determine the best options based on the size of the company, the revenue and pay levels, and other considerations.

Each business is different, and each owner will want to adopt a plan that balances their needs  with that of employees and the business itself. Your financial advisor will be a good source of information about both the mandate and about your retirement plan options. You may also want to speak with an advisor who is a Chartered Retirement Plan Specialist or a Certified Exit Planning Advisor, as designated by FINRA.

Patrick M. “Pat” Lizza, CRPC®, CRPS®, EFC, CEPA®, is the Branch Manager at UBS in Indian Wells. He joined UBS in 2011 and has built a comprehensive wealth management practice, serving professionals, entrepreneurs, retirees, and their families locally with financial planning at its core. Prior to UBS, he spent 17 years in the high-end hospitality industry. He served as treasurer on the Board of Directors of Xavier Jesuit College Preparatory High School and currently also serves on the Southwestern Growers Tournament Committee for the Boys and Girls Club of the Coachella Valley.

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