8 Answers to Small Business Retirement Plan Questions

BY Nathan Beers Writer, Bank of the West

May 5th 2022

Small businesses in California are about to take center stage in helping workers retire more financially secure.

Here’s the backstory: Employees who get access to a retirement plan at work become all-round better prepared for retirement. That’s why, as of June 30, California companies with more than five employees will be required to give workers a retirement plan option. Other states are moving in a similar direction.

This is what you need to know to be prepared:

1. WHY IS CALIFORNIA MANDATING SMALL BUSINESSES PROVIDE RETIREMENT PLANS?

More than half of Americans report they’re behind on saving for retirement, and one-third don’t have a retirement account at all. At the same time, longer life spans, climbing healthcare costs, and a strained social security system mean retirement savings will have to do a lot more work in the decades ahead.

That’s why lawmakers in 20 states and cities want businesses to help workers save more and are considering legislation mandating that they offer retirement benefits. Many have already rolled out laws—including California.

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Prior to California’s retirement plan mandate, 7.5 million private-sector workers in the state lacked access to a workplace retirement plan. Women and minorities made up a disproportionate percentage of that number—even with financial empowerment efforts making inroads.

In 2019, the state began requiring businesses to offer access to a retirement plan to their workforce. California companies with over 100 employees have had to comply since 2020 and those with over 50 since 2021.

Smaller businesses had the longest time to comply, but the June 2022 deadline is now approaching.

2. DO OTHER STATES HAVE SIMILAR LAWS REQUIRING SMALL BUSINESSES TO OFFER RETIREMENT PLANS?

Yes, small business owners in Oregon and Colorado must also offer retirement benefits to employees and have similar state-run (auto-IRA) enrollment plans. The smallest businesses in Oregon have until late 2022 to comply, while Colorado’s plan is still ramping up. At least a dozen other states are studying the issue or considering legislation.

3. WILL OFFERING A RETIREMENT PLAN TO MY EMPLOYEES BE GOOD FOR MY BUSINESS?

As any small business owner will attest, hiring and retaining strong employees who will help your business grow is one of the toughest parts of the job. It’s become even harder during the Great Resignation and when the unemployment rate is near historic lows.

Small businesses need to appeal to job seekers now more than ever. Research shows that in a competitive hiring environment, offering retirement benefits attracts job seekers.

Eighty-six percent of workers value a 401(k) or similar retirement plan, and 75 percent of new hires at a company offering a 401(k) say a retirement plan provides a compelling reason to stay. So there’s a strong opportunity to gain a competitive advantage as an employer.

4. WHICH TYPES OF RETIREMENT PLANS MEET CALIFORNIA’S REQUIREMENTS?

A small business can choose one of two paths:

  • (1) Sign-up for California’s state-sponsored CalSavers plan. By signing up with the state plan, employees will be auto-enrolled into a Roth Individual Retirement Account (IRA) funded from their own paychecks.
  • (2) Partner with a retirement benefits provider to offer employees access to a qualified employer-sponsored plan such as an IRA, 401-K, 403-B, and 457-B plan, pooled plan arrangement, or SEP-IRA.

5. WHAT ARE THE BASICS OF THE CALSAVERS PLAN?

Full- and part-time employees who have been with the company for 30 days, are 18 years old or older, and have a social security number or an individual taxpayer identification number are eligible to be automatically enrolled.

They will be signed up for a 5 percent after-tax contribution to a Roth IRA, initially, but can also opt out or choose a different rate. Employee contributions will increase automatically every year until they reach 8 percent of their salary. It’s important to note that businesses will not have to make any contributions themselves.

6. WHAT ARE THE BENEFITS AND DRAWBACKS TO CALSAVERS?

The CalSavers plan is straightforward, and there are no employer fees or fiduciary liability. Employers will have to do some administration work, including submitting employee contributions, adding new employees, and removing others who leave the company.

For businesses using CalSavers, IRAs are the only investment choice, with the default being a Roth IRA which takes post-tax contributions. Contributions to IRA’s max out at $6,000 a year or $7,000 for employees age 50 or older. Household income limits also apply to eligibility for Roth IRAs. If the employee is single, then their modified gross income must be below $129,000 to be able to max out contributions. If they are married, filing jointly, their modified gross income must be below $204,000. That means higher-earning employees or business owners (if they choose to participate) will need to either opt out or recharacterize their contributions to go toward a traditional pre-tax IRA. Either way, IRA contribution limits are much lower than those for 401(k) plans (see below.)

CalSavers also doesn’t allow employers to match contributions if they want to, and the plan is bare-bones in terms of online guides, tools, and resources.

7. WHAT ARE THE BENEFITS AND DRAWBACKS OF AN EMPLOYER-SPONSORED PLAN?

An employer-sponsored plan isn’t free, but it will typically offer more investment choices and flexibility, such as the ability to make employer contribution matches. For example, a 401(k) plan can include a profit-sharing option and allows for combined employee and employer contributions up to $57,000 a year or $63,500 for those age 50 or older. Many companies feel matches are a great benefit to help recruit and retain employees.

A private plan may also come with services to make administration easier and resources to help employees grow their investing and retirement smarts. According to a study from the Pew Charitable Trusts, most workers get planning guidance from online tools and calculators, and those who participate in employer-sponsored plans have access to better planning resources.

For mission-driven companies, there is a growing interest in providing employees with environmentally and socially responsible (ESG) investments through their 401Ks partly due to the positive impact on recruiting and retention. Few private plan providers currently offer these options, but with the increasing popularity of ESG investing, that’s likely to change that in the future.

The costs for a small business to implement a private retirement plan vary widely by provider, so you should shop around. Typical costs can include startup fees plus ongoing administration fees based on plan type, employee number, and assets under management (AUM). There will also be a percentage fee charged to employees.

The good news is businesses can also tap into some additional tax advantages when going with a private option. The Retirement Plan Startup Costs Tax Credit enables eligible employers to claim a tax credit for up to 50 percent of plan startup costs up to $15,000 over three years.

8. IS THERE A PENALTY FOR SMALL BUSINESSES THAT DON’T MEET THE JUNE 30 DEADLINE?

Yes, there are per-employee penalties for non-compliance. The state can charge businesses $250 per eligible employee if non-compliance continues for 90 days and an additional $500 per employee if non-compliance continues after 180 days.

Want to find out more about offering your employees a retirement plan? Contact Bank of the West, and a business banker will reach out to discuss your options.

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Nathan Beers Writer, Bank of the West

Nathan joined Bank of the West in 2018 as a writer for technology, finance, and green businesses. On weekends he’s often out with his family exploring the California coastline.

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