CalSavers: Expanded Business Registration Requirement by the End of 2025

Noncompliance is Leading to Penalties for Some Businesses

The Good Part...

Under the IRS Retirement Plans Startup Costs Tax Credit (IRC §45E), small businesses can claim two types of tax credits:

1. Startup Costs Credit: This covers up to 50% of the costs associated with starting a qualified retirement plan, such as a 401(k) or SIMPLE IRA. The credit is capped at $5,000 per year for the first three years. Eligible expenses include plan setup, administration fees, and employee education about the plan.

2. Employer Contributions Credit: For eligible small businesses, this credit covers a portion of employer contributions made to the plan. For the first two years, employers can claim 100% of contributions (up to $1,000 per employee), and the percentage reduces by 25% for each of the next three years.

These federal tax credits are designed to incentivize small businesses to provide retirement savings options for their employees. Employers should consult a tax advisor to determine eligibility and to maximize the benefits from these credits.

By the close of 2025, every California business with one or more employees aged 18 or older must enroll in the CalSavers program if they do not already offer a qualified retirement plan. (Gov’t. Code §100000 et seq.; 10 Cal. Code Regs. §10000 et seq.) CalSavers is a state-run retirement savings program that provides an auto-enrollment IRA option, defaulting to a Roth IRA, with the possibility to opt for a traditional IRA instead.

In addition to registering, employers are required to submit an updated employee roster to CalSavers and facilitate payroll contributions for those employees who choose to participate in the program.

For more in-depth coverage of this topic, see the article “June is the deadline for most employers to register with CalSavers” in the May 2022 edition of Spidell’s California Taxletter® and “CalSavers and California’s retirement mandate” in the September 2023 edition.

The registration requirement for businesses with 1-4 employees doesn’t apply if the only employees are the business owner and their spouse. CalSavers projects that this regulation will impact about 450,000 businesses.

The "Legal" Part...

Begin Considering Your Options Now

Businesses with fewer than five employees should start evaluating their options. They will need to decide whether to enroll in CalSavers or establish an alternative qualified retirement plan. Employers should keep in mind that the IRS, under IRC §45E, offers two types of tax credits to encourage offering qualified retirement plans:

1. A credit covering start-up costs related to offering a retirement plan, valid for up to three years.

2. A five-year tax credit based on a percentage of employer contributions, starting at 100% for the first two years and reducing by 25% annually thereafter.

Unlike the federal government, California does not provide comparable tax incentives.

Information on CalSavers

For more details on the program, visit the CalSavers website at www.CalSavers.com.

Registration Requirements for Larger Businesses

Businesses with five or more employees who don’t offer a retirement plan should already be registered with CalSavers and have submitted their employee rosters.

As of June 2024, more than 134,000 businesses are registered with CalSavers, and nearly 130,000 have been exempted from participation due to offering a qualified retirement plan. Approximately 575,000 employees have opened Roth IRAs through CalSavers. (CalSavers Retirement Savings Program Participation & Funding Snapshot, June 2024; www.treasurer.ca.gov/calsavers/reports/participation/2024/june_2024.pdf)

Employee Participation is Optional

Once a business submits its employee roster to CalSavers, employees are contacted to determine whether they wish to open a Roth IRA through the program. The default contribution rate is 5% of the employee’s wages, but they can opt for a higher or lower percentage. Employees are also free to opt out of the program entirely. According to CalSavers, around 68% of employees contacted have opted out.

Penalties for Noncompliance

Employers that are required to register but fail to do so, or who neglect to update their employee rosters or facilitate payroll deductions, face penalties of $250 per employee. An additional $500 per employee is levied if the noncompliance continues for more than 90 days. Annual penalties of $500 per employee are imposed for continued noncompliance. (Gov’t. Code §100033; R&TC §19287) These fines are enforced by the Franchise Tax Board.

Employers are given multiple reminders before penalties are enforced, including notices to register, update employee rosters, and initiate payroll deductions. If an employer takes action before penalties are assessed, they can avoid these fines by working directly with CalSavers to ensure compliance. (10 Cal. Code Regs. §1000(d))

Penalties are Being Enforced

Despite numerous reminders, the state has begun imposing penalties on noncompliant businesses.

CalSavers reports that most employers — about 75% — take action before reaching the penalty stage. The remaining 25% receive a series of three notices spaced 90, 60, and 30 days apart. If employers come into compliance during this period, penalties are not enforced.

Here’s a breakdown of the notices issued so far:

• 90-day notices: 54,377

• 60-day notices: 53,338

• 30-day notices: 42,495

Of the original 54,377 businesses that missed the deadline, 43.5% (23,676) became compliant within 90 days. The remaining 30,701 employers were referred to the Franchise Tax Board for penalty enforcement.

As of June 2024, the Franchise Tax Board has collected $1.8 million in penalties from 722 businesses. Additionally, 15,000 businesses have come into compliance since then. New rounds of penalties are being imposed on businesses that continue to remain noncompliant.

Although penalties are strictly enforced, CalSavers emphasizes that their goal is to help businesses achieve compliance. They offer direct outreach to assist businesses in the registration process, including in-person help to ensure businesses fulfill their obligations and facilitate employee participation. CalSavers’ aim is for the first penalty to be the last one ever assessed.