California is one of ten states requiring companies to offer a retirement plan to their employees. The California retirement plan mandate began rolling out in 2020. Companies with over 100 employees were required to sponsor a retirement plan by September 30th, 2020, and companies with over 50 employees were required to sponsor a retirement plan by June 30th, 2021. The final deadline is quickly approaching for companies with over 5 employees. The final deadline for companies with over 5 employees is June 30th, 2022. The deadline covers the largest group of small businesses affected by the mandate. The penalty for non-compliance begins at $250 per eligible employee and increases to an additional $500 per eligible employee 90 days after the initial notice.
Employers have several great options to offer their employees. The options are a 401(k) plan, a Savings Incentive Match Plan for Employees (SIMPLE) IRA, a Simplified Employee Pension (SEP) IRA, or CalSavers state-sponsored plan. Below is a comparison of the different types of retirement plans.
A 401(k) is the best-known pre-tax savings plan in America because it offers the highest contribution limits of any defined contribution plan. 401(k) plans are flexible and can fit the needs of most businesses. A SIMPLE IRA and SEP IRA are two additional types of pre-tax savings plans that are easier to set up and less expensive than a 401(k) plan to maintain.
A SIMPLE IRA is best suited for a company that does not expect its participants to contribute the maximum amount to the plan but still wants to provide their employees with a company match or contribution. SIMPLE IRAs have low overall costs and can be set up quickly.
A SEP IRA is a simplified pension plan funded solely by the employer. Employees are not allowed to contribute to the plan. SEP IRAs are best suited for sole proprietors or family businesses because contribution percentages must be made by the employer evenly to all eligible employees.
CalSavers is the state of California’s default retirement plan. CalSavers is offered as a bare minimum plan which functions like an after-tax Roth IRA. Employees do not receive an employer match or any additional benefits that increase employee retention. In our professional opinion pre-tax savings plans such as a 401(k) plan, SIMPLE IRA, or SEP IRA benefit both employees and employers more effectively than the CalSavers state-sponsored plan.
The deadline for companies with over 5 employees is approaching. To avoid penalties a retirement plan must be offered to employees before June 30th, 2022. There are great retirement plan options, however one retirement plan does not fit all companies. Since all companies differ in size and complexity, please consult with our team for a suitable recommendation. You may schedule an online meeting with a financial advisor.
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