Effective June 30, 2020, California employers with 100 or more employees, that do not maintain or contribute to a retirement plan, must participate in the CalSavers Program, by forwarding salary deferral contributions to the Program on behalf of most employees. The CalSavers Program expands to employers with between 50 and 99 employees on June 30, 2021, and to employers with 5 or more employees on June 30, 2022, again presuming that the employer does not have a retirement plan in place Employers of any size may voluntarily participate in CalSavers at the current time, and self-employed individuals, including those in the gig economy, may enroll effective September 1, 2019.
How do business owners count employees in order to determine their applicable CalSavers effective date? What is the impact, if any, of being part of a “controlled group” of businesses, or of using a staffing or payroll agency? What about out-of-state employers, or California-based employers with out-of-state employees? Below we do a “deep dive” on these and other CalSavers employer coverage issues. For more information, you can also check our prior post on CalSavers.
Before we get to the details, CalSavers has not cleared all legal obstacles in its path as of this writing. The U.S. Department of Justice has stated that it is considering intervening in the federal court case over whether ERISA preempts CalSavers, and has asked for additional time, to September 13, 2019, to make its decision. CalSavers earlier survived a preemption challenge brought by the Howard Jarvis Taxpayers Association, succeeding in having the complaint dismissed, but the Association filed an amended complaint. The court’s decision on the amended complaint was pending when the Department of Justice got involved. We will continue to track the pending court challenge to CalSavers and update you on future developments.
- How do I count employees to determine when my business is subject to CalSavers? To determine employee headcount, take the average number of employees that your business reported to EDD for the quarter ending December 31 and the previous three quarters, counting full- and part-time employees. California Code of Regulations Title 10, § 1001(a) (2019). So, for example, if you reported over 100 employees to EDD for the quarter ending December 31, 2019 and the previous three quarters, combined, you would need to register your business with CalSavers on June 30, 2020.
- What if my business is part of a controlled group of corporations? The CalSavers regulations do not address this issue. They appear to require each business with a separate federal EIN/California payroll tax account number to register or opt-out of the program. So, for example, if your business has 25 employees but you are part of a controlled group that includes over 100 employees, and there is no controlled group plan in place, you would not need to register with CalSavers on June 30, 2020. This would also be the case if your business is part of a group of trades or businesses under common control (e.g. business types other than corporations), or an affiliated service group.
- What if my business contributes to a controlled group 401(k) plan or other retirement plan? Does my business qualify for the CalSavers exemption? If your business is part of a controlled group and contributes to the controlled group retirement plan on behalf of its employees the CalSavers exemption should apply, as it includes businesses that either “maintain” or “contribute to” a retirement plan. Cal. Code Regs. tit. 10, § 1000(m) (2019). The answer is the same if you are part of a group of trades or businesses under common control, or affiliated service group, that sponsors the retirement plan.
- What if my business is part of a controlled group, and the controlled group maintains a plan, but the plan excludes my business and my employees cannot participate? CalSavers personnel have informally stated that the CalSavers exemption applies even in this situation, because the business is still part of a controlled group that maintains a plan. Businesses that maintain their own plan, but that exclude a subset of employees from the plan (within the requirements of minimum coverage and nondiscrimination testing), even a majority of employees, are also exempt, per informal CalSavers commentary. In such situations, an exempt employer cannot enroll their business in CalSavers voluntarily but can forward employee contributions on behalf of employees who have established a CalSavers account through prior employment.
- How do I do the employee headcount if my business uses a staffing agency or payroll company? Whether the staffing agency/payroll company or its “client” – your business – is the employer for headcount purposes depends upon what type of agency is involved. The CalSavers regulations refer to a“Tri-Party Employment Relationship,” which means that the employer enters into a service contract with a third-party entity for services including, but not limited to, payroll, staffing (both temporary and non-temporary), human resources, and employer compliance with laws and regulations. That category is further sub-divided into four categories.
- What categories of staffing/payroll companies do the CalSavers rules identify? The CalSavers rules refer to the following: Temporary Agencies, Leasing Agencies, Professional Employer Organizations or PEOs, and Motion Picture Payroll Services Companies. The basic rule is that the agency is the employer if you use a temporary agency or leasing agency, but your business is the employer for CalSavers headcount purposes if you use a PEO or Motion Picture Payroll Services Company. However, conditions apply! More details are provided in following questions.
