Legislation in 2016 created CalSavers, California’s retirement savings program, designed “to ensure all Californians have access to a workplace retirement savings account.”

The following are some key elements that tax practitioners in California might encounter regarding the program—both for their own firms and for small businesses they work with.

Registration Deadline

Although the deadlines for larger businesses have already passed, employers with one-four employees have until Dec. 31, 2025, to register in CalSavers. According to CalSavers, “Businesses that do not employ any individuals other than the owners are exempt from the expansion of the mandate.”

The State Treasurer started to send emails in March based upon businesses with active EDD Employer Payroll Tax Accounts. These emails assign a unique access code to login to the CalSavers website to either register or apply for an exemption.

Exemptions Apply

Employers that do not offer their own retirement plan must register in CalSavers. Sponsoring a qualified retirement plan, such as a 401(k) or SIMPLE IRA among other plans, will exempt a business from needing to register. However, CalSavers will still want to know if the employer is exempt, so there is a mechanism to indicate this on the website (Request Access Code) or via email (see above).

It is also worth noting that religious, tribal and government organizations are exempt from the program.

Employer Costs

Although the employer registers their business in CalSavers, the business cannot contribute or match any funds toward the employees’ retirement accounts. The employer simply remits employee contributions to each employees’ account on their behalf.

Employee Automatic Enrollment

Employees are “automatically enrolled” and must opt out if they do not wish to participate. Default contributions are set at 5 percent of gross pay and increase 1 percent on Jan. 1 of each year until that percentage hits 8 percent. Employees can change this default percentage if they wish.

The funds are automatically invested based upon the employees’ date of birth and target retirement age. Most of the underlying funds are State Street Index Funds.

Roth IRA Treatment

The employee’s retirement account is treated as a Roth IRA and therefore is subject to annual IRS contribution limitations. For 2025, the contribution will be limited to earned income up to $7,000, or $8,000 for those age 50 or over.

Caution Areas and Red Flags

• Roth IRA qualification: If an employee has income above the MAGI limits for making a Roth IRA contribution for the calendar year, they could be subject to the IRC Sec. 4973(a) 6 percent tax on excess IRA contributions if this is not corrected on a timely basis. Income from a spouse or other non-wage source could disqualify the employee from making a Roth IRA contribution for a particular year.

• Enrollment across various employers: If an employee changes jobs mid-year and is auto-enrolled in multiple CalSavers plans, there is the potential for overcontribution and a 6 percent tax on excess IRA contributions if not timely corrected.

• Outside IRA contributions: If an individual makes either traditional or Roth IRA contributions on their own accord and then does not opt out of a CalSavers program with another employment position, there is the potential for an overcontribution.

• Penalties for non-compliance: An employer that fails to register in the program may be subject to penalties of either $250 per employee or $500 per employee, after service of notice of its failure to comply. Review the CalSavers website for more specific information on the imposition of penalties.

• New employees: Even if an employer has already registered, they must notify new hires of their eligibility in CalSavers within 30 days of their hire date and upload their information to the CalSavers portal.

Conclusion

Staying informed of the CalSavers program is important for California tax practitioners, even if they already have their own 401(k) plan in place. There will be communications from government agencies, payroll processors and clients that necessitate a general knowledge of this area.

Note that this article does not cover all elements of the program, so it’s advised practitioners review available resources via CalSavers and the State Treasurer’s office.