By now you may have heard the news that California business owners with five or more employees will be required by a new mandate to set up a retirement plan or enroll employees into CalSavers. The deadline for employers with 100 or more employees will be required by June 30th, 2020, 50 employees by June 30th, 2021, and 5 or more employees have an extra year, until June 2022 to comply. Employers will be identified using EDD and payroll FTA records.
What’s driving this law? California says the main culprit is increased costs for medical and other state programs that are the result of an aging population.
We have been having a lot of conversations with business owners who are asking what makes more sense, signing up for CalSavers or establishing a 401k retirement plan? If you participate in CalSavers you do not need to establish a separate retirement plan for your business, and if you have an existing retirement plan than CalSavers is not mandatory. In the latter instance, you do need to certify with the state through the California “secure choice” website that you offer an employee plan and confirm employees are aware of it. It’s also important to understand that CalSavers employee education is the fiduciary responsibility of the employer.
Simple Impact is a fan of retirement plan design crafted for the owners of the business. This option is a better way to reward themselves, pay lower taxes, and build employee loyalty, all at the same time.
Appropriate plans for business owners that fit the California mandate will include Simple IRA's, SEP IRAs, and our favorite, the 401k. 401k’s allow the most options including larger annual contributions, taxable or tax deferred contributions, 401k loan provisions, employer matching contributions, vesting schedules and profit sharing.
All businesses and employers are unique. Working with a trusted partner such as Simple Impact is the best way to make the most educated decision for your business.
Some key terminology business owners should know:
In a 401k the employer will set up legal documents known as the Retirement Trust with its own tax ID. The employer will be referred to in this these documents as the Plan Sponsor and Fiduciary.
The Retirement Trust is the plan design for the businesses. We use documents created by the legal teams of the record keeper or actuaries.
Actuaries, aka: TPA (Third Party Actuaries/Administrator) are the number crunchers to make sure the plan is maintained and compliant with ERISA laws.
ERISA is a federal law that sets minimum standards for voluntary established retirement private industry plans to protect participants.
The Record Keepers keep details on employee and employer contributions, account numbers, investments loans, withdrawals, and other administrative information. For very small plans experienced CPA's often act as the record keeper.
Today, recordkeeping duties are often bundled together with the Asset Custodian. The asset custodian will offer a selection of investments based on the plan sponsors requests or needs. They will often construct and investment portfolio and offer it as a plan model that is consistent with the participants risk profile, investment objective, and individual preferences. The custodian is the entity that sends you your statement, provides online access for viewing participant investments, and has specialized resources and teams for employee education. Specialized resources include language assistance. Custodians also send out the tax notices for additions, withdrawals, and rollovers.
As the assets grow inside of the retirement plan, the record keeper or actuaries will recommend an ERISA Fidelity Bond purchase. ERISA bonds protect retirement accounts by guaranteeing monies available if the fiduciary mishandles the funds entrusted to them.
As the Advisor, our role is as a 401k care coordinator. It begins with helping the employer to gather and organize critical information including the census data spreadsheet. We take time to understand what the employer needs and share best practices to create a successful plan for their industry.