Important Note: the Tri-Party Employment Relationship categories overlap to some degree, but not entirely, with federal rules governing who an employer is under ERISA employment benefit plans. The discussion here applies only to determining coverage under the CalSavers Program. For more information on ERISA benefit plan coverage issues raised by staffing agency and payroll company workers, see S. Derrin Watson’s treatise, Who’s the Employer esource, chapters 3, 5, and 6.
- What is a temporary agency or leasing agency for purposes of the CalSavers rules? California Unemployment Insurance Code § 606.5 (b) defines a temporary services employer or leasing employer as a business that does all of the following:
- Negotiates with clients or customers for such matters as time, place, type of work, working conditions, quality, and price of the services.
- Determines assignments or reassignments of workers, even though workers retain the right to refuse specific assignments.
- Retains the authority to assign or reassign a worker to other clients or customers when a worker is determined unacceptable by a specific client or customer.
- Assigns or reassigns the worker to perform services for a client or customer.
- Sets the rate of pay of the worker, whether or not through negotiation.
- Pays the worker from its own account or accounts.
- Retains the right to hire and terminate workers.
If your business uses a temporary or leasing agency you should review the terms of your services agreement with them and confirm that it meets all of these requirements. If it does not, please see the response to Question 10.
- What is a PEO for purposes of the CalSavers rules? The CalSavers rule incorporate the definition found in Section 7705(e)(2) under the Internal Revenue Code, which describes a PEO as a business that does all of the following:
- assumes responsibility for payment of wages to such individual, without regard to the receipt or adequacy of payment from the customer for such services,
- assumes responsibility for reporting, withholding, and paying any applicable taxes [ . . . ] with respect to such individual’s wages, without regard to the receipt or adequacy of payment from the customer for such services,
- assumes responsibility for any employee benefits which the service contract may require the certified professional employer organization to provide, without regard to the receipt or adequacy of payment from the customer for such benefits,
- assumes responsibility for recruiting, hiring, and firing workers in addition to the customer’s responsibility for recruiting, hiring, and firing workers,
- maintains employee records relating to such individual, and
- agrees to be treated as a certified professional employer organization for purposes of section 3511 with respect to such individual.
If your business uses a PEO you should review the terms of your services agreement with them and confirm that it meets all of these requirements. If it does not, please see the response to Question 10.
- What is a Motion Picture Payroll Services Company for purposes of the CalSavers rules? If a payroll services company in the motion picture industry meets all of the following criteria as set forth in California U.I. Code § 679(f)(4), then the “employer” is the client motion picture production company:
- Contractually provides the services of motion picture production workers to a motion picture production company or to an allied motion picture services company.
- Is a signatory to a collective bargaining agreement for one or more of its clients.
- Controls the payment of wages to the motion picture production workers and pays those wages from its own account or accounts.
- Is contractually obligated to pay wages to the motion picture production workers without regard to payment or reimbursement by the motion picture production company or allied motion picture services company.
- At least 80 percent of the wages paid by the motion picture payroll services company each calendar year are paid to workers associated between contracts with motion picture production companies and motion picture payroll services companies.
If your business uses a motion picture payroll services company you should review the terms of your services agreement with them and confirm that it meets all of these requirements. If it does not, please the response to Question 10.
- What if my business uses a third party staffing or payroll arrangement that does not fall within any of those definitions? In such instance, your business will be considered the employer for California payroll tax purposes per California Unemployment Insurance Code § 606.5(c), and likely for CalSavers employer coverage (employee headcount) purposes. The cited Unemployment Insurance Code section clarifies that the staffing or payroll company is considered a mere agent of your business in such instances, and is not a separate employing entity for payroll tax purposes.
- Does CalSavers apply to out-of-state employers? An employer’s eligibility is based on the number of California employees it employs. Eligible employees are any individuals who have the status of an employee under California law, who receive wages subject to California taxes, and who are at least 18 years old. If an out-of-state employer has more than 100 employees meeting that description, then as of June 30, 2020 it would need to either sponsor a retirement plan, or register for CalSavers.
- Does CalSavers apply to businesses located in California, with workers who perform services out of state? Yes, if the employer is not otherwise exempt, and if they have a sufficient number of employees who have the status of an employee under California law, who receive wages subject to California taxes, and who are at least 18 years old.
The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. (c) 2019 Christine P. Roberts, all rights reserved.