At the present time, an estimated 7 million employees in California are not offered tax-qualified retirement plans through their employers. Starting Jan. 1, 2017, this is going to change. Under the California Secure Choice Retirement Savings Program (Senate Bill 1234), employers who do not currently offer a tax-qualified retirement plan to employees will be required to offer the new California state-run retirement program to their employees. According to California Treasurer’s Office, this new law is the “most ambitious push to expand retirement security since the passage of Social Security in the 1930s”.
Who is Impacted by the New Law?
Almost everyone in the employment world is impacted by the California Secure Choice Retirement Savings Program. For example:
California Employers. All employers with five or more employees and that do not already offer a tax-qualified retirement plan to employees – such as a 401(k), IRA, pension or profit-sharing plan – will be required to offer the new California state-run retirement program to their employees.
- employers with more than 100 employees will need to offer a retirement plan within 12 months after the program is open for enrollment;
- employers with more than 50 employees will need to offer a retirement plan within 24 months after the program is open for enrollment; and
- employers with more than 5 employees will need to offer a retirement plan within 36 months after Secure Choice is open for enrollment.
The mandate for employers does not go into effect until the Secure Choice program is fully operational.”
California Employees. Automatic Enrollment – Under the program, employees will be automatically enrolled unless they opt out, which they are free to do before or at any time during enrollment. Starting out, 3% of an employee’s salary will be automatically deducted from their payroll and placed into a personal tax-deferred retirement savings account. Employees will have the option to change contribution levels at any time.
Automatic Escalation. As noted above, deductions will start at 3% of total pay and will automatically increase by 1% annually to a maximum of 8%. As with the automatic enrollment default, participants will have the ability to stop or change the rate of deductions at any time.
At this point, the law is unclear as to what enforcement mechanisms are available if eligible employers do not comply with the new laws. However, it is always best to err on the side of legal caution and discuss the steps your business needs to take with an experienced business lawyer.
What 2017 Will Bring
We will be closely monitoring our legislative and judicial branches to see what changes are coming down the pike for California business owners under the new Trump administration. If you have any questions about your business operations and policies, contact attorney Drew E. Pomerance today.